Benefits and drawbacks of Options Trading

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A friend of mine recently started trading options. It's definitely not a thing to do for the light hearted, but it is a trading (not investing) mechanism to create leverage when doing trades.

Advantages:

a/ Somewhat flexible. It doesn't matter whether you are a bull or a bear. There are options for all sorts of different types of traders regardless of whether you wish to take a conservative or high-risk (hedge fund) approach.

b/ Leveraging. As I mentioned earlier, if you believe a stock will be going up or down you can gain leverage in that particular stock without the risk of being forced to do a trade!

c/ Risk is limited to the option premium paid. You can't lose more than the option premium that you paid. Whereas with a stock you can theoretically lose everything that you invested.

Disadvantages of Options Trading

a/ Depending on one's brokerage the cost of trading options as a percentage is higher than trading stocks through discount brokerages. As such, if you are trading options, you are betting on big swings up or down!

b/ As there are tons of options available, with various strike prices. Depending on the popularity of the stock, liquidity could be a big issue. If you can't do anything with your options, you lose the money! Risky!

c/ I'm not going to lie to you. Options are Complex trading vehicles. They require constant observation and maintenance. It is not recommended for those with full time jobs as trading options could very well be a full-time job in itself.

Given my current situation, I don't think investing options is a smart choice for me as I don't have time to monitor price fluctuations and momentum of various stocks.

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