Option contracts are also a lot cheaper than stocks. Now, I can hear you think: 'an option contract is worthless unless you can exercise it', and that's true in a sense. The advantage of owning a stock is that you truly own a piece of that company. You are a true stock holder. With an option contract you only trade a little piece of risk, and you do not your own a share of a company. Another issue with options is that it has an expiration date, if you let your option contract expire worthless you lose your investment.
- Underlying security is: MCD
- Experation date: June 22
- Strike price: $100
- Type of option: Call (right to purchase a stock)
Another advantage of having options in your portfolio with respect to stocks is that the risk is very easy to manage. In times of panic, exposure can simply be reduced by writing calls, or by setting up a whole different kind of option structure. When it comes to stocks it's often 'hold on tight, the ride may get a little bumpy', but with options you can take on a pro-active stance, that's why I personally favor options over stocks. And it looks to me it is also a lot more pleasant for someones portfolio and the piece of mind of the investor.
Of course there are disadvantages as well, you have no rights to claim dividends - which is often a reason to invest for many long term investors. There are, however, little tricks you can do with options and dividends without owning the actual stock.
Aside from that you have volatility issues. Option contracts are very sensitive to volatility and that's certainly something that you'd have to keep in mind as a trader. Luckily with a little bit of knowledge (a basic option course for example) it's well manageable. Getting and keeping options requires a little bit more insight than simply buying a stock, but the profits are often a lot higher. Check out some of the results of some option portfolios. Trust me, the average stock trader will be jealous.
|CBOE's most actives. The QQQ, SPY and DIA (also known as the Diamond) are usually the most actives, they represent the NASDAQ, the S&P 500 and the Dow Jones ETFs.|