Why should you trade options?

Here’s a question I get a lot, along with all its other permutations: “What’s so good about options?” , “Why not just trade stock?”, etc.

There are a myriad of reasons why I like to trade options, but let me tackle just a few of the main reasons for the purpose of this article.

1. Leverage - Most people have a good understanding of leverage when it applies to other disciplines. For example, if I qualify for a $500,000 mortgage loan with a 20% down-payment ($100,000), my initial investment is only $100,000 out-of-pocket to purchase a home worth 5 times that value. If I rent the property out to a tenant I will get substantially more rental income than I would if I bought a $100,000 house with all cash. Granted, I still have to make the loan payments, but I stand a better chance of getting qualified tenants in a more desirable location.

If I buy an in-the-money call option for $1000 and I think that that stock is going to rocket higher, I will reap the rewards of the call option gaining exponentially more profit than if I owned stock – plus my risk is capped at only the $1000 I paid for the option. Now just like the mortgage example above however, I still need to make “payments” to the seller of the option, in the form of time-decay, but that unfortunately is the price of doing business.

2. Being the House – Not only can I buy options, but I can also sell them, which gives me the ability to play the odds as if I were a casino owner and the market are the people sitting at the slot machines and roulette tables. What a great setup! Of course, like any casino owner will tell you, you will occasionally have someone who will be a larger-than-expected winner – but over time, you will eventually be the profitable one if you keep letting people play the game. Here are some articles on how to do this: http://optionboost.com/members/tag/selling-premium/

3. Protection – Who says that I have to pick only stock or options? I can combine these two investment vehicles to enjoy the advantages of both. Perhaps I want to buy puts on my existing long stock positions, or I want to sell calls on my long stock position to collect some premium (income) as every day passes, or maybe I want to sell some puts to have my stock positions grow when the stock pulls back and I get assigned more stock through the exercise of the puts.

There are many more reasons, but suffice it to say: Options give the investor flexibility to structure just about any scenario as well as the ability to flip any scenario the opposite way to bet against it.