Old fashioned stock investing is long gone. The new bull to ride is trading options.
With any type of investment, there is risk involved. For many people, anything that touches income can be worrisome and deter you. But the stock market is hot and the best time to get in is always sooner rather than later.
These seven reasons will encourage you to start looking around to start trading immediately.
1. Trading Options Is Lower Risk Than Traditional Stocks
Options contracts are an arrangement set up by the investor and a company with the intent to buy a set amount of shares at a specified time. A contract is set at 100 shares. So if you decide to buy 5 contracts for a company, you are agreeing to buy 500 shares at the set price.
The major benefit of trading options is the lower risk. Investors and companies will use options to help offset the constant fluctuation of prices in their traditional stocks over time.
You also have the option to back out of a trade. For instance, say the company tanks after making your contract. You can then back out of the buy option and only lose the money you had put down initially.
And it goes vice versa, you can decide to go all-in on a call earlier than you originally intended. If your option was to buy a stock at $10 a share over the next month and in two weeks it hits $50 dollars, you can then follow through with that share ahead of time rather than having to wait the entire month.
2. Higher Potential Returns
One of the best reasons for trading options is higher potential earnings. Because you are agreeing to buy 100 shares of a stock at a certain price, you have the potential to earn much higher.
For instance, if you place an options contract to buy 100 shares of Company 123 at $10 a share, you only put down $10. Now say this company released a hovercraft machine and beats earnings by quite a bit and they shoot up to $100 dollars a share. You then exercise your right to buy at $10 a share, only paying $1000.
But because that share is now worth $100, you turn around and sell it for $10,000 meaning you make an $8,990 profit ($10,000-$1,000-$10).
3. More Strategic Options
The other benefit is the number of diverse options you have when it comes to trading options. Choosing different options for different companies can help with risk management.
Strategies for trading can differ from company to company. Keep the number of options open and you can help mitigate risk even more.
You can change the amount of time that a stock will take to get to the target price. You can change the target price. You can decide to ditch the stock or follow through at any given time that you have the option.
Because there are so many different outlets for strategizing, you can ensure that your portfolio is in a safer position. You can play the stock market ballfield on your own terms, compared to wall street terms.
4. Fixed Price
There is a deep sickening feeling when you go to buy a stock one day and forget to put the order in and then it shoots up overnight.
By getting into trading options, you can guarantee that you are setting your price from the get-go. No more worrying about what the stock is going to do the moment you place the order. It is a simple “this is what I want” option.
Once the target stock hits the target price, you can follow through with your option to buy the contracts at your price. Consider this the haggling of the stock market world. Where you are making the call on what the price will be rather than letting the rest of the stock market influence it.
5. Fewer Upfront Costs
While there are requirements for trading options, it does require fewer upfront costs for purchasing the stocks at large amounts. You don’t need all the money at the time of purchasing the contract to put down.
Many brokerages will try and make you keep a minimum in your brokerage account. Alternatively, you may be required to deposit a great deal of cash to start off the account in the first place. This can range from $10,000 to $25,000 depending on the brokerage.
If you want to buy an options contract that consists of 100 shares at $10 a share, you only need to put down $10 initially. That sounds a lot less scary than $1,000.
6. Fewer Commissions
Many investment brokers have lowered or eliminated their commission fees. Brokerage firms typically charge $0.65 per contract. This means you owe less than a dollar when you decide to fulfill your contract.
Compare that to normal investing accounts, which tend to take percentages of your stock sale. If you sell a stock for $5,000 dollars, a company may look to take 0.5% – 1% of that sale. That would mean you’re out anywhere between $25-50 dollars.
If you start doing this over multiple different stock investments, these commission fees will start to add up. By choosing different options contracts, you can minimize what you are paying to brokerages.
7. Diversified Portfolio
Because of the lower upfront costs and a higher chance of profit, trading options is a great way to diversify your portfolio. Choosing different options strategies for different companies creates even greater portfolio diversity, creating an even safer trading route.
These lesser costs allow you to buy Company 123 and Company ABC at the same price when you may have only been able to invest in one with normal investing options. There is always a risk and reward when it comes to investing, so keeping your portfolio diversified will ensure you put in most minimal risk with the highest return.
Trading Options Is the Future of Investing
Traditional investing will always be around. It makes sense to invest in smaller companies you believe in that don’t offer options trading. You should also invest in bigger companies that do offer options trading to maximize your profits.
If you’re looking to get the best knowledge and strategies when it comes to trading options, act now, and buy our Options Income Course. This course is based around making an income off of trading options and ensuring that your strategies are sound when it comes to playing the stock market.