Leverage - a small outlay can get big returns IF the underlying security makes a big move. Most of the time this does not happen, of course, and the option value decays over time (and decays quickly near the end of the option's lifetime).
holy hell. where to start.
holy hell. where to start.
What is the benefit of using options?
Why pay for the privilege to buy/sell at a certain point when you could just simply set an alarm and then buy/sell at that actual point?
Many, if not most, option traders trade the option itself, without ever being interested in excercising the option, since that would mean buying the underlying, ie. investing more capital. Ie. they are mainly interested in trading just the option premium itself...
In this case a table like in the following posting can explain the real power behind option trading; it's the leverage effect on the option premium when the underlying moves some points...:
http://www.trade2win.com/boards/tra...a-traderum-using-demo-acct-4.html#post1013934
You will never see those profits in real life. As I said, novices get caught up in the leverage aspect. You will be eaten alive if you try buying options looking to get that leverage without hedging your position somehow.
Straight-up options trading is really for folks who like to define the precise risk they want to take on a trade ahead of time, without the worry that, for instance, a stop may prove ineffectual because of a gap on the open.
At minimum, you should do vertical spreads to help out with theta and to precisely define your risk/reward. Of course, once you do, you will introduce yourself to the problem of multiple commissions and bid/ask spreads. Options trading isn't simple or easy.
http://www.trade2win.com/boards/options/78718-give-me-straight-advantages-disadvantages-options.html
The question has been asked before...
Why options trading is better than trading the underlying stock
Suppose you want invest 100k into a stock that you have throughly analyzed
and of which you expect that it should rise about 5% in the next 1 or 2 weeks.
You are so confident in your prediction that you even accept a temporary drawdown
of 5%, ie. your risk is equal to the expected reward (5%).
If you buy the stock and things go well you make a profit of 5%,
but if you are stopped out you make a loss of 5%.
Now let me present an alternative:
Instead of investing 100k for buying the stock better invest just 5k into Call options of that stock.
If the underlying stock rises say on the 5th day say just 3% relative to when the position was opened
then the options make a profit of 34%.
Let's say the underlying moves up 5% on that day, then the profit is even 69%.
[even more is possible if one uses a Strike that makes the option "Out-of-the-Money", OTM]
If things go against you then the maximum you can lose is what you paid for the options, ie. the 5k.
(cf. an options calculator or see this table:
http://www.trade2win.com/boards/tra...a-traderum-using-demo-acct-4.html#post1013934 )
Ergo: we used the same risk (5% = 5k), but the reward with options is a multifold better (69% vs 5%) than buying the underlying stock.
Anybody disagree?
Hey hey - mother goose. How was your xmas mate? You working in between or at home?
Happy and healthy new year to you and yours.
Ha-work. Where else buddy?!
Same to you. Here's to 2010 steepening. Please!