Option Trading Gives You Leverage
With options trading you can use a very small amount of your capital to purchase stocks.
Compare this to a stock trader who has to pay the full price of the stock tying up a great deal of the traders capital.
This allows you to make a very significant amount of money if the option makes even a small move.
The trader likes options because they can make bigger bets with less money. And the investor likes options because they can completely hedge their long-term sock positions at a very small price.
You Can Trade Options Up, Down, and Sideways
Options give traders the opportunity to make leveraged bets on the direction of a stock. But by using any one of a number of options strategies ranging from the simple to the complex, traders can also look to gain from a stock that doesn’t move at all.
The ability to trade both direction (up versus down) and volatility (movement up or down versus little or no movement up or down) is an aspect of trading options that is often overlooked by the average options trader.
Trading Options Limits Your Risk
Traders who use options have the ability to completely control their exposure to risk.
Buyers of put options, for example, risk only the amount of the premium paid up front.
By contrast, a trader who sells a stock short can find him or herself deeply underwater if the position moves suddenly into the red. In a worst case scenario, a trader could be forced to cover at a level where the losses could be massive.
There are a number of options strategies, from buying naked options to backspreads, which actually have a limited risk and virtually unlimited profit potential.