Options Trading: Benefit from Rising Share Price

Shares are the most commonly traded commodity in the stock market, but there are alternatives that you can buy which can give you less risk and bigger chances for profit. If you are confident that a company's share price will take off, consider buying call options. As the share price increases, the call's value will follow suit, providing the opportunity for unlimited profits. The most you can lose if the price falls or stays steady, is the premium you paid. Here are the advantages that you can get when riding a rising share price when trading options.

Options Provide Leverage

It means you get a large exposure at a small cost. A small movement in price leads to a large change. If the price increases, your rate of return from trading options are significantly bigger than the percentage of trading shares. More importantly, call options only cost a fraction of the underlying shares. However, you should remember that if the price moves in the opposite direction, your loss will also increase.

Options Have Limited Risk

If the share price at the expiry date drops below the exercise price, the call option will become worthless and you lose everything you paid. However, if you look at it in dollar terms, its considerably less than the total amount you risk when buying shares. No matter how low the share price plummets, the most you will lose is your premium.

Options Secure a Maximum Purchase Price

You secure the maximum purchase price until the expiry date of the option. No matter how much the share price soars, you can still buy at the exercise price. This provides you the opportunity to buy more time, to proceed with the purchase or not.

By now you probably think that buying call options is a sweet deal, but like any other trading transaction, there are risks involved. The main problem is if the share price falls or stays steady instead. In this case the option's value will drop. If the share price drops below the exercise price when your option expires, the call will become worthless. A fall in volatility also has a significant effect. Your position will also become worthless prior to the expiry date, even if the share price increased. Last but not the least, time works against you. To make money, the share price must be high enough to cover the time value lost at the extent of the option. However, if your forecast is right, then you are guaranteed to make money.

Related Topics:

• A Guide to Buying Call Options
• How to Exit a Call Option