Many investors are trying to beat the stock market and generate above-average returns from the stock market consistently. In this article, we’ll reveal why options investing might be one of the best ways for you to achieve your goal!
What Is Options Investing?
Options investing is a strategy that involves buying or selling stock options on stocks with great financial performance.
You achieve indirect ownership of a company’s shares by investing in stock options instead of the stock itself.
In simple terms, a stock option is a contract to buy or sell a stock at a certain price within a certain time. The promise is automatically enforced by your broker.
With options investing, you do not only purchase stocks in a company. Instead, you purchase an option which derives its value from an underlying stock. For this reason, options are also classified as derivative products.
But why should you consider options investing for your portfolio this year? Let’s go through some of the huge advantages this strategy provides you with.
How Does Options Investing Work?
Since you’re buying a contract instead of shares, you do not need as much capital upfront. Depending on the contract you buy, you can achieve a similar upside as buying the shares itself.
Let’s compare buying stocks for the company Microsoft (MSFT) as compared to buying MSFT stock options over a 1-year period. Here’s a chart for reference:
On 4th Jan 2021, MSFT was worth $217 a share. Buying 100 shares would have required an investment of $21,700.
At the same time, an at-the-money, 620-day call option was worth $3,500 per contract. This means you could have bought around six MSFT call options for the same investment of $21,700.
While both would require a similar amount of capital, let’s look at the difference in returns at the end of 2021.
This is a result of how options investing would have performed as compared to stock investing.
Comparing Stock Investing and Options Investing
From 4th Jan to 28th Dec 2021, the stock price of Microsoft went from $217 to $341. This would give you an impressive 57.1% return on investment!
If you had invested $21,700 in Microsoft stocks, your investment would have become $34,000 in just 12 months.
Over the same time period, the price of a Microsoft stock option went from $3,500 to $12,900. This means Microsoft options would have given you a 270% return on investment instead!
If you had invested $21,700 in Microsoft stocks, your investment would have become $77,750 in just 12 months.
Can you see why options investing can make a life-changing difference for you?
Where Can I Use Options Investing?
It’s important to note options investing can only be used in stock exchanges with a highly liquid options market.
This is highly effective in the US stock market. You can also consider using options in the Hong Kong or European markets as well (although there are some important differences).
If you’re thinking about options investing, your best choice would be to check with your broker. They will be able to provide you with the information about whether options are available for you.
However, do note that options are considered a leveraged financial instrument. Depending on which country you’re from, you might have to take a test to prove you have a basic understanding of options.
Our Conclusion On Options Investing
Options investing is a new approach that allows you to potentially achieve higher portfolio returns with the same amount of capital.
However, there are certain risks and regulations that are involved due to the leveraged nature of option contracts.