3 Reasons To Trade Options And A Sweet Play On Hershey

I often advise readers to gravitate toward options to limit risk during periods of particularly tumultuous market action.

And I recommend options as a risk-management tool in all sorts of environments -- whether the choppiness in stocks is due to the collision of major support and resistance levels for the benchmark equity indexes, a particularly fraught geopolitical backdrop, high-stakes macro uncertainties (such as a looming Fed decision), or even just periodic presidential tweetstorms.

This advice might surprise some readers, given that options trading is so often associated with aggressive, "swing for the fences" type bets on big directional moves. But there are three simple ways that options limit your risk (while letting your profits run!) in even the wildest, most unpredictable market environments:

1. Your dollars at risk are clearly defined and limited.

When buying options, the cost to purchase one options contract (representing the right to buy a fixed number of shares, typically 100, of the underlying security at a set price by a set date) is far lower than purchasing that same number of shares outright.

And even if you wind up dead wrong on the trade, the maximum amount you can lose is that initial dollar amount you put up to buy the option.

So not only are you putting less capital at risk, you're also curbing how much you can potentially lose on that single trade. By contrast, strategies such as selling a stock short leave the door open to potentially steep (and theoretically unlimited!) losses on an adverse move.

2. You stand to make profits many times greater than your dollars at risk.

The reduced cost of entry on options, as described above, also allows option buyers to reap profits that represent a multiple of their initial investment — and often, many times greater than shareholders in the same security, who may be collecting single- or double-digit percentage gains while options holders rack up triple-digit gains.

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