Listed options have been available to trade for more than 40 years. The reputation of listed options has always been shrouded in mystery, with many beginner retail traders warned off listed options for fear of them being too risky and difficult to understand.
Others have had their fingers burnt; often because neither they nor their chosen broker had a clue how to properly use them. Fortunately, listed options have become increasingly popular in more recent years due to the four following benefits.
Improved cost efficiencies
Options are a great way to leverage profits without having to invest huge amounts of capital. With options trading, it’s possible to take similar positions to that of a stock. If you were to buy 100 shares of a stock worth £50, you would need to spend £5,000 on an initial investment.
Meanwhile, those who trade listed options can buy two £10 calls, each representing 50 shares and the total investment needed would be only a fifth of what you’d need to physically buy shares.
Of course, it’s not quite as straightforward as that as investors still must make profitable calls to maximise their funds, but it has become popular due to the reduced funds required to make it work.
Not as risky as equities
Although some listed options represent more of a risk than owning equities, millennial traders are increasingly acknowledging the benefits of using options trading to reduce risk and hedge against other investments. Options provide 24/7 insurance against equities and stocks as, unlike the stock exchanges, options don’t shut down with them.
That’s why an increasing number of financial traders look to options as the most reliable form of hedging.
A chance of higher percentage returns
Of course, although trading options requires reduced up-front capital to get started, the leverage offered ensures that you can still rake in the same returns as those who stumped up greater capital to physically purchase the stock in question.
Therefore, you don’t have to be a brain surgeon to work out that listed options offer greater potential returns when they go your way. By the same token, options that don’t move in the market the way you intended can wreak havoc on your investment portfolio. It ultimately depends what side of the risk-to-reward ratio you want to be on.
An extra dimension to your investment portfolio
Finally, the other key advantage of trading listed options is their flexibility to help investors eke out alternative profitable positions in the markets. Some investors find the costs of margins when attempting to short a stock somewhat prohibitive. Options brokers will, therefore, be used by traders to take advantage of moments of stagnation and downturn by purchasing puts to make a profit on the downside.
Ultimately, what’s most exciting about trading options is that it gives everyday people the chance to invest their personal wealth and make it work harder for them in the future.
Retail investors – or day traders, as they are also commonly known – can take positions just like the multi-billion-pound hedge funds, creating a new dawn for individual investors. Day traders are people who buy and sell securities within the same trading day.
Video – Become a Trader
Perhaps you are already a trader. If not, have you ever considered becoming one? Most successful traders earn a very good living. There are many different types. In the world of business and finance, there are for example stock, forex, and futures traders. This Market Business News video explains briefly what a trader does.