Four Main Reasons Investors Use Options in their Portfolios
There are four main reasons investors use options strategies in their portfolios: flexibility, leverage, hedging, and income generation. This short article will cover each strategy.
When you buy stock, your gain depends only on the price going up. But options may provide potential benefits if a stock rises – or if it falls. That means you can speculate on the future price of a stock, whether it goes up or not.
Leverage means you may be able to use less money to gain exposure to the movement of a stock’s price. In other words, with options, you gain market exposure that’s similar to owning a stock, but you generally commit less money to make that happen and that could mean more flexibility for you and your portfolio.
Hedging is about reducing risk. You make trades based on your best judgment, then options can help protect those trades — or your overall portfolio — in case things don’t work out quite like you planned.
4. Income Generation
One of the biggest reasons some investors trade options is to produce income. Much like a dividend on a stock, options can be used to help generate an income stream. There are options strategies that let you collect money on your existing or future stock positions.
You can trade options in the most common types of accounts, including your brokerage account, certain types of retirement accounts, and even your IRA. The next time you’re thinking about trading stocks, don’t forget about these four big reasons people use options.
To learn more about using options strategies in your portfolio, visit us today at etrade.com/options.