For some investors, options trading is something they never truly enjoy the benefits of for multiple reasons. Most of this centres around a lack of understanding on how to use these powerful instruments properly.

1. What are the advantages of
options trading?

2. For some investors, options trading is something
they never truly enjoy the benefits of for multiple
reasons. Most of this centres around a lack of
understanding on how to use these powerful
instruments properly.

3. When asked the question posed above, as I have
been many times, my response is simple. Imagine
the stock market is a board game. Most investors
are stuck playing checkers. In other words their
only strategy is to try and make money by guessing
correctly the direction the shares are to move in.

4. Massive flexibility and control
As a professional options trader, I play the board
game equivalent of chess. Through a broad range
of options strategies, I can manage, profit from a
move up, a move down or even no move in the
shares.

5. I can generate an immediate and upfront income
from my trading, I can capture an increase in
market volatility or, in contrast, profit from a fall in
market volatility. In short, by trading options I have
an incredible amount of flexibility, control of
outcome and far more opportunity than the buy and
hold investor.

7. An alternate way of thinking of this would be
playing a round of golf. It is unlikely you would have
a good outcome just by using the same club on
every shot. Hence just like trading options we have
a bag of clubs, with the right tool for each
opportunity.

8. Lower capital requirement
Depending on strategy, using options can require a
relatively small amount if working capital as
compared to other types of investment. While this
can be tempting given the leverage elements
offered, to really be very aggressive, in my
experience taking a more sensible and
conservative approach tends to deliver a better
long term outcome.

9. For example, the lowest capital requirement
strategy would be to simply buy a call or put option
to trade direction. This provides a leveraged
exposure to the upside, enabling double or triple
digit returns on a good trade. However, tempting as
this may sound, there are several factors at play
which may limit your success from this strategy,
one of which is time passing by!

10. Can you use time as a friend not a
foe?
Absolutely! Trading with time as your ally is one of
my preferred ways of trading in the options market.
I love this because it enables me to base my
trading around a guaranteed event. That is, time
passing by.

11. This element of certainty enables the trader to earn
an immediate and upfront income, in a largely
passive way, as time passes by, rather than fighting
against it, as many options traders find themselves
in that uncomfortable and likely stressful place.

12. Guaranteed risk management
It is not often in financial markets that the word
guarantee is used. Often, it makes the lawyers run
for the yellow legal pad, but in this case, it is
appropriate! Using options to assist in risk
management can provide a level of control over the
trader’s outcome.

13. One example of this would be through using a put
option to protect and insure the value of the shares.
In other words if the share price falls, even very
heavily, the option holder can sell their shares at
the higher, insured level. This is massive, when it
comes to the peace of mind and comfort level that
so many investors seek. Yet so few actively apply
this strategy, perhaps because they don’t
understand it. That being so, reminds me of a
terrific quote “education isn’t expensive, but
ignorance is”

14. Alternatively, and perhaps slightly more complex, is
the use of spreads to assist the trader in delivering
a more certain outcome. In this instance, the risk on
the trade is specific and upfront, with the outcome
binary.

15. The trade either works or doesn’t. If it works, your
return is XX and if it doesn’t, the loss will by YY.
Both are known upfront, enabling the trader to
make an informed decision prior to entering the
trade. Great, right?

16. Safer leverage
 The use of leverage by many investors carries
with it the potential for some serious downside
risk. After all leverage cuts both ways, right?
 By using bought options (not sold) great
leveraged opportunity is provided but the risk is
also capped, effectively limited to what you have
paid out.

17.  Compare this to other types of leverage, say
portfolio margining, foreign exchange or futures,
where the potential losses can be open ended
and greater than the outlay on the trade.

18. In conclusion
Having spent 20 years as a professional options
trader, I could talk for days about this. The point is,
learn more on how these powerful tools can assist
you in your trading and investing. Not learning more
sadly may mean an enormous amount of missed
opportunity.

19. Not learning enough could also lead to a dangerous
outcome. Learning how to master these
instruments and you have a skill set that will enable
you to earn, manage risk and ultimately win in the
market place, irrespective of market conditions!

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