Traders make money from fluctuations in price levels. By using leverage, traders can maximize return on capital. Leverage involves using margin to make more money than you can with your own funds.
Margin trading provides high rewards when you are right, but may also cause huge losses if you are wrong.
Traders are then confronted with some confusion: Leverage or margin trading can enhance return but carries high risk. This becomes a difficult decision since traders should not go for any increase in risk, but should at all times try to leverage their money for more profits.How can these two opposing viewpoints be reconciled.
The Answer:
If margin trading can be used with an always known and strictly limited risk, it becomes High Leverage with Low risk. (HLLR).
The instruments of HLLR are Put and Call options.
Buyers of puts and calls gain an enormous amount of leverage while applying only a small amount of capital. They also have limited and well defined risk.
Advantages of Option buying:
You do not have to possess large amounts of capital. (Remember, all trading activities require that you should be well capitalized.)
As an option buyer you enjoy all the benefits of margin trading when your are right, without the risk associated with leverage, if you are wrong.
Total risk is always known and limited. The maximum risk is the cost of your option.
A Trading Plan:
Successful trading depends on knowledge, courage of conviction, the discipline to execute your plan, and hard work required to develop the knowledge, courage & discipline.
In trading options, you must have the financial and the psychological strength to face adverse situations when they arise. (This applies to all trading methods).
