Diversity and Flexibility in Option Trading

A highly successful financial product nowadays, stock options offer the investor flexibility, diversification and control to protect his/her stock portfolio or generate more investment income. Options are advantageous because they can be used under almost every market condition and for almost every investment objective. Options also help the investor to purchase stock at a lower price and to benefit from a stock price’s rise or fall without owing the stock or selling it outright.

As options have a unique risk/reward structure, they can be used in combination with other option contracts and/or other financial tools to seek profits or protection.

Using stock options, investors can fix the price for a specific period of time, at which an investor can buy or dispose of 100 shares of stock for a premium that is only a percentage of what one would pay to own the stock outright. This helps investors to leverage their investment power while increasing their potential reward from a stock's price fluctuations.

As far as stock options are concerned, there are only limited risks for buyers. In no way can an option buyer lose more than the price of the option, the premium. With the right to purchase or sell the underlying security at a specific price expiring on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the contract are not met by the expiry date.

Even as options offer many investment benefits, they are not meant for everyone. Just as one’s returns can be large, so too can the losses – leverage. Moreover, the means for realizing the potential for financial success in option trading may be difficult to create or identify. A large amount of information must be processed before an informed trading decision can be arrived at. Option trading is more complicated than stock trading because traders must choose from many variables besides the direction they believe the market will move. Careful consideration and sound money management techniques are a must for successful option trading.