Top 7 Reasons to Trade Options

by John Lansing | December 8, 2010 1:35 pm

Top 7 Reasons to Trade Options

You may be asking yourself the question: Why should I be interested in trading options?

Well, here are seven reasons you should consider it:

1. Options offer the potential for huge returns.

Options offer the potential to make a 200% or even 400% return on your investment in a matter of days, according to many options trading articles.

Though stocks can offer good returns, there is no trade in the stock market that has the potential for such huge percentage returns within such a short period of time.

For example, last fall, we had the pleasure of enjoying option trades that realized 400% and 800% returns on our investment in just eight hours. Most months, we are involved in option trades that bring us 100%-200% returns on our investment.

However, keep in mind that with this potential for high returns comes high risk.

2. Options can be profitable even when stocks are going nowhere.

While stocks require movement either up or down to make money, options can pay off when stocks are in a holding pattern or going nowhere in terms of price.

When you write an option, stock neutrality can be one of your best friends. So, while everyone else is watching paint dry, you can be making money.

3. Options can function as insurance.

If you are holding stocks for an extended period of time and are concerned about significant price fluctuations, you can purchase options to offset any potential losses due to price drops for a minimal amount of money. Options can give you the opportunity to reap the rewards of riskier investments while limiting your losses.

4. Options are a good add-on.

If you are planning to hold a stock for a number of months, or even years, writing options can be an excellent way to add value to your investment without selling your stock. Of course, you will have to choose the right option, but if you do, you can pocket most of the premiums (cash), if not all of them.

5. Options are affordable.

If you are fully invested in other areas, options can be a way to invest in stocks without having to fork over a lot of cash. At the same time, they limit your losses if the trade goes against you.

6. Options offer flexibility.

While stocks can only be purchased at the current market price, options offer a variety of packages based on different strike prices and expiration dates. Because of this unique feature, you can implement a number of different strategies and tactics to generate income.

7. Options are leverage.

When you buy an option contract, you have bought the ability to control 100 shares of stock. It’s a form of leverage, and it gives you the potential for significant returns.

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