Our trading preference is stock options.
But you have probably been told or read that options are risky. Even worse, that you can lose your shirt trading them!
Well, what is the truth?
Let’s take a look at stock ownership. What can happen if you buy stock?
The price can go up.
The price can go down.
The price can go sideways.
In the first case, you can make money. In the second you lose money.
And in the third case you don’t directly win or lose but in fact it costs you money in two ways. The direct cost of brokerage and fees. And the indirect cost known as opportunity cost.
This is the cost due to lost opportunities. The fact that you aren’t able to be involved in other, potentially profitable trades.
So if you purchase stock you can only make money if the stock price goes up.
Now some of you may be thinking, “But what about shorting?”
Well yes, short selling stock is possible but it is quite a tricky strategy and has almost unlimited risk so it is certainly not an approach we recommend.
You see, when you short a stock, you actually sell a stock that you don’t own. And your intention is to then buy the stock back at a lower price. The price difference is your profit per share.
But can you see what the problem is here?
Well what happens if the stock price goes up? Particularly if it goes up a lot?
As you have sold the stock at a lower price you now have to buy it back at a higher price. And so your loss can be substantial.
So, to summarize, when you trade stock you can really only make money if the price increases.
Now there is one other aspect to this that I want to address. And this is that owning stock is expensive!
If you purchase 100 shares of a $50 stock it will cost you $5000. And if you buy it on margin it is still $2500.
That is a lot of money to outlay. And, more importantly it is a lot of money to put at risk. Especially seeing that you only have a one in three chance of the stock moving in the right direction.
Plus as stocks don’t trend all that often you not only need to pick the right direction, you also need to be able to pick the right time.
So stock trading is not that easy. And it’s expensive.
But options provide a great alternative.
For a start you only have to invest about 2% of what the stock was worth and yet you still control the same 100 shares.
So in the example above, instead of investing $5000, we might only have to outlay $100.
Plus, if you select the right strategy, you can profit no matter whether the stock price goes up; goes down or even goes sideways!
And finally, your risk is limited. The maximum you can lose is the amount you put into the trade. So in the example above - $100.
But the best thing of all is the leverage that options provide.
In the above example, if the stock price goes up by $5, the profit on the stock trade would be 10% or on margin, 20%.
But with this increase in stock price the value of the option might increase by 100%. And so the profit on the trade would be 100% - or ten times that of the straight stock trade.
So don’t just accept the common view that owning stock is safe and trading options is dangerous.
If you understand options and learn how to trade them they can be a great investment vehicle.
David Chandler
www.StockMarketGenie.com
Ordinary People Making Extraordinary Profits
Our comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn't worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.
|
|
 |
Home
Business Search
Business
Career
Internet-Marketing
Marketing
PROPERTIES FOR SALE IN CYPRUS - PLEASE VISIT www.propertyincyprus.com
BLUE SKY PROPERTIES IN CYPRUS work closely with a wide range of real estate professionals within our group of companies This allows us to assess your individual needs independent of pre-selecting any area or town. Our goal is to provide sound...
...Read More
The Harvest: Shared Power
The fall harvest comes upon us once a year. The farmers collect the sometimes-scant rewards of their heroic efforts begun months before. For those of us who are hobby or family gardeners, fall is the time for us to pluck the firm orange...
...Read More
No-Holds-Barred Conversations with Dan Lok - Part 2
Question: How to deal with ultra skeptical offline or be it Internet surfers in order to reassure them and get them to happily open up their wallets? I like that “happily open up their wallets”! Your customer should be happy to open his/her...
...Read More
Tips for Increasing Your Profits with Gift Certificates
Offering gift certificates is an excellent way of increasing your sales by solving your customers' gift-giving problems. Often people would like to give your products as gifts, but are hesitant to choose a specific item for someone.
I'm a...
...Read More
One of The Best New Business Opportunities May Be Right there in Your Home - a New Daycare Business.
The day care industry is expanding. There are now more than 100,000 licensed child-care centers and 250,000 licensed family day care homes across the United States.
The market for day care increases every year as the working mother in society...
...Read More
|
