SHARETIPSINFO >> Articles Directory >>Why stock is more risky than options?
Any form of stock market trading has some sort of risk factor associated with it. By risk we mean to say the probability of loss in your trading capital. Whether it is trading in the stocks in cash segment or trading in the options in derivative segment you always run some amount of risk when you are trading at stock market. But at the same time it is also wise to trade in the instrument that has lower risk. Option trading for example has lower risk than stock trading in general. There are so many factors that make option trading a better option than the stock trading if you are considering the risk factor associated with both types of trading. Here we are going to discuss different aspects that make option trading less risky investment in comparison with the stock trading.
Leverage in option trading – In option trading you can enjoy the higher leverage than stock trading. This high leverage lets you invest in assets of much higher valuation than your deposit. This is not really possible in stock trading. So it is quite obvious that in option trading you are risking significantly smaller amount of money in comparison to stock trading for trading in the same quality of stocks. But while you are taking advantage of the leverage of option trading you should always remember that you need to use the leverage diligently instead of abusing the advantage sop as to avoid huge loss in option trading. So if you can wisely use the leverage in option trading by selecting the right trading option, you can make huge profit from option trading while risking a smaller sum of money in comparison with stock trading.
Short Selling in option trading – When you are trading in stocks and have a speculation that certain stock is going to fall you have a chance to profit from the fall by short selling the stock. Short selling is the process where you are selling the stocks that you do not own. That means you are selling the stock at a higher price and when it falls you are buying it back at a lower price to close the position. This is surely a great way to make profit in stock trading but then if the stock suddenly rally at a market and your speculations go wrong you are going to make a huge loss. But in option trading if you are speculating that certain stock is going to fall you can simply buy a put option. Even if the stock moves up unexpectedly you can ignore the option contract and let it expire worthless. It will only cost you the premium amount for buying the put option. So it is quite evident that buying an option contract is much less risky than short selling in cash segment.
Trading in multiple direction in option trading – In stock trading you have the chance to make profit straightway when the price of the stock goes up. Or you can make profit by short selling when the price of the stock goes down. But in option trading you can make profit when the stock goes up or down, or when the stock goes up or stays at a point, or the stock goes down or stagnant or even when the stock is simply stagnant at a fixed position. By diligently using the option trading strategy you can always make profit irrespective of the movement of the stock. So with more probability of profit in option trading it surely has less risk than stock trading.
Hedging in option trading – Hedging is a process in stock trading where an investor can minimize the risk of one position with another position. While you are trading in the stocks in the cash segment the only way you can hedge is by diversifying your portfolio. That means to cover the risk of one stock position you can hedge by having another position with a different stock. But when you are trading in options you can always hedge in different types of option contracts. In fact you can hedge one stock position with option or one option contract with another.
Option contracts are more advanced financial instrument that can be effectively used to minimize your risk while trading at the stock market and hence option trading is lot safer than stocks.
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