The popularity of online options trading has exploded in recent years. The Internet has fueled a booming business of small investors throwing money at the derivatives market. The upside to an expanding array of financial products is a greater potential for profit to be made by investors skilled in daily trading; the downside is increased risk and a more complex trading environment. For the amateur investor who is ready to learn how to trade stock options the derivatives market can be enticing, but also frightening. This article will outline some of the advantages and disadvantages of the stock options market for the average investor.
5 Reasons to Trade Options
Trading stock options is not for the faint of heart. Derivatives trading can lead to the permanent loss of investor capital, especially when that money isn’t secured by hedging. This leads one to ask, “Why would I want to enter such a volatile market?” The answer is simple - there is a lot of money to be made. Here are few other reasons.
1. Quicker returns
There is a lot of money to be made within a brief time frame
The payoff is fast compared to equities.
2. You don’t need a bull market
Stock options aren’t as tied into the market trends. You can still profit in a bear market.
Through ‘hedging’ (a type of stock option) you can insure significant amounts of your portfolio against catastrophic loss; hedging can significantly cut down the risk during a down market. For more information on hedging see the Options Trading Guide.
Since options are purchased at percentages of standard stocks (equities) you remain more ‘liquid’ retaining a greater amount of money for purchasing stock and stock options.
5. Another weapon.
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... help you get your feet wet in derivatives trading. Sites like Optionsexpress.com and Investopedia.com let you learn how to trade stock options by setting up a dummy account of free ‘money’ to use in a simulated options market. It is highly recommended that you practice buying and trading virtual stock options before you risk any money in actual derivatives trading.
Simulations are excellent resources for trading stocks. They can show you where you are strong and in what areas you need to improve for the best chance to beat the investment game.