NASDAQ Shares the Advantages of Options Trading

According to NASDAQ , Options trading started in 1973 that means it has been around for over 30 years but it has only been over the past decade that it has become popular to traders and investors. Although there is still some risk involved, options can be a huge advantage to individual investors.

One of these advantages is that they are cost efficient. This is because options have leveraging power. You can get an option position that can mimic a stock option that is almost identical but at a huge cost savings. This strategy which is known as stock replacement is not only viable but it is also practical as well.

Options trading have been stained by perceptions that they are very risky. The truth is it all simply depends on how you use them. There are times when purchasing options can be riskier than getting equities but there are also times where options are used to reduce risk. They can be less risky to investors since need less financial commitments compared to equities.

You can also have higher potential returns. If you spend less and make the same profit then you will have a higher percentage return when they pay off. Another advantage is the fact that there are a lot of strategic alternatives since options are very flexible. This gives you more chances of making profit.

With all these advantages, it is no wonder why trading options have caught the attention of most investors these days.

The difference between Stock trading and Option trading

A lot of people who are quite new to the stock market would have a hard time determining the difference between a stock and a stock option. For a clearer picture, let us say that the relationship between the two is the same thing as the relationship of a house and the option to purchase.

The option to purchase will allow the buyer to get the house at a fixed price. So even if the value of the house increases at the time of the purchase, the buyer will still pay for it on the agreed fixed price. This means that the buyer will benefit from the rise of value through the purchase option but the buyer does not really own the house yet.

So when we relay this back to the stock market, the stock options are not actually the stocks themselves but are contracts to buy or sell the stock. Since stock options are merely contracts it is not an asset that you can have indefinitely since they will expire after a period of time. When they expire, they cease to exist. The only similarity that stocks and stock options have is that they can be bought and sold just like a stock.

Putting Odds to Your Favor

There are actually a few things that you can do to put the odds in your flavor when you are dealing with stock option. Instead of buying puts and calls you can buy and use credit spreads instead. When you use the credit spread method, you are selling a higher priced option and buying a lower priced option. This method allows you to make money no matter what the market status is so whether the market goes sideways, down or up the odds will still be in your favor. Using the credit spread method will let you win as much as 90% of the time. This is mainly the reason why most traders use this type of trade in order to make a consistent income.

Of course you still need to do technical analysis and have a look at the S&P index. When you see that the index is moving higher than its usual 200 day moving average then you should purchase stocks or use bull put credit spreads. But if the index is moving lower than the usual, you should sell stock or use bear call spreads. Your earnings can fluctuate depending on the market conditions. But usually when you use credit spreads, you can earn up to 20% extra income each month