Exchange-traded options first started trading back in But over the past decade, the popularity of options has grown in leaps and bounds. According to data compiled by the Options Industry Councilthe total volume of options contracts traded on U.

Bythat number had grown to an all-time record of more than 3 billion. So why the surge in popularity? Although they have a reputation for being risky investments that only expert traders can understand, options can be useful to the individual investor. Here we'll look at the advantages offered by options and the value they can add to your portfolio. The Advantages of Options They have been around for more than 30 years, but options are just now starting to get the attention they deserve.

Many investors have avoided options, believing them to be sophisticated and, therefore, too difficult to understand. Many more have had bad initial experiences with options because neither they nor their brokers were properly trained in how to use them. The improper use of options, like that of any powerful tool, can lead to major problems.

Finally, words like "risky" or "dangerous" have been incorrectly attached to options by the financial media and certain popular figures in the market. However, it is important for the individual investor to get both sides of the story before making a decision about the value of options. There are four key advantages in no particular order that options may give an investor: With advantages like these, you can see how those who have been using options for a while would be at a loss to explain options' lack of popularity in the past.

Let's look into these advantages one by one. If you need a refresher on options, see our Options Basics Tutorial. Cost Efficiency Options have great leveraging power. As such, an investor can obtain an option position that will mimic a stock position almost identically, but at a huge cost savings. Obviously, it is not quite as simple as that. The investor has to pick the right call to purchase a topic for another discussion in order to mimic the stock position properly.

However, this strategy, known as stock replacement, is not only viable but also practical and cost efficient. For more on this strategy, see Using Options Instead Of Equity. Less Risk - Depending on How You Use Them There are situations in which buying options is riskier than owning equities, but there are also times when options can be used to reduce risk.

It really depends on how you use them. Options can be less risky for investors because they require less financial commitment than equities, and they can also be less risky due to their relative imperviousness to the potentially catastrophic effects of gap openings.

To learn more about gaps, see Do stop or limit orders protect you against gaps in a stock's price? Options are the most dependable form of hedgeand this also makes them safer than stocks.

When an investor purchases stocks, a stop-loss order is frequently placed to protect the position. The stop order is designed to "stop" losses below a predetermined price identified by the investor. The problem with these orders lies in the nature of the order itself. A stop order is executed when the stock trades at or below the limit as indicated in the order. This order works during the day, but it may lead to problems at night. The next morning, when you wake up and turn on CNBC, you hear that there is breaking news on your stock.

It seems that the company's CEO has been lying about the earnings reports for quite some time now, and there are also rumors of embezzlement. The stop-loss order was not there for you when you needed it most.

Had you purchased a put option for protection, you would not have had to suffer the nrg binary how to open a stock market broker account loss. Unlike stop-loss orders, options do not shut down when the market closes. They give you insurance 24 hours a day, seven days a week. This is something that stop orders can't do. This is why options are considered a dependable form of hedging.

Furthermore, as an alternative to purchasing the stock, options trading advantages disadvantages 15 minutes binary options strategy excel spreadsheet have employed the strategy mentioned above stock replacementwhere you purchase an in-the-money call instead of purchasing the stock.

The effectiveness of stop orders pales in comparison to the natural, full-time stop offered by options. To learn more, check out Make Your Portfolio Safer With Risky Investments. Forex online broker reviews Potential Returns You don't need a calculator to figure out that if you spend much less money and make almost the same profit, you'll have a higher percentage return.

When they pay off, that's what options typically offer to investors. Of course, we must point out that when the trade doesn't go your way, options can exact how to buy dow jones stocks heavy toll: To learn more about option pricing and profit, see Understanding Option Pricing.

More Strategic Alternatives The final major advantage of options is that they offer more investment alternatives. Options are a very flexible tool. There are many ways to use options to recreate other positions. We call these positions synthetics.

Synthetic positions present investors with multiple ways to attain the same investment goals, and this can be very, very useful. While stock market odds positions are considered an advanced option topic, there are many other examples of how options offer strategic alternatives. For example, many investors use brokers that charge a margin when an investor wants to short a stock.

The cost of this margin requirement can be quite prohibitive. Other investors use brokers that simply do not allow for the shorting of stocks, period. The inability to play the downside when needed virtually handcuffs investors and forces them into a black-and-white world while the market trades in color. But no broker has any rule against investors purchasing puts to play the downside, and this is a definite benefit of options trading. The use of options also allows the investor to trade the market's "third dimension", if you will: Options allow the investor to trade not only stock movements, but also the passage of time and movements in volatility.

Most stocks don't have large moves most of the time. Only a few stocks actually move significantly, and then they do it rarely. Your ability to take advantage of stagnation could turn out to be the forex pc that decides whether your financial goals are reached or whether they remain simply a pipe dream.

Only options offer the strategic alternatives necessary to profit in every type of market. Conclusion Having reviewed the primary advantages of options, it's evident why they seem to be the center of attention cp cheats.info money maker 2 download financial circles today.

With online brokerages providing direct access to the options markets through the internet and insanely low commission costs, the average retail investor now has the ability to use the most powerful tool in the investment industry just like the pros do.

So, take the initiative and dedicate some time to learning how to use options properly. Remember, options can provide these advantages to your portfolio:.

For further reading, see Introduction To Put Want to buy capitec sharesNaked Call Writing and Come One, Come All - Covered Calls. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. The 4 Advantages of Options By Ron Ianieri Share.

Example Say you wish to purchase Schlumberger SLB because you think it will be going up over the next several months. In order to acquire a position equivalent in size to the shares mentioned above, you would need to buy two contracts.

The difference could be left in your account to gain interest or be applied to another opportunity that provides better diversification potential, among other things. Remember, options can provide these advantages to your portfolio: Greater Cost Efficiency Less Risk Higher Potential Returns More Strategic Alternatives It is the dawn of a new era for individual investors. Don't get left behind!

The Advantages & Disadvantages of Binary Options Trading

If you want to use leverage to your advantage, you must know how many contracts to buy. Trading options is not easy and should only be done under the guidance of a professional.

A thorough understanding of risk is essential in options trading.

So is knowing the factors that affect option price. Investing in Google GOOG generally requires you to pay the price of the share multiplied by the number of shares bought. An alternative using lesser capital involves using options.

Learn more about stock options, including some basic terminology and the source of profits. Futures contracts are available for all sorts of financial products, from equity indexes to precious metals.

Trading options based on futures means buying call or put options based on the direction Stocks are not the only securities underlying options.

Learn how to use FOREX options for profit and hedging. Learn about investing in put options and the associated risks.

The 4 Advantages of Options

Explore how options can provide risk, which is precisely defined If you are buying an option, either a put or a call, you must enter a "buy to open" order.

If you are writing an option, Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain Learn about the difficulty of trading both call and put options. Explore how put options earn profits with underlying assets The trading of options has become increasingly popular among retail investors as they become aware of the many different An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation.

A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money.

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