| Even if you just started to research options as a | | | | $1,000) and still have plenty of funds left over to |
| potential addition to your portfolio, you've probably | | | | diversify your investments with. |
| seen some the advertisements that talk about | | | | Options are also superior to stocks in that once |
| how options allow investors to "control" hundreds | | | | you graduate to more advanced options |
| or even thousands of shares of a company's | | | | strategies you'll see the versatility of this asset |
| stock for just a fraction of the price of buying | | | | class cannot be beat. When we trade stocks, we |
| the shares directly. That bit of information may | | | | really only have two choices: Go long, which |
| have you scratching your head and wondering | | | | means we buy a stock in the hope that it will go |
| how is it possible to play with the big boys for | | | | up, or sell short, which means we want the stock |
| just a small slice of the normal cost. Well, that's a | | | | to decline. |
| reasonable question and the answer is why so | | | | Sure, we can go do that with options, too, but |
| many investors have found their way to options | | | | we can also profit with options during range-bound |
| in recent years. Let's take a look at why options | | | | markets. We can also use options to generate |
| investing is the place for giant returns. | | | | income by selling covered calls on stocks we |
| Leverage, Leverage, Leverage | | | | already own. More advanced options traders use |
| Leverage has become a four-letter word of sorts | | | | strategies like spreads, collars, straddles and |
| as its abuse had a hand in the collapse of a few | | | | others to profit from a variety of market |
| major financial institutions, but leverage is not a | | | | conditions. It's even possible to add a new options |
| bad thing when investors understand it and know | | | | position to an existing one to bolster your |
| how to limit their risk. Here's how leverage works | | | | chances of profitability. Try doing that with stocks! |
| with options. Let's say you want to buy the | | | | Don't Forget Higher Potential Returns |
| August 25 calls in Microsoft. Remember that each | | | | Obviously, investors love options because the |
| equity options contract grants you control of 100 | | | | chance exists to make more money faster than |
| shares of stock. Microsoft is trading at $23 a | | | | with many other asset classes. Hence the beauty |
| share and the calls are trading for $1. That means | | | | of leverage. Evaluating an options contract's profit |
| that when you purchase one contract of the | | | | potential means we have to look at its delta. Delta |
| August 25 calls, your costs AND your risk is $100. | | | | is the measure of how much the contract will |
| (The price of the contract is $1 x 100 shares). If | | | | move in relation to the underlying stock. Let's say |
| you had bought 100 shares of Microsoft in the | | | | that we're looking at buying some Pepsi calls that |
| market, your cost and risk would've been $2,300. | | | | have a delta of 0.8. This means that for every |
| Now you're starting to see one of the biggest | | | | dollar Pepsi stock goes up or down, our calls will |
| attractions of options investing. If your Microsoft | | | | increase or decrease by 80 cents. That's a high |
| shares go up $1, you make $100. Great, but | | | | delta contract. We buy those calls at $5 a |
| you've also exposed $2,300. If your calls leap to | | | | contract ($5 x 100 = $500) when Pepsi is trading |
| $2, your investment has doubled with very little | | | | at $50 in the open market. Then the stock |
| risk. This is how leverage works in the options | | | | shoots to $55, so while the stock investors made |
| investor's favor. Lots of profit potential, at a | | | | 10%, our options with a delta of 0.8 went up $4 |
| more rapid pace than with stocks, all with a very | | | | in value, or 80%. We made $400 on a $500 |
| low risk profile. The worst thing that can happen | | | | investment. That's a tough return to beat. |
| when buying puts or calls is that the contract | | | | Versatility, Profits and More |
| expires worthless and you lose the premium paid | | | | We're not saying that you should completely pass |
| to enter the trade. You'd lose a lot more if a | | | | on other investment vehicles because options are |
| stock you owned directly fell to zero. | | | | so wonderful. Yes, they're great tools, but at the |
| More Options Advantages | | | | end of the day, you want your portfolio to be |
| As you can see, options are far more | | | | diversified. That said, the versatility options offer |
| cost-efficient than stocks. If you have $20,000 to | | | | combined with profit potential that is impossible to |
| invest and you are interested in a $50 dollar | | | | ignore make this asset class worth learning about. |
| stock, buying just 400 shares would eat up all of | | | | Take the first step into the world of options. Your |
| your funds. On the other hand, you could buy | | | | portfolio will thank you. |
| three $10 calls for $3,000 ($10 X 100 shares = | | | | |