Understanding the rise a fall of of stocks is much easier than the intricacies of options trading and so people tend to avoid options as an investment vehicle. However, options have several benefits as a part of your share market strategies.

Leverage

Buying a call option gives the investor a good option position that is similar to a stock position.

For example, if an investor was to buy 5000 stocks selling at $10 per share, he would have to pay $50,000. But if he would choose to purchase five $1 calls (each contract representing 1000 lots or shares), he will only have to pay $5000 (5 contracts X 1000 shares/contract X $1 market price). The investor would then have his saved cash to spend or invest at his or her discretion.
The process is really just that simple but, the investor would have to know which call to buy to have a good option position, similar to stock positions. So, if you are looking for a good investment without risking large sums of money at the outset, option trading is the better choice.

Limited Risk

Investment in stock is often said to be for risk takers. The risk is worthwhile if it automatically yields a profit. In options trading, however, you can have unlimited profit potential and at the same time have limited risk. This is because options trading only gives you the right to buy or sell the underlying stock, and not the obligation. Meaning, if the price is not right at the end of the contract, you can just ignore and let the contract expire. If, however, you can profit from the change in shares prices, you can take your right and pursue the contract.

For example, you buy a certain call option for $50 (strike price) that will end on the last Thursday of April. On the expiry date, shares you bought are trading at $65. Now such a healthy profit would earn $15 per share and you would have every right (and common sense) to call on the contract.

What if at the expiry date the stock is lower than the strike

Let us pretend that the shares you have bought went down to $45 or even $40 at the end of the contract.

Do you have to pursue the contract? No!

You just have to let the contract expire and you risk no further loss.

What have you lost then?

The option premium you paid the seller. No more.

Unlimited Profit Potential

A certain call option you have bought is now trading at $80 per share. You can exercise your right to buy it for the strike price of $60 and earn $20 minus the Option Premium you have paid.

The price of shares can go sometimes go higher than that. And if you have carefully studied the market and identified a likely strong trend, you can get the best profit without breaking your bank.

Footnote: if at any time you are planning to pursue the contract and buy the shares, you have to pay the full amount. So at the expiry date, make sure that you have you the cash to pay straight away.

Protection

In comparison to other kinds of trades options trading can give better protection to its participants. Large losses are typically uncommon in this trade type since traders only lose what they have invested. These investments are just minimal because they are limited only to the price of the option. It should be noted that typical options are just 10% of the value of the asset.

Traders could also benefit from protective puts. This is a type of options strategy that allows for purchasing the same number of puts and stocks such that the stocks are protected from loss of value. Also, a trader who needs to buy an option in the future at a certain price can do so. It is a sort of insurance policy for the trader who currently has investments on long stock positions, especially during the times when the market is extremely volatile.

The biggest protection you can have is share wealth education and that is the point of this Blog!