The average stock investor looks to buy promising stocks at lesser price and sell it later at high price. It makes sense for the long term investor, but for the short to medium term investor, stock option investing is an additional investment option for better returns on his investment capital. Option investing has three features of leverage, protection, and volatility trading.
Leverage
The option investor only has to cough up a fraction of the required capital to control the same amount of equity. This leverage ability is desirable for short term speculative trading purposes.
Protection
One beneficial feature of stock option investing is that it can add on insurance into any trading plan. In times of great market uncertainty, protective put options can be purchased to hedge a long stock position against a sharp drop in the underlying stock price.
Volatility Trading
Under volatility trading, besides upwards or downwards, the options investor can bet on whether there is movement or no movement in the underlying stock price. Therefore, the investor can profit by investing in options, irrespective of the direction the market takes.
