The Trading Power of Options

Traders can also receive income from their stock holdings through options. As traders we can use strategies that will be profitable during a sideways market, as well as being able to control large blocks of stock for pennies on the dollar creating the potential of very attractive returns. This is referred to as leverage and options are a great tool to employ to maximize the benefits of this very powerful factor.

When using options, it is easy to take a low-risk position that will meet your expectations about the market. For example, if you have a bullish bias, you can simply buy a straight call; if the option seems to be more expensive, then you could choose to construct a bullish vertical spread, which involves buying a call and then selling a call that is a further strike out to help finance the call that was purchased. However, if the strategist is bearish they can either buy a put or implement a bearish vertical spread, which involves buying a put and a further strike out-of-the-money to help finance the put that was purchased.

Options can also be used to trade a neutral outlook on the markets. For instance, if an options trader does not really know what direction a market may trade but does think the market will breakout one way or the other, then they can purchase both an at-the-money call and put and capture profits, regardless of which way the market goes. This particular neutral options strategy is known as a straddle.

Options are also terrific alternatives to use versus purchasing stock outright. By using options you can literally control stock for much less money. An option trader can buy an in-the-money long-term option for far less than actually purchasing the stock outright. In addition, the return on investment figure is greatly enhanced due to the leverage factor that options possess.

Options can also generate income on current stock holdings. Using options, you can generate cash by selling calls against the stocks that you own. This particular options strategy is called the covered call. You can also sell calls against any of the in-the-money calls you might have purchased, as well generate monthly income and continue lower the cost basis of the call, which consequently lowers the overall risk.

These are just some of the huge benefits that you can derive by actively employing options as a trading vehicle. As you become more and more skilled in the use of options, you will see the virtually unlimited combination strategies that can be employed to create the best risk-to-reward profile.

Given their flexibility, low cost, income generating potential and superior risk control, options can provide the trader with the best chance of success in the markets.

Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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