The Benefits of Trading with Options
Jim Graham

For anyone who is uncertain about how the stock market will act in the near term – and that describes just about every stockholder – options present tremendous opportunities. They let you leverage your investment capital, give you greater flexibility when making investment decisions, and allow you to tailor your risk to fit your personal comfort level. They can be used to speculate in the market for profit, earn income to enhance your investment returns, protect against a temporary decline in a stock’s value, or to hedge your entire portfolio against market risk.
    
An option trader can profit in either an up or a down market. When you buy an option, you are hoping that the underlying stock will move in the direction you want. If you’re right, you make a profit. If you’re wrong, you lose money. It really is all a matter of time – the option contract always expires at some point – and of timing. As with all forms of trading, timing is everything. Most of all, it is important to take the time and learn as much as you can about options and option strategies before you trade them.
 
The Leverage Inherent in Options
 
Each option contract gives you the right to buy (a call option) or sell (a put option) 100 shares of stock at a specific price (the strike price) by a specific date in time (the expiration date). When you buy an option, you hope that the stock will move in your predicted direction, and quickly enough to make a profit. The cost of the option – the option premium – is far less than the cost of buying 100 shares of stock. 
 
For example, it would cost $6,000 to buy 100 shares of a stock currently worth $60 a share. If the option premium for a call option on this stock is $4, you could buy the option for only $400. That gives you the right to buy 100 shares of the stock – but you don’t have to. That $400 gives you control over $6,000 worth of stock. That’s leverage.
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