Options are mostly misunderstood but are a very important tool that the average investor could use to enhance their returns.

Using the leverage of options

Options are mostly misunderstood but are a very important tool that the average investor could use to enhance their returns. Basically, options are a negotiable instrument, can be traded, that give the buyer the right, but not the obligation, to buy(call) or sell(put) the underlying stock (or futures contract) at a specified price until their expiration. In other words, options are tradable insurance contracts. An investor can purchase an option as insurance against decline in the stock or a rise in the stock. There are many ways to trade options, some are very complicated, but only the basic methods are outlined here.

Advantages of Options

Options have a few advantages that every investor should be aware of, such as high leverage, lower overall risk, more versatility and ability to generate extra income. Since options are a tradable insurance contract, their value fluctuates in direct relationship to the underlying security. The price of the option is only a fraction of the price of the security and therefore provides high leverage and lower risk. There are many ways to trade options, some are very advanced, but most investors only need to be familiar with the basic methods in this article.