Ebele Kemery: Options trading has been the centre of much debate of recent years. Is it dangerous? Can we go bankrupt? Indeed, options as a form of derivative instrument is far more complex than the stocks that they are written based on and, like a wild stallion, can hurt you if you do not understand how it works and how to use it properly.
Here you will get why options trading is actually better than stock trading in order to dispel the age old myths of how dangerous options trading is. Let's remember this: Options trading is dangerous only when you do not understand it.
1) Variable Leverage
The leverage that options give you is perhaps the main reason why people gravitate to options trading in the first place. Leverage is the ability to do more with the same amount of money. Trading options allows you to make a lot more profit on the same move on the underlying stock. When you buy the stock itself without margin, you are merely making 1% profit on a 1% move in your favor. However, in options trading, you could be making 10% profit on that same 1% move the stock made or even up to 100% on that same 1% move!
Yes, the beauty of leverage in options, unlike in futures trading, is that it is VARIABLE!
You could take on more leverage for more risk or lesser leverage for lesser risk by choosing options of different strike prices and/or expiration month. In general, the more out of the money options, the higher the leverage and the more in the money options, the lower the leverage.
Leverage cuts both ways. This is why the beauty of leverage in options trading is that it allows you to do the same trades with much lesser money, as such, you could simply use only money you can afford to and intend to lose in any failed trade for each options trade so leverage actually help you control your losses instead!
2) Low Capital Requirement
Apple Inc., AAPL, is trading at $295.36 today which means it takes $29,536 to buy 100 shares today. However, AAPL's at the money call options costs only something like $715 to control the profits on those same 100 shares of Apple!
3) Bet Downwards Without Margin
In order to profit from a downwards move on a stock in stock trading, you could only short the stock which incurs margin. However, in options trading, all you need to do in order to bet on a stock going downwards is to BUY its put options with no margin needed at all. That's right, buying put options for profit to downside works exactly the same as buying call options for profit to upside. There is no need to own the stock beforehand and there is no need for margin!
4) Multi-Directional Profits
In stock trading, you only profit when the stock goes in the direction you want it to. Upwards when you buy the stock or downwards when you short the stock. There is no way to profit in both scenarios simultaneously and there is no way to profit if the price of the stock does not move. However, in options trading, such multi-directional profits are possible! There are options strategies that allows you to profit no matter if the stock goes upwards or downwards quickly and there are options strategies that profits even if the price of the stock remains unchanged! Such is the real magic of options strategies which greatly increases your chances of winning in options trading versus stock trading!
5) Play Banker
Sick and tired of always being at the player's side of the table? In options trading, you could switch instead to the banker's side of the table and do what market makers do by selling options to people who are wants to take the side of the player! When the players lose, as they often do, you get to keep the bet as profit just like a real banker! Only options trading has the "bet" which you get to keep and it is known as "extrinsic value".
Ebele Kemery associated with JPMorgan Asset Management is also a member of the Global Fixed Income, Currency & Commodities (GFICC) Group. Based in New York, Ebele is the head of Energy Investing within the Commodities team. Prior to this role, she provided institutional client relationship management and tailored risk management solutions in the Investment Bank’s Global Commodities Group.
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