The average stock investor will simply buy a promising stock and hope to sell it later at a higher price. For the long term investor, investing this way makes perfect sense. However, for the short to medium term investor, stock option investing provide an additional suite of investment options to let him make better use of his investment capital.
There are 3 key features of option investing: 1) leverage, 2) protection, and 3) volatility trading.
To control the same amount of equity, the option investor only needs to cough up a fraction of the capital needed. This ability to leverage is desirable for short term speculative trading purposes. For an illustration of how leverage can be achieved using call options, take a look at the long call strategy.
Another useful feature of stock option investing is the ability can add on insurance into any trading plan. In times of great market uncertainty, protective put options can be purchased to hedge a long stock position against a sharp drop in the underlying stock price.
Besides upwards or downwards, the options investor can bet on whether there is movement or no movement in the underlying stock price. This is known as volatility trading. So, by investing in options, the trader can profit no matter which direction the market heads. To see how one can use options to buy volatility, check out the straddle options investing strategy.
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