Option trading is fast becoming one of the hypes of this generation. Option
trading has been and still is being taught all over the world as the definitive
investment instrument for entry to the fast track. Popular speakers like Robert
Kiyosaki and Robert G Allen have fuelled this option trading hype in a very big
way. The steadily rising number of option contracts that have been traded over
the past years is evidence to the rising popularity of option trading.
While option trading is one of the most versatile investment vehicles that
have ever been created, it does have fundamental limitations.
First of all, the number of optionable stocks in the markets is really quite
limited. Only 2649 out of 7277 tradable securities in the US markets offer stock
options. This represents only 36% of the universe of tradable securities. This
percentage is even lesser in other markets in the world. This results in a
fairly limited choice for investors to choose from.
Secondly, the liquidity of most stock options up for option trading is also
pretty limited. In fact, only a handful of stocks have options with liquidity to
handle a respectable fund size. The result of which is that it may be difficult
for investors with bigger funds to participate as freely in option trading as
they may in trading shares. In this respect, option trading may be more
productive as a hedging instrument against a large portfolio of shares.
Thirdly, due to its liquidity and its leverage effects, option trading is
fast becoming the favorite of small investors with only a very small fund to
trade with. However, many of the complex spread strategies that are being taught
by option trading speakers all over the world require an extremely high
commission outlay that is much higher than if you trade stocks. These high
commissions frequently eliminate any possible profits from these complex spread
strategies.
With these in mind, I hope you will be able to make an even more informed
decision when applying option trading as part of your overall investment
strategy. If who you are learning from is just telling you all the pros and none
of the cons, then it is time you change teacher to someone who teaches the
truths.
