Options trading has the advantage of leveraging capital by allowing a small amount of capital to control a larger value amount of the underlying asset.
At the price of 100 it would cost 100,000 to purchase 1000 shares of XYZ company. However you can control the same number of shares using options for a fraction of that amount.
This tremendous leverage means that for a smaller investment, the profit potential can be the same as if you owned a much larger underlying asset position.
Options provide a very flexible investment tool. Options are available for many types of underlying assets such as stocks, futures, indices, and other markets such as currencies.
At any given time, you can buy or sell options with a wide selection of strike prices and various contract expiration periods.
In fact, stocks and indices offer LEAPS, which are long duration options, giving you flexible expiration dates that can be years away.
Because of this unique risk/reward structure, options can be bought and sold in many different combinations to take advantage of almost any market.
Options strategies can be created to make money in rising or declining markets, markets with no price movement, explosive markets where the direction is unclear and as a hedge to protect profits.
C. Limited Risk – Unlimited Profits!
Whenever you buy an option contract the maximum loss that you can incur is limited to the amount of money you paid for the option contract. On the other hand, you have the potential for unlimited profits.
This limited risk, unlimited profit investment profile is very attractive to many investors who want to know what their risk potential is at any point in time.
Trading options also gives you an extra edge in limiting the way you expose your investment to risk. Factors that can affect the risk of an option position include asset price, volatility, time, and interest rates.
Options strategies can be created and adjusted to limit your risk for these factors when the market is going against you.