With so many alternative ways of investing in markets, these days, working out which is right for you. Can be more challenging than ever. While some areas, such as CFD’s have become fashionable, as we all know. The fashion lasts just a season at best! Options, however, are now approaching their 40th Anniversary on the Australian Stock Market – they aren’t fashion, they are style, and real style never dates!
What are some of the key benefits of trading options?
More than any single investment vehicle, options provide flexibility. By that, I mean you can have the potential to profit from a whole range of market conditions – Up, Down, Sideways, Extremely Volatile, not volatile and frankly, no other investment vehicle can offer this kind of opportunity, period!
Options can be used to manage risk, or to protect and hedge, or to generate income, or to exploit market moves for leveraged capital gain, or to profit from no move in the market – again – no other investment vehicle is able to offer this!!
Perhaps most importantly, for many, they bring leverage to the table in what is a potentially far safer way than other instruments. Specifically, with instruments such as Forex, Margin Lending, CFDs or Futures, it is possible to lose more money than you put down. In other words you become the victim of a margin call. With a bought option this is simply not possible – you cannot lose more than you put in.
What about security?
Options are what is known as an Exchange Traded Instrument or ETO for short. This means that all trades are cleared out through a regulated exchange, be that the ASX in Australia, or in the US, the Nasdaq for example. By trading through an exchange there is an enormous safety net. That safety net is zero counterparty risk.
Because all trades are cleared through an exchange, a process called Novation means that if the other person or broking firm on the other side of the transaction is unable to settle, fails financial or has no money, your position is guaranteed by the Exchange themselves, who stand behind the trade. While you may not necessarily appreciate the significance of this, it is huge!
By contrast, trading on CFDs or Forex are Over The Counter or OTC products where, as an investor, you are not protected by the Exchange, to effectively guarantee the other side of the trade. In short, if the counterparty fails, you lose your money…
Trust me, in today’s market this is critically important and hence why we love Options.
Are there risks with Options trading?
Yes there are but in the majority of cases, these risks can be mitigated. Specifically there are strategies that are lower risk, and others that are higher.
As a result, learning which strategies best fit for you and your circumstances, is an important and often missed step.
For example, “Naked” or “Sold only” positions in the options market can be extremely risky. Hence, we encourage our clients to avoid these like the plague! That is of course, until they have built up a good level of expertise. Instead, we far prefer lower risk strategies that have the ability to more consistently offer a steady return.
Remember the children’s story “The Hare and the Tortoise?”
Slow and steady wins the race. Afterall, the key to making it financially is a long term proposition. Take a moment to think of lottery winners. Research has shown that typically after 7 years the money is gone. “Easy come, easy go” for a quick dollar. Most likely not what you are hoping for, for your wealth building plan.
As a result, by getting educated, learning about the right sort of strategy for you, and building the confidence to consistently apply that strategy will most likely get you from A to B a far more successfully than trying to take a dangerous shortcut or misuse leverage.
Given the flexibility and staying power of Options as “the professional trader’s instrument of choice”, you have a great opportunity to put yourself in the box seat and hey, if you need some coaching, guidance, training or mentoring along the way, that’s perfectly normal and we are here to help!
If you would like to book for our Webinar on How to Trade Options Click Here