Efficient with Costs and Fees
Options can be massively leveraged. Therefore, you can have an option position similar to a stock position, but with a huge savings at costs.
For instance, if you want to buy 200 shares of a stock that costs $80, you must be willing to pay out $16,000.
On the other hand, if you just bought two $20 calls, each contract representing 100 shares, the total would be only $4,000. You would then be able to save $12,000, which you can use for other purposes.
Of course, there are certain situations where buying options poses more risks than actually owning equities. However, there are more situations when you can use options to lower your risks.
It depends on how you use them. For one, options can be less risky for you since you only have to use less financial commitment than with equities. They can also be less risky because of their relative imperviousness to the potential disasters that gap openings can cause.
Good for Hedging
Options are very great tools for hedging, and this also makes them far safer than stocks. When you buy stocks, a stop loss order is typically placed to protect the position.
The stop order is created to stop the losses below a predetermined price that you identify. The only problem with these orders lies in the nature of the order itself. The order will be executed when the stock trades at or below the limit as indicated in the order.
Unlike stop orders, options do not shut down when the market closes. You can benefit from some sort of insurance for 24 hours, seven days a week. This is something that stop orders cannot do. This is also the main reason why options are more dependable in terms of hedging. Investing in options also give you higher potential returns.
Options also give you the chance to get 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 give you multiple ways to get the same investment goals. Needless to say, this can be very useful. While synthetic positions are considered an advanced option subject, options provide many strategic alternatives.
For one, many investors use the service of brokers who charge a margin when an investor wants to short a stock. The cost of this margin requirement can put a cap on your potential profits.
Other investors use brokers who simply do not allow for the shorting of a stock, and you can’t do much about that. The inability to play on the downside when it is needed can virtually disarm you and force you to be in a grey world while other markets are trading with flying colors.
The good news is, no broker prohibits an investor to buy puts to bet on the downside. This is a real benefit that options trading can easily give you, quickly and efficiently.