A third advantage is options also give you the ability to short stocks without the restrictions of short-selling stocks. When you short a stock in the anticipation that it will go down in price you not only have a larger cash outlay versus buying put options but you also have to pay interest on the stock you borrowed to short plus you have to pay the dividends back that the stock might pay during the time you hold it. With put options, you avoid all that plus you can make faster returns and much sooner since the stocks will usually fall twice as fast as they rise.

Additionally, if a stock is rumored to miss its earning projections you can make a lot of money quick by playing negative earning releases in the right market environment. The reason is that stocks can often gap down by 50% or more on bad news. That translates into a hug profit to a smart option trader without tying up a lot of capital.

That also brings up the most important advantage is that the most you risk is the actual premium you paid for the option itself. If a stock gaps up or down on news and you’re on the other side of that trade you only risk a small amount of you capital where if you had bought the stock you could lose half your position overnight! Early in 2006, Google reported strong earnings but not as great as Wall Street had expected and the stock was pummeled. Then a few weeks later, Google’s Chief Financial Officer spoke publicly about a temporary pullback in their future growth and the stock plummeted. If an options trader were long Google call options at that time that trader would have only lost a small portion of his overall trading capital versus someone who had bought the stock itself (Google’s stock had been as high as $475 before these events and then lost almost a 150 points in a couple of weeks as a result).

The advantages written here are only a few compared to the dozens that options afford traders who are disciplined enough to learn them. Stocks have been likened like playing the game checkers where options are compared to the game chess because of the tremendous opportunity and flexibility that they can give traders and investors. Stock and option traders that take the time to learn and apply a few simple strategies offered by options can better assess risks in the markets and potentially put themselves into positions to profit handsomely.

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