Should You Invest In Stock Options?

Generally, stock options are considered to be the experienced traders’ forte. But, it can be a helpful tool for individual investors too. In fact, experts say that when carefully chosen, stock options can be equally beneficial for investment purposes, and not just day trading.

Knowing how do stock options work, will help you decide whether to put your money in it or not.

Stock options have been around for quite some time now, but they have only recently started getting the deserved attention. Investors mostly avoid stock options as they do not have a clear idea about them. 

They think it to be sophisticated, hence challenging to understand the investment. Brokers and investors must be offered proper training on the right ways to use stock options. Only then will it get the worth that it deserves.

Due to the lack of understanding, negative words like “risky” and “dangerous” are associated with the overall financial markets and their various components. The stock option is no different in this case. 

However, as an investor, you must investigate the model before making any decisions about the option value. But believe it or not, there are some sheer advantages of investing in stock options too.

Let us find out what advantages stock options can offer.

Cost-efficiency

Options come with great leveraging power, similar to the stock position, but in a cost-saving way. For example, if you want to buy 200 shares of $80 stock, you would need to invest $1600. 

But if you purchase two $20 calls, where each contract would represent 100 shares, then you would only have to pay $400. You will be able to use the additional $200 at your discretion. 

However, things are not as easy as it seems. You would have to make the right call to mimic the position of the stock properly.

Less Risky

Depending on the situation, buying options can sometimes be riskier than owning equities. But there will be times when options are used for reducing the risks. It mostly depends on your usage pattern.

Options are a dependable form of a hedge, and that makes them safer than stocks. While an investor is purchasing stocks, a stop-loss order is usually released to protect the stock’s position. 

This order helps to stop losses below a predetermined position which you will identify as an investor. However, the problems with these orders lie in the order itself. 

The stop order will only be executed when the stock trade goes at or below the predetermined margin by the investor indicated in the order.

It is essential to remember that the stop-loss order only works when the market is open. It does not apply at night. So if a given stock opens below your predetermined margin when the market opens, you will have to make the first trade with that amount. It means that the stop-loss order will not work in your favor when you need it the most.

In such cases, the put option offers some excellent protection. They are operative round the clock and will not stop as the market closes. They will be your 24*7 insurer, which is why most investors consider this their dependable form of hedging.

Higher potential returns

Every investor invests their money intending to get higher returns, and stock options increase that chance. With this investment model, you will spend less but get almost an equal profit, which means the percentage of income would be higher. It is one of the main benefits that attract a lot of investors towards options.

More strategic alternatives

The options offer more strategic investment alternatives. They are pretty flexible, and there are many other ways to use options to recreate other positions. These positions are popularly known as synthetics.

The primary aim of synthetics is to present investors with different ways to achieve the same investment goal. The option helps investors to trade in stock movements along with the passage of time and volatility movement. 

As an investor, you would notice that most of the stocks do not have significant moves most of the time, and you can take advantage of this stagnation as it can decide if you have reached your financial goals.

How the Pandemic Has Impacted the Stock Market

Expect the unexpected. It’s good advice across a wide variety of circumstances –– and it especially applies to investing. Relying on past performance or historical averages is a mistake. So is the failure to diversify. 

At some point, stock prices will fall. It’s inevitable. Some companies try to game the system by engaging in fraud. If you’re employed by one, know that you have reporting protections as an SEC whistleblower.

Although there have been warnings about global pandemics for years, few saw one happening in 2020. No one could have predicted the ways it has radically altered our lives. Nor could anyone have foretold the impact it had on investments. So how has the pandemic affected the stock market in the United States?

Plunging Markets

In February of 2020, the novel coronavirus that causes COVID-19 was detected across the U.S. and Western Europe. Although the pandemic’s worldwide spread might have been unpredictable, the market’s response wasn’t. 

Across the globe, stock indexes plummeted as nervous investors sold across sectors. In the U.S., on Monday, February 24th, the Dow Jones Industrial Average dropped over 1,000 points. Its more than three percent drop was matched by the falling S&P 500 and Nasdaq indexes. Across the board, markets lost nearly one-third of their value between January and the end of March.

Rising Values

By April, many investors had abandoned the market entirely. With the benefit of hindsight, they might have held on. That’s because even as the overall economy seemed dire, the market began to improve. 

After the Federal Reserve indicated it would maintain historically low interest rates, investors sought better returns in everything from gold and bitcoin to real estate and equities.

With millions working from home for the first time, it made sense that the tech companies supporting the transition would benefit. Video conferencing company ZOOM, for example, increased in value by nearly 500%. 

Besides remote workers, millions more were forced to stay at home –– which benefited companies like Netflix, Amazon, and Apple, along with many smaller tech firms.

This largess was spread unevenly. Some businesses that closed their doors in March never reopened. Besides bars and nightclubs, restaurants, nail salons, and many other small businesses went out of business. 

Yet large chain stores like Target, Walmart, Publix, and Ralph’s remained open throughout the pandemic. This was reflected in earnings reports as they reported high profits even as fitness and department store chains filed for bankruptcy.

Similarly, workers able to work from home endured and even thrived while laid off retail and hospitality employees struggled. Those still employed or with private incomes led to an influx of new investors. After being forced on the sidelines by prices they felt were too high, they helped drive the U.S stock market to new heights.

On November 24th, the Dow Jones Industrial Average hit a record high of 30,000. Besides this significant psychological milestone, the month was equally record setting. After giving up some of its gains, it closed out November up nearly 12% –– for the month, not the year. The last time it did so well was in January of 1987.

That year stands as a beacon for investors since, on October 19, 1987, U.S. markets dropped over 20%. Panicked sellers locked in their losses. Yet, if the pandemic has proved anything, it’s that timing the market is a fool’s game. Instead, experts recommend dollar-cost averaging. 

Putting a fixed amount into the same fund or stock every month regardless of daily fluctuations is a proven wealth builder. Unless you have a working crystal ball, it’s the best way to prepare for the unexpected.