When using stock options to invest in a particular stock, the reasons for investing in the stock should be the same as when buying the actual stock. The only difference is that the trade is executed using options contracts instead of the underlying stock. Once a suitable stock has been chosen, the stock investing trade is executed as follows:
1.Buy one in the money call option for every 100 shares of stock
2.Wait for the stock price (and therefore the options' price) to increase
3.Sell the call options to realize the profit
Advantages of Stock Options
There are two main advantages of using stock options to invest in stock.
Firstly, stock options cost much less than the actual stock, so the amount of margin required is much lower. This means that traders with smaller trading accounts can invest in stocks that would otherwise be out of reach, and that traders can have more trades active at the same time.
Secondly, the risk of a long call option is limited to the amount paid for the option, so the risk of the trade is limited and known in advance. When most long term stock investors are still holding their stock when it is down by $10,000, an options trader may only be down by $3,000, with no further risk regardless of how low the stock price goes.
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