Trading Stock Options to Increase Your Returns

Did you know that there is a way to increase your returns in the market? This method is very powerful and if you already have experience in the market they can be worth looking into. This strategy involves using stock options.

A stock option is simply a contract that gives you the right to buy or sell a stock at a specific price on or before a specific date. Once more they can be extremely powerful and can greatly increase your returns if you are right, or increase your losses if you are wrong.

For example, say you are buying a $50 stock option contract on stock XYZ for $4. Now stock XYZ is already trading at $48 and you expect it to go up in the short term. It finally moves up to $58 and your option contract is worth at least $8 ($58-$50). It is probably even worth more.

What this means is that the option contract would have given you a return of at least 100%, most likely more because of other factors that go into pricing an option. But the stock trade would have only given you a return of about 20%. Both are great returns no doubt. But the option would have given you a larger bang for your buck and in the end would have been more powerful.

However, there is a downside to options as well. Because options do eventually expire you might find your investment expiring worthless one day.

Of course there are ways to manage risk, but in general if you are having trouble making money by trading stocks, then switching to options will only increase your losses.

On the other hand if you are making money then stock options can be a perfect way of increasing your returns and controlling more with less. As long as you have a plan on using these tools and keeping your losses short they can be extremely powerful.

If you are just using them because you heard they were powerful and you want to get rich quick without a plan or experience, I would reconsider.

Now that you know, What is an Option here is an interesting article on trading stock options. This article, Trading Stock Options to Increase Your Returns is available for free reprint.

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