This weekend I wanted to do an article about the argument for options. This article is addressed to people that know little to nothing about options trading.
Look at options similar to a lease on a car. If you had several thousand dollars to invest saying maybe even $30,000. You could invest in a car. Or if you just needed the car to get to school and work you could lease a car. Your commitment to them to a lease may be say $300 a month and over the course of three years or 36 months you’d spend about $9000. At the end of the lease, you could choose to get a new car or you could buy the car for $20,000. This is a great example of how lease can be a good thing. Options are the same.
But you’re making payments and you don’t own the car? Yes this is true, but you also don’t have to commit as much capital upfront. A new concept for most people is the cost of money in your life. If you’re borrowing money you know exactly what it costs you to have debt. But what about the other side of the equation, when you’re on the right side of debt? You have money to invest and the interest rate you get is a great component of an investment portfolio. You need to know how much your investments are making each month and you have to remember that you have an issue with taxes, as well as inflation. Inflation can eat away at things like CDs, savings accounts, and many many mutual funds as well.
So, if you are on the ‘right’ side of debt, how you handle your investable money is important. If you could make $9000 (30% return on $30,000, the price of the car) per year on the ability to drive a car, would you rather pay $30,000 up front to make $9000 per year, which yields 30%? Or, would you rather pay $3600 (Twelve payments at $300 = $3600) to make $9000 per year, which yields 250% Return? I would certainly take the latter.
What makes this possible is increased ability to use your money and margin to make greater gains. Options can be a double-edged sword, though. You can lose big money too. However, if done correctly, the lossses can be minimized and the gains can be accentuated. There is a lot to learn. I would make the argument though, that people learn how to bet, watch sport’s rules, and give these things the same attention where they could learn to make their financial lives more secure.
The most basic options trade is a covered call. We have a video on Youtube, which you can watch at this link: http://youtu.be/5d3W-NxrDKw
I know this isn’t the end-all explanation, but I wanted to get something on our site that helps people see how to get started in options trading. We will be posting what puts and calls are and explain more about options for beginners. If you have questions, please feel free to post in the comments below or visit our forum page!