Options Trading

investingWhat are options trading? Do you not fully understand this fundamental aspect of finance? If so then you may be missing out on protecting any gains or making a large return on your investment. Options trading can be used to not only secure your portfolio but when used correctly can generate a large ROI on a small amount of capital as leverage.

First let’s discuss how you can use options trading to hedge against risk. Options contracts are a great way to do this if you know what you are doing. It can take some practice so maybe doing this on paper to start is the way to go.

To hedge against any downside risk, you would put a “collar” on your stock. That means you would buy a call option for a couple dollars above where you think it may hit. Then you would sell a put option for several dollars below the bottom of where you think this stock would go. Either way you are hedging against any risk here as you are bound to make money regardless if the stock goes up or down.

Options trading also allow you to profit if you know how to use long calls. These are contracts that are called LEAP options. By using these, you can risk far less capital if the stock price should fall below your initial estimates. If you know your stock is going to go up, or has a good likelihood to go up, then you can buy 100 LEAP options instead of the 100 shares. As option contracts are far cheaper than a stock price for the most part, you then would risk less money if the stock should go down.

A bull call spread is where you believe the stock is going to go up but don’t necessarily want to risk the money to buy the shares. To do this again, you would buy a call spread above your target price and sell a put below the price you believe the stock will reach. Even if the stock remains flat you should earn a hefty return on your investment.

Options trading are a great way to maximize your money, even if you want to just leverage a small amount, but this should be practiced on paper first. You should get a feel on how to do this before actually risking any money.

While you can certainly lose money with options trading if you do this the right way you should be able to almost always earn a positive return on your investment, and that is the dream of every investor.

This should be taught to every stock investor and should become part of everyone’s daily routine if you plan on making any money in the market. To not fully understand options trading would be a big mistake in the long run; clearly it is a fundamental skill that should be honed.

What I have taught in this brief article is just the tip of the iceberg when it comes to options trading. There is a wealth of information to be learned, and many techniques to master, entire courses are taught at the major trading houses in New York.