Options have been an investment staple since they were introduced in 1973, but they are often considered viable for only professional traders. However, with a thorough understanding and the right strategy to hand, options trading can be a critical component of anyone’s portfolio. Throughout this article, we’ll tell you what options are and why you should get started in 2023.

What Are Options?

Options are a fantastic strategy that gives power to the buyer by locking in the price of an underlying asset for a set period of time. However, despite being tied to a contract, it’s only the seller that’s obligated to follow through. Essentially, it gives buyers the opportunity to think about their choices.

The best way to think about this is with real estate. If you see a house you like but you aren’t sure if you want it, you can speak to the estate agent about taking an option on the property for a fee, which means there is more time to consider the sale. If you decide you want the property before the time lapses, you can at the agreed price. Whereas, if you decide it’s not quite the right move, you can leave it be and you will have only lost the fee.

They Are More Cost Effective

When it comes to leveraging, options give investors more power. For example, if you tried to buy 200 shares in a $60 stock, you’d have to put up $12,000 immediately. However, if you were to buy 2x $30 call options—with an underlying representation of 100 shares—the total outgoing would only be $6000.

This is only a basic example of how options are more cost effective, but it’s still important to choose the correct type of purchase that accurately mimics the target stock position. To get this part right, it’s worthwhile finding a reputable option strategist and consuming as much options-related content as possible.

There is Potential for Higher Profits

Investors don’t need to have a solid financial background to understand that less money spent to make the same profit is a good thing. When an option pays off, this is exactly what you will experience. However, to understand the potential percentage return for a given option, you’ll have to learn about position delta.

It Can be Less Risky

Options have the power to alleviate risk, but there are also scenarios when risk can be elevated through options. The reduced investor commitment is one of the reasons why options are better than hedge funds. Unlike stop loss orders to mitigate risk, which close when a certain loss figure has been reached, options don’t close when the market sleeps. This means there’s movement 24/7, making them the ultimate choice.

Investing successfully is all about mitigating losses and finding viable strategies that align with financial goals. Options present the perfect opportunity to reduce loss and achieve financial milestones, but you need to understand how to pick the right options to avoid suffering even larger losses.