Many investors prefer to take a relatively conservative approach to their portfolio management activities. Maintaining a position in a widely recognized, index-based, exchange-traded fund for years often turns out to be an effective way of building up a portfolio’s value over time.
On the other hand, there are those who would rather pursue much larger returns and who are willing to accept more exposure to risk in the process. As those who view this video today here will see, learning how to trade options can open up opportunities like this one and others.
More Leverage and Potential for Returns on a Given Investment
When an investor pays a hundred dollars for a share of stock whose price has only moved within a small range around that level for a year, it will often take quite some time to produce a return of even as little as ten percent. That can be a source of comfort for some investors, but there are also times when relatively constrained potential like that will seem less than acceptable.
Stock options open up a way of producing far more potential for returns even from stocks whose prices are prone to moving slowly. Because a particular option contract represents only the right to buy or sell a quantity of stock at a set price in the future, the cost of that derivative will normally be very low compared to that of the underlying asset.
At the same time, continuing movement of the stock price above the strike price established in a call option, for example, will add to the value of that contract a nearly corresponding amount. An option contract that cost only a couple of dollars to buy could therefore easily double in value when the stock price it is based on moves by only a few percent.
A Powerful Tool for Investors Who Understand How to Use It Wisely
Naturally enough, opening up that kind of potential for returns also means accepting quite a bit more in the way of risk. Whereas stocks might only rarely see their value reduced to nothing, options regularly expire worthlessly out of the money. Investors who wish to make good use of this style of trading therefore always do well to understand all the relevant possibilities.