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Options trading not only offer the strategist a plethora of alternatives, but, when done correctly they really are also the best trading vehicles ever devised.  The reason why is that there are so many things that can be done with them. For example, options provide the trader the capability of having either a bullish or bearish bias in the market. In addition, the trader can put on an options trade, which can make money regardless of market direction.

The trader can also receive income from their stock holdings through options. The trader can use strategies that will be profitable during a sideways market as well as being able to control large blocks of stock for pennies on the dollar, creating the potential for huge returns. This is referred to as leverage, and options are a great tool to employ to maximize the benefits of this very powerful factor.

It is easy when using options to take a low risk position that will meet your expectations about the market. For example, if the trader has a bullish bias, he or she can simply buy a straight call; or if the options seem to be more expensive, the trader could choose to construct a bullish vertical spread, which involves buying a call and then selling a call a further strike out to help finance the call that was purchased.  However, if the strategist were bearish, he or she can either buy a put or implement a bearish vertical spread, which involves buying a put and then selling a put a further strike out-of-the-money to help finance the put that was purchased.

Options can also be used to trade a neutral outlook on the markets. For example, if an options trader does not really know what particular direction a market may trade, but does, however, think the market will breakout one way or the other, then they can purchase both an at-the-money call and put and capture profits regardless of which way the market goes. This particular neutral options strategy is known as a straddle.

Options are also wonderful vehicles to use versus purchasing stock outright.  By using options you can literally control stock for pennies on the dollar.  An option trader can buy an in-the-money long-term option for far less than actually purchasing the stock outright. In addition, the return on investment figure is greatly enhanced due to the leverage factor that options possess.

Options can also generate income on current stock holdings. Using options, you can generate cash by selling calls against the stocks that you own. This particular options strategy is called the covered call. The options strategist can also sell calls against any of the in-the-money calls they might have purchased as well to generate monthly income and to continue lower the cost basis of the call, which consequently lowers the overall risk.

These are just some of the huge benefits a trader can derive by actively employing options as a trading mechanism. As the trader gets more and more skilled in the use of options they will quickly see the virtually unlimited combination strategies that can be employed to create the best risk to reward profile. Proper use of options provides the trader with the best chance of success in the markets given their flexibility, low cost, income generating potential and superior risk control. Options, when done correctly, are indeed a marvelous trading vehicle.

Happy Trading.

Jeff Neal
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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