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Using Stock Options To Increase Your Returns

By Shaun Rosenberg

If you are already making money by trading stocks in the stock market then you might want to consider looking into something called stock options to help you increase your return in the market and to make it easier on you.

A stock option is simply a contract that gives you the right to buy or sell a stock at a specific price on or before a specific date. Once more they can be extremely powerful and can greatly increase your returns if you are right, or increase your losses if you are wrong.

For instance say stock XYZ is trading at $48. We believe that this stock will make a large move upward in the near future and because of this we have a couple options here. We could choose to buy the stock or we could buy the $50 call option on it for $4. If the stock goes up to $58 then your option would be worth at least $8 ($58-$50).

The option trade in this example would have returned it’s investors over a 100% return (most likely more), while the simple stock trade (while still very profitable) would have only returned about a 20% return. This is only 1/5 of what the leveraged option play would have made.

But there is a downside to options. Since options are dated there is a chance that your option will simply expire worthless and you will lose all of the money you invested into it.

Of course there are ways to manage risk, but in general if you are having trouble making money by trading stocks, then switching to options will only increase your losses.

On the other hand if you are making money then stock options can be a perfect way of increasing your returns and controlling more with less. As long as you have a plan on using these tools and keeping your losses short they can be extremely powerful.

Those who will use options as simply a way to get rich quick will get burned, so if that is you reconsider.

Now that you know, What is an Option here is an interesting article on stock options

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Topics: Stocks Mutual Funds | Comments Off

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Article Citation
MLA Style Citation:
Rosenberg, Shaun "Using Stock Options To Increase Your Returns." Using Stock Options To Increase Your Returns. 24 Jun. 2010. uberarticles.com. 25 Jul 2014 <http://uberarticles.com/finance/stocks-mutual-funds/using-stock-options-to-increase-your-returns/>.

APA Style Citation:
Rosenberg, S (2010, June 24). Using Stock Options To Increase Your Returns. Retrieved July 25, 2014, from http://uberarticles.com/finance/stocks-mutual-funds/using-stock-options-to-increase-your-returns/

Chicago Style Citation:
Rosenberg, Shaun "Using Stock Options To Increase Your Returns" uberarticles.com. http://uberarticles.com/finance/stocks-mutual-funds/using-stock-options-to-increase-your-returns/


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