Options are can help you beat the market
As a stock trader, you can use the buy-and-hold philosophy on your investment and own various stocks and mutual funds. If you’re serious about your investment, you’re probably going to perform research and analysis on the stocks you own.
The market is a tough nut to crack, which is why even an experienced money manager fail to do it consistently.
History shows that stocks outperforms other assets in the longer term
However, this isn’t comforting for those who are currently taking their shot, especially for those who are true beginners in the world of stock trading.
There are many reasons why investors cannot stop losing in this market. Sometimes they simply don’t know how to hedge.
Options can help you avoid losing too much in this market.
Hedging
Trading options lets you minimize the risk on your stock market investments. After all, most of the losses everyone experiences can be avoided if you use the right strategy, in which hedging through options belongs to.
Insurance
Options can serve as insurance that can protect your investments in a very similar manner where your car or house is insured.
While options trading are somewhat expensive, you can use it for various strategies that can protect your investments for little to zero costs.
Income
By selling someone the right to buy your stock at a predetermined price in the future, you get paid a premium that you can consider as a special dividend.
Leverage
You can use leverage but the good thing is that you never have to trade a single share of stock. You can also invest far less money when compared to what stockholders invest.
Bearishness
You don’t have to always be bullish. Options let you create positions that prosper when the market moves higher, lower, or sideways (trading in a range).
Traditional investors only gain a huge profit when the stock moves disproportionately higher.
Limited Risk
You can choose the strategies with very limited losses but with a very high potential for success. The tradeoff is that profits may also be limited. After all, higher risks generally mean higher rewards (though this may not always be the case).
The limited losses nature of many options strategies is one of the most important factor why options are appealing to serious investors.
Indexing
If you prefer to trade using a diversified portfolio rather than investing in individual, handpicked stocks, you can also trade options on all the major indexes in the world.
Various strategies
There are many great strategies with options that you can choose from. Most of them are also very easy to learn and understand. More important, these strategies are much less risky than simply owning a stock. These include:
- Covered call writing
- Cash-secured naked put writing
- Collar
- Credit spread
- Iron condor
- Diagonal or double diagonal spread
These strategies all involved the use of options. Therefore, you must take your time and learn how options work and how these strategies can help you achieve better profits and fewer losses.
