Day traders and swing traders (active traders) most often limit their trades to shares of stock; but using options solves many problems of leverage, diversification and risk.
Options highly leverage active trading since every option controls 100 shares of stock. So for a fraction of the cost of 100 shares, options (averaging about 5% of stock price) leverages capital up to 20 times more. This also improves diversification. Buying stock for active trading is limited by the capital available, even using margin. With options, traders can trade so many more issues because of the flexibility and low cost.
Risk is also lower. A long option at its low cost level is the most a trader can lose, compared with a much greater exposure with 100 shares of stock. There is another risk factor: Many active traders only swing from the bottom of the trend up to the top, using long stock. They fear shorting stock, and for good reason. This is risky, expensive, and awkward. However, traders can also play the downtrend using long puts in place of short stock - lower risk, better leverage, and even better diversification.
Options can be used in dozens of possible configurations. These include the combined use of long calls and long puts, short calls and short puts, long/short combinations, any of these employing single contracts to control 100 shares. If traders base their entry/exit on very short-term trends, they can also pick the very cheap options due to expire in less than one month. This means little or no time value premium and, assuming they pick contracts at or slightly in the money, a point-for-point responsiveness with intrinsic value.
To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. You can take part in discussions among members on the site at the Members Forum.
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