I’ve read a few option books.
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Wednesday, April 11, 2007

Why Options Trading? (Part 1)

There are a few reasons why people use options:

1. Require less capital

Options trading generally require less capital than the corresponding stock trading, because option price is only a small fraction of the underlying stock price. When a trader is confident that a stock price will move in a particular direction significantly within a short term, he can invest in options rather than in the stock itself to take advantage of the expected movement because of the limited risk, high potential reward and smaller amount of capital required to control the same number of shares of stock.

2. Protection

For an investor who invests in stocks, put options can be used as a hedging tool to protect your stocks from a price drop. When the stock price drops, the put option will increase in value, hence offsetting the loss in the stock. When the stock rises, the put option would simply expire worthless when the expiration date comes and you will only lose the price you paid to purchase the put options. So, here as if you buy put options as an insurance policy to protect your stocks from a price fall.

For an option trader, when the stock does not move in the expected direction, you should lose much lesser than a stock trader (in terms of dollar). Because the maximum you can lose is limited to the amount you spent to buy the option (premium), which is only a small fraction of the underlying stock price.

Click here to continue to "Why Options Trading? (Part 2)"

2 comments:

Anonymous said...

The reason of buying options cuz its cheaper is sorta of bs. The fact of the matter is, if your trading options your not trading just 100 contracts at 1 dollar.
Your still risking 1000 dollars, 10,000 dollars, etc. instead. its like saying penny stocks are better, because at 5 cents u can buy more shares than of berkshire at 100,000ish.

At the end of the day, if your trading your still putting the same amount of capital up at risk, for the return desired.

Nifty Tracker said...

who said anything abt. "cheaper" ??? We are talking abt. "less capital".