Options can be an intimidating investment prospect for new and experienced traders alike, but as you’re about to see, they really aren’t all that scary.
In fact, they have two main advantages over traditional stock investments.
See, when most people think about trading stocks, they either think of penny stocks that you can trade with a small account (but that are very volatile), or day trading that requires you to have a massive account (usually $250,000 just to start).
So, you’re either taking on a lot of risk by trading cheap penny stocks, or you’re shelling out a boatload of money up front to own more stable companies.
Now, when you buy options, you’re buying a contract that gives you the right to buy or sell 100 shares of a stock at a specific strike price by a certain expiration date.
Right off the bat, you already know how much risk you’re taking on because the most money that you can lose on an options trade is the initial premium you paid for it.
Compare that to a stock, which can end up costing you more money than your initial investment if it drops below your purchase price.
So, you’ve got limited downside risk with options versus potentially limitless risk with stocks.
Options also require less upfront financial commitment than buying shares of a company outright, so you can trade them with a much smaller account — often starting with as little as $2,000.
Let’s look at a real-life example of how this works.
Say you want to buy 10 shares of Apple at $100 per share. That’s going to cost you $1,000 upfront, which can tie up most of your portfolio if you’re starting with a smaller account.
Instead, you decide to buy one call option of Apple, representing 100 shares of Apple’s stock. In this scenario, that call option is only going to cost you $1, or $100 total. (That’s $1 multiplied by 100.)
Now, you get to control 100 shares of Apple instead of just 10.
And let’s say that stock goes up $5 over the next week. If you’d just bought common stock of Apple, you’d make $5 per share. So, you’d come away with $50 if you own 10 shares of Apple.
But if you bought the call option for $1 and Apple’s stock went up $5, that call could go from $1 to $2 in just one week — which would double your money.
AND your risk was only $100 instead of the $1,000 that would have been tied up by buying Apple’s stock itself.
I don’t know about you, but that sounds like a pretty good deal to me.
So the next time you want to add positions to your portfolio, consider giving options a try. Not only is it a tool that advanced and professional traders use, but they can also significantly boost your portfolio in record time.
Until next time,
The Future of Wealth