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If you’re new to trading, you’ll want to know if options are worth getting into. Many professional investors tend to have options in their portfolios, even if they aren’t trading them.
Overall, is options trading worth it?
For most people, it’s worth trading options as they can be profitable when done right. However, many new options traders lose money as their options may drop in value over time as the expiration date gets closer.
Unlike stocks, options have expiry dates associated with them, so they can definitely be riskier than stocks.
With a stock you really only have to pick a good company that does well long term to make money. However, with options you have to pick a good company that will do well before the option expires to be able to make money.
That option expiration is often what gets people in trouble.
You can be 100% right on a stock going up and it being a good company but if it doesn’t rise until after your option expires you will lose money.
You’ll also need to fully understand when to use calls or when to use puts. The type of option you choose makes a huge difference in whether or not you see success.
If you want to learn more about why options trading is worth it, make sure to keep reading this article!
Why Options Trading Is Worth It
There are many reasons why it’s worth trying out options trading. Working with options is more cost-efficient, sometimes less risky than trading stocks, allows you to form detailed strategies, is versatile, and even offers high profits.
It’s also worth noting that, while generally less risky than stocks, all forms of trading come with some level of risk- including options!
You want to make sure you don’t invest more than you can afford. The more you know about the underlying stock, the better decisions you can make.
Never go in on an option that you can’t afford to lose is a good rule of thumb.
Overall, those who put in time and effort tend to perform better, especially in options trading. Always assess what levels of risk you’re comfortable with before buying any stock.
Options Trading Can Be Cost-Efficient
First of all, options trading can be cost-efficient. You’re controlling 100 shares worth of the underlying security- which is much cheaper than buying the same amount of stocks outright. When purchasing the option contract, you need to pay a premium, but you still save a ton of money.
Because of the lower price associated with options, it’s easier for those with a lower budget to get into. You can start with just one option contract, then work your way up to having more!
It’s a rewarding process that gives you plenty of opportunities to learn about trading.
Options Trading Can Be Less Risky Than Stocks
You can use options to lower the levels of risk associated with your trades. Since they cost less, you won’t lose as much money as you would with stocks if things go badly.
This benefit makes them great as a hedge too.
An ITM, or in-the-money call, is very safe and follows the stock market’s trends almost identically. Plus, you can only lose what you spent on the call option.
That means you have unlimited upside potential, with the premium you paid is the maximum loss if it doesn’t work out for you.
Overall, options trading does have some risks, but you can lower it by strategizing. If you’re new to trading, it may take a while to understand, but you have plenty of strategy options available to you.
I recommend reading Options Trading Strategies by Nathan Real. It offers suggestions for your first steps and many plans that should work for you.
You Can Form Detailed Strategies With Options
There are also many more investment strategies that you can form with options trading. You can create plans based on stock movement in the market but also volatility and time.
When it comes to trading based on time, options are the only form of stock that allows you to do this.
When the market’s at a standstill, being able to trade based on other factors is essential, you can still turn a profit even when nothing seems to be moving.
Examples of Option Strategies
According to Investopedia, there are several options strategies that you need to know. These include:
- Iron butterfly and iron condor
- Long call butterfly spread
- Protective collar
- Long strangle and long straddle
- Married puts and covered calls
- Bear put spread, and the bull call spread
Each strategy fits best with a particular situation, so you’ll want to make yourself more familiar with them. The covered call is the most common type of option strategy.
You’ll use it if you expect no significant changes to the underlying stock’s price. It’s excellent for more downside protection, although you limit the amount of profit you could make.
Overall, you can form plenty of detailed strategies, depending on the situation the market is in. You’ll begin to sense which choice is the best the more you make options trades.
Options Are Versatile
Options trading allows for more versatility in your strategies as well. You can buy or sell based on many different underlying assets. This benefit will enable you to determine where the stocks will move.
If you’re good at predicting the market, you’re sure to receive many benefits from options!
You can enter a forex market with options, too, then trade using foreign currencies. This method is a great way to invest if you’re already interested in other countries’ currencies. Overall, you have many different ways to trade your options available to you.
You Can Have High Returns From Options
Finally, options trading can offer you plenty of high potential returns. Since you spend less money on options than stocks, you’re almost always going to receive a higher rate of return (or % loss).
This fact comes from you spending less but still making the same profit margins.
If you’re looking for high returns, then options are going to be worth it! Utilizing the best practices and planning can help you get the most from your returns.
Are Options Better Than Stocks?
Both stock and options are known to be volatile. So, how do you know which one is better for you?
If you are a conservative investor then stocks are a much better choice for you. If you don’t mind the risk or if you want to take a flyer on some stock that is being talked about as possibly jumping massively then options are a good choice.
With options, you can work with 100 shares at once instead of just one at a time. This allows you to control hundreds of shares of stock for a fraction of what it would cost to buy the stock outright.
But keep in mind that you need to buy or sell options before the expiration date as of an option expires it is worthless.
Which Options Strategy Is The Most Profitable?
There are many options strategies that you can use, so you’re probably wondering which is the most profitable. This strategy can differ for everyone- you may feel more comfortable with certain strategies that other traders don’t deem “profitable.”
However, there’s one strategy that many traders tend to agree on.
The most consistent profitable options strategy to take is to sell out-of-the-money put or call options. This strategy allows you to keep the premium and lowers the amount of risk you take.
Selling calls allows you to profit the majority of the time but you do limit your upside on that stock.
Many professional traders agree that selling a call or put for the premium is a good idea. Plus, this strategy also allows you to earn a consistent income over time.
So, I’d have to say that options trading is worth it! It’s cost-efficient, it can be less risky than trading stocks, there’s plenty of strategies, and you can receive high returns for what you pay in premiums.
While beginners do tend to lose their money, don’t let that discourage you from trading options! You’ll improve with experience.
If you’re interested, be sure to give it a shot. You’ll learn more if you have the first-hand trading experience to work with.