7 Reasons Investors Should Trade Options

If you are a typical stock market investor, you adopted a buy and hold philosophy and own stocks or mutual funds. If you are a hand-on investor, you do research and carefully select stocks to own. It's difficult to beat the market, and most professional money managers cannot do it.

Historically, stock market investing has worked out well. But that provides no comfort for those currently invested. The market recently traded at 12-year lows, and even more frightening is the idea that many investors lost half their assets over the past year.

Why did so many people watch their investments shrink in value and do nothing?

That's a difficult question. Investors tend to be long. They own stocks. They don't know how to hedge, or reduce the risk of owning, investments. That's why options are so important. To me, it's a crime that so few stockbrokers help clients to adopt risk-reducing strategies.

Here are 7 great reasons why you should take time to learn how options work:

1.Hedging - Options allow you to reduce the risk of investing in the stock market. Imagine how investors everywhere would feel if they learned that the giant losses they suffered were unnecessary. By using appropriate strategies, those losses could have been trimmed by 50 to 90%.

2.Insurance - You can buy insurance that protects the value of your portfolio - just as you buy insurance to protect the value of your home or car. This insurance is expensive, but there are strategies that allow you to own insurance for little, or no, cost.

3.Income - By selling someone else the right to buy your stock at a predetermined price, you are paid a premium that you can consider to be a special dividend.

4.Leverage - You never have to trade a share of stock, and invest far less money than stockholders.

5.No Need to Always Be Bullish - Options allow you to create positions that prosper when the market moves higher, lower, or trades in a range. Traditional investors only prosper when stocks move higher.

6.Limited risk - You can adopt strategies with limited loss, but with high probability of success. The trade off is that profits are also limited. The limited loss nature of so many option strategies is the single factor that makes them so attractive, in my opinion.

7.Indexing - If you prefer to trade a diversified portfolio rather than individual stocks, the major indexes (e.g., S&P 500, DJIA, Russell 2000, etc) have options you can trade.

The Credit Spread

Up to this point here at Equityscholar.com We have had the privilege of reading many of your technical analysis related questions and responding to them. With that in mind, I have decided that pulling from this pool of questions would be an ideal place of inspiration. Here I go…

In Lesson 3 of the Options trading course we speak about making money in three directions: up, down and sideways. Knowing that the credit spread is a strategy employed in a sideways moving market it is appealing to many of us when the market is doing precisely this, moving sideways.

The key to this strategy is the understanding that so long as the price action does not reach within parameters of the spread we are a-okay…as the adage goes, you set it and forget it. The problem occurs when the price action decides to move against us. What to do? This is the question I often times receive. “What do I do now that I have placed this spread and the price action decided to run head first into my short leg. What do I do!?!”

I am a major proponent of spreads, I especially love weekly spreads; great tool to have in your back pocket for the appropriate time! That all said, one of the caveats I often share with my coaching students and now you, is that prior to placing a single spread you had better understand and more importantly be comfortable with trending trades. Yes, I’ve said it. To all of those readers out there with the thought that: well I can just place spreads forever and not ever have to place a trending trade you are oh so wrong. Well not really…you can always just take a loss… But to those of you who would like an opportunity to unravel the spread it is best to understand how to do just that: Trade to targets, enter a trade upon seeing/receiving confirmation, and simply trust your analysis.

 Instead, prior to setting up your next spread, simply make sure and practice thoroughly the unraveling process.