The Actual Advantages Of Buying Options Rather Than Stocks


An option is really a derivative on an underlying security that gives the right, but not necessarily the requirement, to buy the underlying security at a certain set price.

They come with different strike prices, expiration dates, and allow tremendous leverage as each option controls up to one hundred shares of stock in a certain company. These advantages make options a far superior trading instrument than merely trading stocks.

One benefit is leverage. Leverage is the ability to use a small quantity of capital to control an enormous asset.

As in real estate, where a small down payment permits a prospective buyer to control a huge piece of property, options enable the trader to control up to one hundred shares of stock with just a tiny bit of capital or, in this case, it is referred to as the option's "premium" which will be the actual cost of the option.

Another advantage is that a trader can generate income by employing credit spreads with options. When you see that ABC stock is in a trading range and is staying above $50 a share, you'll be able to create a credit spread by creating what's referred to as a "bull put spread".

A third advantage is options also give you the ability to short stocks without having the restrictions of short-selling stocks. Whenever you short a stock in the anticipation that it will go down in price you not only have a more substantial cash outlay, but you also need to pay interest on the stock you borrowed to short. You have to pay the dividends back that the stock might pay during the time you hold it.

With put options, you prevent all that plus it is possible to make faster returns and much sooner since the stocks will generally fall twice as quickly as they rise.

The positive aspects written here are only a few compared to the dozens that options afford traders who are disciplined enough to learn them.

Stock and option investors that take the time to learn and apply several simple strategies offered by options can better assess risks in the markets and possibly put themselves into positions to profit handsomely.

For those who need start up capital for your company, the above advice can help you produce funds. Or you may ask an investment professional about shell companies for sale and then research the cost of going public to expand your business.

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