Options Trading Explained

Many of us have been brought up thinking that the stock market and real estate are the only legitimate investments. Well as the past few years have shown us, these markets can be volatile and unpredictable, especially if you use the buy and pray method of investing.

What is the buy and pray method of investing?

You buy it today and pray that it will go up tommorow.

When buying these investments you have three true scenarios:

• Your investment can go up and you make money.
• Your investment can go down and you lose money.
• Your investment can remain the same and you can lose money.

But I can't lose money if I don't sell it right?

Wrong! If the market goes down or sideways you are losing money due to inflation and the interest that you could have been earning even in a money market account.

So how do I protect my money and grow my wealth portfolio?

Alternative investments like options and futures trading can be used to minimize risk and have historically seen a much higher return than the stock market and mutual funds.

Here are just a few of the benefits of investing in the options and commodities markets:

• Limited Market Exposure

Your risk is limited to the cost of the option(s) plus commissions and fees. Because of the LIMITED LIABILITY aspect of buying options, you will NEVER get a call from your broker asking for additional margin to retain your existing position(s) in the market. A Wide Variation in Pricing

• A Wide Variation in Pricing

The wide range of strike prices and expiration dates for options will permit you a wide degree of latitude in choosing how much you wish to place at risk on any one trade. Unlike stocks you get to make an educated choice as to which call or put that you wish to purchase and when they will come due.

• Affordability

Because you will know, beforehand, the maximum amount you will need to commit to any single option trade, as well as the maximum exposure involved, you will be able to participate in a variety of markets employing less in terms of discretionary funds than you would normally be required to put up in the futures markets where you may be forced to commit additional funds if necessary.

• Less Stress

Because of the DEFINED EXPOSURE feature of buying options, you will never have to worry about losing more money than your initial investment. You will sleep better…and so will your broker!

• More Choice by Utilizing Global Markets

Because of the defined loss, when buying individual options you make "safer" bets as opposed to writing naked options, or buying outright futures contracts on commodities. You are also able to comfortably participate in perceived market trends, be they in grains, metals, energies, currencies, interest rates and the like. You will be able to participate in the 'big game' just like the 'big players'. Note that the likelihood of loss is not less when buying options.

• A More Disciplined Trading Approach

The defined market exposure buying optionsmakes it psychologically easier to maintain a disciplined approach to the markets. It facilitates being able to stay with trends and alleviates the problem of second guessing yourself or your trading plan.

• You Can View Your Trades Online with Many Brokers

As with futures contracts, optionson futures contracts, once executed, most brokerage firms allow your account to be viewed on your computer screen 24/7. Each day you will be able to a) view your positions in the market; b) view the end-of-day or 'settlement' value of those positions as they are 'marked to market'; and c) view the excess cash on hand in the event you wish to add additional positions without depositing additional funds into your trading account. 

*The risk of loss exists in buying optionsand option spreads and such trading is not suitable for all investors.