Most everyone is familiar with stock investing for the long term as a way to create wealth.  It is one of the most common ways for the non-trading person to invest in the financial markets. Typically stocks are bought and held for a long time horizon as the investors waits for the price of the stock to increase or possibly collects dividends for income.

Even though most people consider this to be a safe way to invest, in fact it holds many risks, not the least of which is the huge margin requirements.  A safer alternative is investing using options, and reducing risk with options is something every investor should consider.

What are Options?

An option is a financial derivative that gives an investor the right, but not the obligation, to purchase or sell an underlying asset at a future date.  Options are most commonly based on stocks, but options are also available for other asset classes.  Options have many advantages, and can be used in a variety of ways to decrease risk or to increase profits.

Investing with Options

Those who wish to invest using options should understand that the reasons for buying a particular option are the same used when deciding to buy a particular stock.  Options are used instead of the stock (or other asset) to reduce risk, to hedge against volatility, and to increase profits.  They are also useful because the margin requirements are much lower, so an investor who purchases using options can actually control 10 times the amount of the asset or even more in some cases.  If the investor is correct in the direction of price this can lead to large returns with less risk than owning the actual underlying asset.

Option Advantages

Investors will find two major advantages with using options.  The first is the forementioned margin requirements.  When using options an investor can buy a much greater number of shares, or can invest in the same number of shares for much less.  This frees up capital for other uses and can magnify gains.

A second advantage comes in the form of risk reduction.  When an investor buys a stock, the risk is much greater than with options.  A stock investor stands to lose their entire investment if the stock should go all the way to $0.  The same investment made using options only puts the option premium at risk.  On the flip side, an option investor has unlimited upside potential.  This combination of reducing risk with options while simultaneously increasing the potential reward makes them an excellent investment vehicle.

In Conclusion

Thanks to the risk reduction, lower capital requirements and huge upside potential, all investors should investigate how options can help them make greater profits.  Whether using traditional options, or the more recent binary options, an astute trader can greatly enhance their wealth once they properly understand how to invest with options.