Stock Options and their Advantages

Stock options hold many advantages over just holding a stock. This ranges from higher leverage to managing risk.  Below are all the ways options can be a better way to go.

1.       Higher Return

Options offer a higher return then holding the stock.  Even a small move in the stock can give you a huge return in the option world. There have been times when I have over doubled my investment in under a day due to options.

That has got to speak to the shear ability of option contracts to make you a killing.

2.       Helps Manage your risk

Sometimes I feel safer buying an option then I do buying a stock, you want to know why? When you buy a stock you are risking a good amount of money.  If you buy a stock for $40 you are risking $40 per share. 

So if you are wrong and something bad happens you can potentially lose a large amount of money.  Of course you can always put a stop on a stock, but it doesn’t necessarily guarantee that you will in fact limit your loss to that amount.

Take for Example RCII, you could have bought it at $22 and placed a stop at $21.  If you did that you would have assumed $1 was the most you could possible lose on the trade.  You would have been disappointed however when it gaped open and opened at $19.51.  If you had a stop at $21 you would have been forced to buy it at $19.51 because that is the price it opened at.

This would have given you a loss over twice the size that you were expecting.  However when you buy an option, you know exactly how much you can lose because it is the price of the option contract.

3.       Lets you trade

When you buy a stock and it goes against you it is very easy to justify holding onto it and making the trade turn into something it isn’t.  When you buy an option you have no choice, you have to treat it as a trade or lose all your money.

This little thing can mean a huge difference in your performance in the long term.

For more on stock Options Visit http://www.stocks-simplified.com/stock_options.html