Why You Should Consider Investing in Stock Options

Why You Should Consider Investing in Stock Options

Why You Should Consider Investing in Stock Options? Stock options are high-risk investment options that are only suitable for those investors who have a high level of risk tolerance. If you are such an investor, stock options can help you to speculate as well as provide a hedge for your existing investment portfolio. The traditional hedging instruments are put options on either underlying stocks or on a certain stock index such as the Dow or the S&P 500 index. Here are some reasons why you should give stock options serious consideration:

  1. Speculation – By speculating about the movement of a certain stock, you have the opportunity to make huge profits and to exercise the benefits of leveraging. This means that you can potentially make greater profits from trading stock options than from trading the actually stocks since your investment tends to be much smaller and your returns proportionately greater. Another great thing about stock options is that you can profit from them regardless of which direction the stock market goes. What you need to be aware of however, is that in order to make money from stock options, you need to be able to make fairly accurate forecasts about how a certain stock will behave within a specific time period. Because nobody can say with absolute certainty what will happen in the future, there is a possibility that you could make losses with stock options if your predictions turn out to be wrong. But with the help of seasoned consultants or stock market traders, you could improve the chance of making positive returns on stock option trading.
  2. Hedging – Stock options provide investors with the benefits of hedging. When you purchase stock options, you normally place a stop-loss order that determines your boundaries regarding when to trade depending on the movement of the price of the underlying stock. This essentially minimizes the investor’s risk. With stock option hedging, you have the option of buying any underlying stocks at a predetermined price within a predetermined time frame to minimize any losses that you may suffer. Although stock options are risky, some analysts argue that the underlying stocks themselves present a greater risk than the stock option. The reasoning behind this argument is that the potential investment in a stock option is much smaller than the investment in the underlying stocks themselves. Therefore, the investor has much less to lose when they invest in stock options versus investing in actual stocks.Stock option investing may be better suited for equities that don’t display high levels of volatility. Stocks in certain sectors tend to be more volatile than those in other sectors and as such the investor should be careful to choose stock options carefully.
  3. Hedging also helps to protect investors in cases where they made need to repay the money that they used to make the investment. So if an investor borrows money for investment purposes, they may purchase put options to ensure that they can afford to repay the amount borrowed.