People mostly are familiar with long term stock investment. This type of stock investment allows people to buy and hold shares of stock. These people purchase the shares of stock from a particular company then wait for an increase in the price before they sell it again.
Yet, these people do not realize that this type of investment requires the highest margin, making it one of the riskiest ways to invest in the stock. There is a better way of investing in low-risk stock through stock options trading.
Defining Stock Options
Stock options are the options based on a particular stock underlie them. With stock options, someone can trade stock without actually buying or selling the actual stock.
It is available in most of the individual stock located in Asia, Europe, and the U.S. Stock options contract consists of 100 shares underlying stock.
Ways to Invest in the Stock Market with Stock Option
Basically, a trading stock option is similar to trading the regular stocks. The only difference is in the way the trade is executed, it uses option instead of the underlying stock.
These are the ways to execute investing in low-risk stock through stop options trading.
- Buy the call option for every 100 shares of stock.
- Wait for the increase in that stock price.
- Sell that call to gain profit.
The Advantages of Using Stock Options
There are two main advantages of investing in stock through stock options. The first is stock options cost way lesser than the actual stock. Consequently, it requires a lesser amount of margin.
In other words, traders with small trading accounts can invest in a stock that they otherwise cannot access it. Other than that, those traders can also have more active trades at the same time.
The second advantage is, there is a limited risk from a long call option. The limitation is linear to the amount of capital, a trader pay for the option. So, traders can know that limitation in advance.
Mostly, long term stock investors still holds the stocks even when the price is down by $10,000, while the options trader may only get down by $3,000.
Writer: Lisa Ramadhani
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