Forex, CFD, and stock traders share one common trait: they know very little about options trading. This is a missed opportunity.
This article explains the power of options, how it compares to Forex & CFD trading, and how it differs with classical stock trading.
Our options expert Marco Doni will walk you through many of the benefits, including risk control, multiple trading dimensions (volatility and time), and leveraging one’s position.
Why should an investor consider using Options? Well there are several reasons.
First and foremost is the reduction of risk compared to other assets. Options have a limited risk. No matter what the stock is doing, you can never lose more than that risk.
Imagine having a long position on a futures and during the night the price gaps down. It also skips your stop loss… Unfortunately I’ve been there and it wasn’t pleasant for my account!
This is not possible when trading options. Your maximum risk is capped – no matter what.
Sometimes people tell me that options are difficult to learn. They might be more difficult than other assets like forex and futures, which are so called linear assets. This means that traders gain or lose depending on whether the price moves up or down.
Options has more depth. We can earn profits with the correct direction too but we also have two other dimensions: volatility and time.
Options require a little bit more studying but are all worth it. Once you learn the strategies you will be able to master all market conditions.
Options also use leverage: 1 option controls 100 shares. This means that we can gain much more from the strategy than when trading the same approach on stocks. Very often we reach 100%-200% in return on the capital invested (ROC).
These are some of the advantages of using Options… If you want to be a better trader, then you need to improve your knowledge and learn how to use one of the best tools for controlling risk: options.
Why should a trader use options instead of stocks?
First of all, when we buy a stock then we do what 95% of all the investors do. There is nothing wrong with buying stocks: both stocks and options are traded on regulated exchanges like NYSE and CBOE in the USA. I myself buy stocks for the long period…
But this requires having a lot of cash and an investment vision of several years. You also need to sit patiently as the price moves up and down.
Let me give an example: if I buy 100 shares of Apple ticker (AAPL) st let’s say $270. Total investment is equal to $27,000. This is a substantial investment that not many traders and investors can, would, nor should do. Usually you need to hold Apple for several years if not a decade or more before it makes sense. However, when taking into account how Apple is traded on the market and all the swings up and down, then we wonder why not take advantage of that price action while risking a lot less capital?
How can I do that? Using Options.
By definition an option is a contract that gives you the right to buy 100 shares at one pre-determined price within a predetermined expiration date.
To obtain this right you need to pay a so-called premium. In the case of Apple, an option Call strike 270 has a premium of only $2,370. This is way cheaper than stocks: $2,370 for the option versus $27,000 for the stock. As you can see, the option to hold 100 shares is far less risky than holding 100 shares.
Using options also allows you to trade stocks in both directions: up direction with the Call options and down direction with the Put option. Using Put options is the perfect way to short the market without having to request a large account due to the margin that assets like futures or shorting stocks require. So using stocks is fine but using options is a far more smarter strategy because of the advantage of the lower risk and the possibility to trade up and down market without having huge margin exposure
During my workshops and seminars, there are always a few students that ask me if trading options is better than trading Forex and CFD or vice versa.
The question always makes me smile because there is no such thing as the best asset. What we have to ask ourselves, what trading personality do we have? Am I an aggressive trader or a more conservative trader?
Most of the time we don’t even know which personality we have until we start trading different assets. I’ve traded all the possible assets from Forex, CFD, futures, stocks, options even crypto currency… I found out that my trading personality was way more consevative than aggressive. My ideal trading was clearly with options.
My mentality is like a strategist similar to a chess player. Trading options is better when you are in the mood of being conservative while Forex is better when you feel more aggressive.
I think that a good trader should know how to trade with Forex, futures and options and divide the portfolio based on his trading personality. I personally have 50% on options 25% on Forex and 25% on spread trading.
Thinking about options but not sure yet? There are a couple of ways to move forward before committing to the course or educational signal service. Here is how you can stay in touch:
If you are ready to move forward, then you can choose from:
Make the most of options & participate in a US Options giveaway contest.
To be eligible you need to:
Marco Doni – ecs.OPTIONS expert and CNBC contributor