Almost every investor will be familiar with the ‘buy low, sell high’ ethos. However, sticking to this strategy religiously is nothing if not limiting, as it only profits you provided you’re working with a bull market.
As a result, those looking to diversify their trading strategy portfolio and profit from other market trends often turn to options. The beauty of options trading, like that offered by Sucden Financial, is that it create opportunities for profit irrespective of whether your stocks are rising, falling or even moving sideways.
So how exactly can options be used? The answer is two-fold…
Speculation is, essentially, betting on the movement of a security. The true value of this tool is that it means you’re not limited to turning a profit only when the fortunes of your portfolio are on the rise; indeed, you can make money even when your stocks fall.
Speculation is generally considered to be the realm of big money, characterised by the prevalence of great profit and great loss. Using options in this way is undeniably risky. Not only this, but it also requires an in-depth knowledge of the market: not only do you need the skill to determine the direction of stock fluctuations, but also the scale and timing of these movements.
To be successful, you must possess a detailed understanding of the market to predict whether a stock will rise or fall, how much the price will change by and the time frame that this increase or decrease will happen within. As a result, you’re betting on three different factors, and hoping that each of these predictions comes true in exactly the manner you prophesy. This means that the odds are ever stacked against you, irrespective of your experience or skill.
Why, then, do people continue to use options as a tool for speculation? The versatility of the market is one answer, but this alone would sway very few people to its cause. The true attraction lies in the ability of options to create leverage: if you control 300 shares with a single contract, it takes very little movement to generate a handsome profit.
Options have a further use as a tool for hedging. Essentially, they can be used as an insurance policy to protect against a downturn in the market. Although some would argue that stocks that require a hedge should not be invested in at all, that does not take away from their usefulness: they allow you to take advantage of a stock’s upside whilst limiting losses.
Could options prove a financially savvy investment technique for you?