When most of us think of investments, our minds go to stocks, bonds, and other such Wall-street-related topics. But the stock market isn’t the only way to invest, and it may not be the best option for you. In fact, options trading can have a number of benefits the stock market can’t offer.
Options trading can give you more flexibility, security, and consistency than traditional stock trading. Read on to learn more about this investment option and some stock tips for how to make it work for you.
What Are Options?
Before we dive into the benefits of options trading, let’s talk some about what options are. Options are contracts that give you the chance to buy or sell an asset for a set price at a later date. These assets can include stocks and bonds, as well as indexes, commodities, exchange traded funds, and more.
There are two basic types of options: call and put. A call option allows you to buy an asset for a fixed price at or before a predetermined date – for instance. You could buy a call option on a house that hasn’t yet been constructed. A put option allows you to sell an asset for a prearranged amount at or before the expiration date of that contract.
What Is Options Trading?
As you might guess, options trading is the practice of buying or selling these options. Options trading is one step removed from the stock market since you aren’t actually controlling the assets themselves. Instead, you control the opportunity to buy or sell these assets based on what you predict their value will be by the end of the trade.
Many investors choose not to exercise their options when the terms come due. Instead, they make money on the premiums buyers pay when they acquire an option. You can adjust the amount of time these options contracts run for, depending on what you predict the value of your asset will do over time.
One of the primary benefits of options trading is that it’s more cost-efficient than direct stock trading. In the case of most options, you aren’t buying an option on an entire stock, but rather on 100 shares of a stock. You can buy as many of these contracts as you like, but the minimum buy-in amount is much lower.
This lower buy-in amount allows you to spend your money more effectively. Rather than having to stockpile large amounts of your wealth in stocks that may or may not payout, depending on market fluctuations, you can divide it up among different options. This allows you to use your money more efficiently to get you a greater return on investment.
The other enormous benefit of options trading is that it’s much less risky than traditional stock trading. When you trade on the stock market, you’re subject to the whims of the economy. If a company has a bad week, a scandal comes to light, or a pesky global pandemic pops up, you could lose thousands or more.
Because options don’t deal directly with stocks, you can avoid such catastrophic losses. You can also allow options to expire with no financial consequences if you choose. In that case, your only loss is the premium you paid for the option in the first place, rather than the entire value of the asset you were buying an option on.
Greater Potential Profits
Where there’s less risk, there’s going to be less reward, right? As a matter of fact, that’s not the case when it comes to options trading. Because you’re investing your money more effectively with lower risk, you can actually get greater profits if you use your options right.
Because options trading allows you to hedge your investments (more on that later), you won’t lose as much money in risky or bad investments as you would with traditional stock trading. The smaller buy-in for each trade also limits your losses while allowing you to invest your money as efficiently as possible. All of this adds up to greater overall profits if you handle your options right.
When you work in stock trading, you’re limited to, well, stocks. But stocks aren’t the only type of asset for investing, and they may not be the best fit for you. Luckily options allow you to invest in any sort of asset you can think of, so long as you can get the owner to give you an option on it.
Options trading also allows you to diversify your profile more, as we’ve mentioned. You don’t have to use all your investment money in a few stock purchases. You can spread things out, setting up plans that work for you and your situation, giving you the flexibility you need to make money.
Lower Investment Possibilities
If you’re new to investing, you may not have a lot of money to put in up-front. You may also want to go slow, making sure your investments are smart and safe before you gamble your life savings and lose on a market crash. Options trading allows for lower investment possibilities, making it perfect for beginners.
Most options start at packets of 100 shares of stock, and you can purchase as many or as few of these as you like. You’re only paying for premiums on these options at first, so you could start with as little as $20. Your returns will be small, to begin with, but if you’re smart about it, you can soon grow those to substantial wealth through options trading.
No Financial Obligation
One of the best things about options is that they don’t lock you into an action when the contract expires. When you reach the end of your option contract, you can choose to sell the option, exercise the option (as we’ll discuss more in a moment), or let the option lapse. You are under no obligation to buy or sell the asset at the price you agreed on if that price doesn’t work for you.
If you choose to let your option lapse, you will lose your premium, which acts as something of a non-refundable deposit. But those amounts are usually relatively small – often smaller. In fact, then the loss you might take if you sold on a bad investment. This freedom lowers the risk of options trading still further, protecting your investments and your wealth.
Keep the Chance to Exercise Your Options
Of course, when you get to the end of your options contract, you may decide you want to exercise your options. This is when you either buy or sell the options’ underlying asset for the price you agreed upon when you signed the contract. This is rarer, as most people prefer to stick to trading, but it can be a great choice.
Let’s say you buy a call option on real estate for $500,000 in two years. But during the period of your options contract, the property values in the area go up, the homes built on that land appraise for higher than expected, and your investment option is now worth $800,000. You can still buy the property for $500,000 thanks to your agreement, and you’ll enter the investment with $300,000 equity right off the bat.
Hedge Your Bets
Although call options get all the glory for making profits, put options can be just as important for hedging your investments. If you buy a stock and the market crashes, you’re out of luck, out of money, and out of options. Even if you have a stop-loss order in place, that won’t cover you if the stock crashes before the market opens for trading for the day.
With a put option, you can always sell the stock for the agreed-upon price, no matter what the market value is. If you suspect the market value of a stock might drop, you can purchase put options that will limit your losses and potentially even make you some money. And if the stock keeps its value or improves, you can let the options lapse, losing you nothing but the premium you paid for them.
Always Make Money
When you trade on the stock market, you only make money when the market is up. We like seeing those upward trends, and scandals, disasters, or economic strain can spell financial disaster for investors. But when you deal in options, you can make money no matter which way the market is trending.
If the market is going up, short-term call options can turn a solid profit and give you exponential growth. If the market is going down, you can lock in put options that allow you to sell for higher than the market value. You don’t have to wake up every morning worrying about where the Dow Jones is opening; you’re making money either way.
More Strategic Options
Options trading also gives you more strategic options to work with than traditional stock market trading does. When you trade on the stock market, your strategies have to be based on hoping the market will grow and limiting damage if it drops. But because options allow you to make money both ways, you can do more to increase your profits.
Because you can buy or sell both call and put options, you can create combinations that work off each other to protect your investment and improve your profits. You can set up straddles, spreads, combinations, butterflies, and any number of other groupings, depending on your needs. This access to more strategic options can help ensure you turn consistent profits.
Lower Broker Commissions
Hiring a broker to help you with your options trading is practically a must. Trying to figure out which investments are good on your own can be tricky, to say the least, and managing those trades is a full-time job. A broker can also help you decide which strategies are going to work best for your investments.
Brokers will all have commission fees, of course, and stock traders tend to have high commissions. But some brokers will offer lower commission deals on options trading. This will depend hugely on which broker you work with, however, so always be sure to double-check.
Move Money Quickly
Investing in the stock market is usually a long process; often, investments will sit for months or years before you see the profits. And in general, these long investments will make good money. But if you’re trying to make an income trading, you can’t wait years for those investments to start paying off.
Options trading lets you move money quickly, get paid now, and take advantage of current market trends. There are longer options, of course, that can last months or even years. But you can also get shorter options that expire in a matter of weeks, giving you profits to work with and reinvest much sooner.
Work in All Markets
Even if you try to diversify your stock portfolio across industries, your investments really wind up in one market – the financial sector. The entire stock market tends to move as one, even if individual stocks rise and fall independently. In the event of a stock market crash, having all your investments in one sector could be devastating.
But because options trading is more flexible, you can work in any market you like. You could convince a farmer to sell you call options on next year’s crop and have food, or you could invest in land and real estate. You can get options in any industry you choose, giving you a truly diverse profile.
Find More Great Stock Tips
Options trading can be a great way to make money without putting yourself at tremendous risk. You can diversify your profile, protect your investments, and turn profits more quickly. You’ll also have access to more strategic options and more consistent profits when you use options trading.
If you’d like to discover more great stock tips for yourself, check out the rest of our site at Consistent Options Income. Our courses help teach you how to make money consistently in the options trading market. Watch our free videos today and discover for yourself how you can improve your financial strategy.