The Power of Options lies in their versatility and the way an investor chooses to use them.
Options can be as speculative or as conservative as you desire, depending on whether you buy them or sell them.

You can use them to protect a position from a decline in price, which is also known as "insuring your Stock".

Imagine having this kind of protection in 2008, the losses suffered in one of the greatest declines in the Stock Market would have been greatly reduced if you were a buy and hold investor.
The great thing about Options is that you can use them to profit from a rise or fall of an Index or Stock, and it usually only costs around 10% of the Stock, to benefit 100% on the movement.

You can also sell Options against the Stock you own and receive the money in your account,  I usually refer to this strategy as "renting out your shares".

Despite what anybody tells you, Option Trading involves risk, especially if you don't know what you are doing. Because of this, many people suggest you steer clear of Options and forget that they even exist.

However, being ignorant of any type of investment places you in a weak and uneducated position. Perhaps the speculative nature of Options doesn't fit your style. That's ok - simply don't speculate in Options. But, before you decide not to invest in Options, you should at least understand them.

Failing to learn how Options function, is as dangerous as jumping right in: without knowing about Options, you would not only miss having another choice on your investments but also lose valuable insights into the workings of some of the world's largest Corporations.

Whether it is to hedge the risk of large holdings of Stocks, or to give employees ownership in the form of Stock Options, most Multi-National Companies today use Options in some form or another.

Here is an example of how powerful Options can be. Here we have captured an explosive move using Wilsons Relative Price Channel (WRPC).

Leon Wilson's article in the July 2006 Stocks and Commodities magazine, "The Wilson Relative Price Channel," introduces a new way to show overbought and oversold conditions.  To order a copy of the original article click here.

If you would like to view some additional information on using the Wilson Relative Price Channel tool in Market Analyst 6 please click here.

 Nike is a US stock that has broken out into the Bullish zone of the Wilsons Relative Price Channel. Our entry price was  $74 on the 15th September, buying a 2 month Call Option at the 75 strike, for a cost of $3.00. With the stock now at $85.00, the Call Option has risen to $10.00 -  a $300% gain in 3 weeks.

Now that’s the power of using Options. Of course, looking at the downside of an Option, one could lose the whole $3.00 investment, but the good news  is that's all you can lose - compare that with a $70 stock, where one could lose more on the shares. Therefore when you are educated and know your risk, Options can actually be quite a safe investment strategy.

(Click image to enlarge)

To learn more about Option Trading, email contact@stockcourse.net  to request your free E-Book "Option Trade Your Way to Wealth" By Lyn Summers.

More articles by this author

How to Bank Like Buffet Using Covered Calls 19 May 2012

In one day Warren Buffet's $5 billion investment in the...

Read More >>

Stock Splits19 May 2012

In the 1990’s the top technology stocks were spectacularly successful...

Read More >>