Trading Stock Options To Increase Your Returns
Did you know that there is a way to increase your returns in the market? This method is very powerful and if you already have experience in the market they can be worth looking into. This strategy involves using stock options.
A stock option is simply a contract that gives you the right to buy or sell a stock at a specific price on or before a specific date. Once more they can be extremely powerful and can greatly increase your returns if you are right, or increase your losses if you are wrong.
For instance say stock XYZ is trading at $48. We believe that this stock will make a large move upward in the near future and because of this we have a couple options here. We could choose to buy the stock or we could buy the $50 call option on it for $4. If the stock goes up to $58 then your option would be worth at least $8 ($58-$50).
The option trade in this example would have returned it's investors over a 100% return (most likely more), while the simple stock trade (while still very profitable) would have only returned about a 20% return. This is only 1/5 of what the leveraged option play would have made.
However, there is a downside to options as well. Because options do eventually expire you might find your investment expiring worthless one day.
There are always ways to manage your risk, but if you are unable to trade stocks profitably then investing into stock options will pretty much only increase your losses.
If you are, however, making money in the stock market then options can be a great alternative to traditional stock. They allow you to increase your return and control more with less. As long as you actually have a plan to manage the risk they can be powerful tools.
Those who will use options as simply a way to get rich quick will get burned, so if that is you reconsider.
Article Source: FxTradingStock.com
About the Author
Now that you know, What is an Option here is an interesting article on stock option trading
by: Shaun Rosenberg
Total views: 45
Word Count: 341
Date: Mon, 21 Jun 2010
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