Maximum traders are preferring towards options trading as their investment strategy in the new market conditions. Why options are reliable than stocks?
The most significant reason is cost efficiency. Options are highest support tools. For example, you want to buy 100 shares of any company stock rated at 70. You need to invest in 7000. On the other hand, if you buy one call on the stock XYZ priced 10, you get the right to buy 100 shares of any company stock for only 1000. You can use the left 6000 for other investments.
The another most significant reason is less risk. You buy any company stock for 70. You don't want to risk more than 5% of your investment. So you set a stop order of 66.5, if the rate continues below this, your stock broker will perform the sell order. The stock market stays shut down on the Saturday and Sunday. There is no guarantee that there will be value continuity between the Friday market close and the Monday market open.
On Monday morning, you know in the Wall Street Journal that the CEO of the company ABC was hiding data from the shareholders regarding the running of the firm. That was the breaking news on Sunday. On Monday morning the stock XYZ is trading at 40. It had ended at 68 on Friday. Your stop order did not work during the weekend. You have suffered a straightaway loss of 30.
If you had bought a put option on any company stock with the strike rate of 60 and expiry date of the month, you would not have suffered this condition. You could have used the put option and sell your stock for 60 when it is selling for 40. This would have decreased your loss. Options act like insurance.
Another major benefit is that options give a more ROI as compared to stocks cash. In our example of stock XYZ, assume the call option that you have bought is in the money and has a delta of 80%. That indicates that the option rate will simulate the stock price by 80%. Assume the call option is rated 10. If the stock XYZ rate goes up to 80, the option rate will also gain 80% of the stock value and will become 18 (10+8). ROI on the stock: 14%. ROI on the option: 80%. So the options always provide a better ROI.
There are numerous advantages of using options trading as compared to stocks for your investment strategy. But trading options is not as clear as it has been shown in this article. Before you start trading options, you require to know the options Greeks. You can take option trading tips from any online website.