You may have been told in the past that trading in options is a risky business. You can lose your shirt over night, some times even quicker.



Well, what is the truth?

I want to take a few minutes and look at stock ownership. What are the possibilities when you buy stock?

Stock can go up in value

Stock can go down value

The stock prices moves sideways.

Clearly if the price goes up you make money. Just as clear, with the second scenario you lose money.

With a sideways move your stocks value dose not change; it dose however cost you, indirectly, through indirect opportunity costs and direct fees and brokerage charges.

Opportunity costs result due to your inability to invest in other opportunities hence the loss of the opportunity to make additional profit.

So if you purchase stock you can only make money if the stock price goes up.

Now some of you may be thinking, "But what about shorting?"

Well yes, short selling stock is possible but it is quite a tricky strategy and has almost unlimited risk so it is certainly not an approach we recommend.

You see, when you short a stock, you actually sell a stock that you don't own. And your intention is to then buy the stock back at a lower price. The price difference is your profit per share.

Do you see what the risk is?

The risk is the value of the stock going up; especially if it goes up a lot!

As you have sold the stock at a lower price you now have to buy it back at a higher price. And so your loss can be substantial.

So just to clarify, when trading in stock you only make money when the price increases.

You also need to consider another aspect of owning stock and that is the cost; it can be very expensive.

Consider buying 200 shares at $25 the cost would be $5000. Should you buy at on the margin it will still cost $2500.

That is a lot of money to outlay. And, more importantly it is a lot of money to put at risk. Especially seeing that you only have a one in three chance of the stock moving in the right direction.

Plus as stocks don't trend all that often you not only need to pick the right direction, you also need to be able to pick the right time.

So stock trading is not that easy. And it's expensive.

But how do options offer an alternative?

Options require lower investment, costing approximately 2% of the value of the stock while still giving you control over the same number of shares.

Taking the example above that's investing $100 instead of $5000.

Plus, if you select the right strategy, you can profit no matter whether the stock price goes up; goes down or even goes sideways!

In addition to this you are reducing your risk. The most you can lose is your initial investment of $100.

A major advantage of options is the leverage they provide.

Taking the example above if the price were to go up by 10% then your profit would only be 10% or on margin 20%.

But with a similar increase in prices the value of your option may increase by 100%. This would give you a profit of 100% - this is ten times more profit than on the standard stock trade.

In conclusion don't limit your options by accepting the standard view that stock ownership is the safe way to go and trading in options is the high risk game. By understanding options and the ways to trade them you can see good returns on your investment.

This article is offered for educational purposes only. It is not intended to provide you with financial advice. The information shared is gained through personal experience of what has and has not worked. Should you be considering trading or investing in stock you should seek the advice of a registered licensed advisor.