Why Options Are Better Than Stocks

Options are financial instruments that can provide individual investor with the right, but not the obligation, to buy or sell a specified amount of an underlying asset at a predetermined price within a specified time period.

Following are some of the reasons why options trading is better than stock trading:

1) Options give you huge leverage and a much better control of risk.

2) Using options can increase your returns which would otherwise be lesser if you choose to invest in the same stock without options. To increase your return, you have to predict whether the future market price of the underlying securities will go up or down and the time frame in which this will happen.

3) Buyers of options (both a call and a put) have limited downside risk. Their downside risk is strictly limited to the premium already spent plus commissions and other transaction fees.

4) Options are much cheaper than stocks. Investors will find that it is less expensive to buy options rather than stocks themselves.

5) Forget about complicated investment ratios. With stocks, there are a variety of complex ratios to analyze such as the price/earnings ratio, the price/earning to growth ratio, the earnings per share, the price/book ratio and so on.

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