It is understandable why many investors prefer to buy stocks or trade them – trading stocks is simple, and there is certainly money to be made. Trading other instruments is, in most cases, complicated, and because of that, many investors and traders stick with trading stocks. Some financial instruments, however, can offer better benefits than trading stocks.
Options trading in Australia, in particular, has many benefits, and there are several good reasons why it is worth considering for anyone looking to invest. Let us look at the reasons why trading options in Australia can be a good idea.
Low Capital, High Return
One of the great reasons for options trading in Australia is the fact that it is possible to yield substantial profits without necessarily having to have a significant amount of capital. For that reason, options trading is perfect for investors or traders with the small capital as well as for those with vast capital. It is the leverage that options provide, which makes it possible to yield big profits with small investments. In simpler terms, investors can use leverage to get greater trading power from the capital they have.
For instance, let us say you have $500, and you wish to invest in XYZ stock, currently trading at $10, which you predict to rise in the short term. If you decide to buy those stocks with your $500, then you could have 50 shares. When the stock rises to, say $15 then you would make a $5 profit per share. In total, you would make $250 profit. It represents a 50% return on your investment.
On the other hand, you could buy the call options on the same XYZ stock. It will give you the right, not the obligation, to purchase the stock. If the options with a strike price of $10 were trading at $2 each, you could purchase 250 options; you would be able to buy 250 shares if the price goes up. If the stock rises to $15, you can exercise your option to purchase 250 shares, and then immediately sell them for a profit of $1,250. Taking away your initial investment of $500 to purchase the options, you will still have $750; a whopping 150% return on your money!
This was just an example, but it does show how you can generate substantial returns from whatever capital you have. Small capital, high return is the advantage trading ASX options has over other kinds of financial instruments.
Remember, risks are always there with options trading in Australia because there are no financial instruments that do not entail risks. Whether you trade stocks, options, bonds or any other instrument, there are downsides of losing money. Some strategies can be very risky, especially the ones that are highly speculative in nature. Usually, strategies that help yield higher potential returns have a higher level of risks.
Fortunately, for options trading in Australia, investors can choose whatever level of risk they wish to take. The range of different ASX options contracts that investors can trade and the different numbers of orders they can place make it easier for investors to limit their risk than it is when trading stocks. As investors gain experience in trading ASX options, they will realize how effective tool options are when it comes to managing risk.