As you know, I recommend you trade in options and not in shares. But as 99% of those who trade in Italy work with shares, I thought I’d clarify in this article the 4 key differences between trading in shares and trading in options.
When you have read it, you will understand why I recommend options instead of shares and you will be able to explain it effortlessly to friends and bank employees who will continue to say: “options? Are you crazy? They are very risky, you must be a specialist”.
Here is the truth of the matter.
There are four major differences between shares and options: as you will see, three of them are in favor of options.
To better understand this article, you should read my free ebook on options. If you have not already read it, you can download it here.
An option costs a fraction of the cost of a share. Just to give two indicative numbers (not real) if a share costs $ 50, an option on that share could cost $ 2. In addition, as I have written in my article about options, buying options is knowing how to control, rather than owning them.
Which means that if you have $ 5,000 you can buy only 100 shares, but over 2500 options! Or, conversely, you spend $ 5000 for 100 shares, but only $ 200 for 100 options!
And this is the advantage of leverage in options.
This effect is linked to the previous one. In general, options increase or go down less compared to the corresponding shares. If a share goes from $ 50 to $ 52 by purchasing $ 2 then the option will increase by $ 1 from $ 2 to $ 3 value.
But consider this: if a share increases by 4%, the option increases by 33%! So small movements of shares means highly relevant increases in options. Again an advantage of leverage.
Options Trading is the first seminar in Italy that teaches you to invest in options and gain even when the market goes down
Financial Risk Management
When you buy an option your maximum risk is the cost of the option. If you spend $ 200 to buy 100 Call options at $ 2, and for some reason everything goes wrong with your prediction and they fall, you lose $ 200! Imagine if, instead, you have shares at $ 50 and these collapsed: you would have lost all the capital.
The same applies for Put options, but in reverse. That is, you are happy when the they lose, because it exploits the downward effect. Which is usually disastrous.
Do you understand now why buying options is infinitely less risky than buying stocks. The risk is in the sale of options, but that can be easily controlled.
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It is not a perfect business. Options have their weakness: they expire. So if you invest in options you will always be busy monitoring the expiration to avoid finding yourself with an option that has no value.
The third Friday of each month – the options expiration day – is a special day for those who do trading in options.
As you have seen, there are good reasons to invest in options instead of shares.
Very briefly: financial leverage and risk control.
Be aware though that financial leverage is a double edged sword: the same leverage can make you lose if you do not use the precautions you learn at the seminars we give “Trading in Options”. As you have seen, you will never lose a lot, the maximum is the amount you have paid for the option, which is always a fraction of the cost of the share
Do you understand now why I invest in options and not in shares?
To your financial freedom,