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Is It Safe?
by Kevin MatrasMay 17, 2012 | Comments : 1 Recommended this article: (0)
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Whether you're bullish, bearish, or somewhere in between, investing in the stock market has just seemed a bit more risky lately.
Even if your last stock pick turned out to be a great one, it probably came with just a little bit more anxiety than usual.
And if your last one wasn't as fortunate, it probably left you a bit gun-shy for your next one.
But that's the state of the present day market. And while it would be nice for the crisis in Europe to be solved, the economy in the US to be stronger, and the market to be less volatile; waiting for the perfect environment before you place your next trade will have you waiting a lifetime.
And once the stars seem, at last, fully aligned, something new will quickly come up to cause a new set of angst.
But the market doesn't have to be perfect to make money. And in retrospect, some of the least comfortable times to be in the market turned out to be some of the most profitable. In fact, the entire month of October just proved that as it rebounded from a deepening Euro mess and a post downgrade low to put in one of the best performing months in the history of the stock market, gaining 10.77%.
So how do you reconcile anxiety about being in the market with the opportunity to make money?
One way is to simply invest smaller amounts of money in each opportunity. This way you can stick your foot in the water without worrying about it getting bitten off if you're wrong.
And that's why now is a perfect time to try options.
For example, if you're interested in a stock that happens to be trading at $90 for example, it would cost you $9,000 to buy 100 shares.
However, you might instead be able to buy a $90 call option for as little as $800. That's a significantly smaller investment, and it also comes with a guaranteed limited risk.
If for example the price of the stock fell $20 to $70 a share, your stock investment would have lost $2,000.
However, at expiration, the maximum you could lose on your option investment would be only $800.
But you don't have to sacrifice returns for putting up such a small amount of money.
For example, let's say this time the stock moved up $20 to $110. That would mean your stock investment increased by $2,000 for a 22% gain.
However, at expiration, that $90 call option would have given you a $1,200 profit or a 150% gain. And if you purchased two options, your gains would have increased to $2,400. All with less risk than the conventional stock purchase.
And if you're bearish on a stock, a put option works the same way except you're profiting if the market goes down. And buying puts is a great way to play the downside without having to worry about short-selling.
Plus, options also offer the investor other ways of making money that stocks can't, like making money as a stock goes sideways or trades within a range.
If you bought a stock at $50 and two months later it's still trading at $50; that resulted in a $0 gain. Granted, that was also a $0 loss. But we invest to make money, not to just sit there.
If on the other hand you wrote a call option or a put option for $500 for example; after two months and the stock finishing where it began, you actually would have made $500. Can't do that in a stock.
Options offer many advantages to make money outright, or to hedge your risk in a stock portfolio.
There's a reason why options trading has been setting records for the number of contracts traded for eight years in a row. And it's not in spite of the market's volatility, it's because of it.
If you currently trade options, you know what I'm talking about.
If you don't currently trade options, then you need to learn how you can start incorporating some of these benefits in your own trading right away. And start beating the market, without having to worry about sleeping with one eye open anymore.
You can learn more about different types of option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.
And be sure to check out our Zacks Options Trader.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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