Options traders are often finding themselves in a difficult investing scenario where investing in options comes with a hefty premium.  A stock that sells for $23 a share with an option strike price of $25 per share often comes with a $1 premium when held for longer than 6 months.  This premium usually makes it a better investment to go with stocks where there is no premium, instead shares are bought at market prices.  But with volatility as high as it is today, and stock prices moving wildly it appears better instead to take the option play even with the premium price.

High volatility swings prices in every direction.  An option trader can get a much better and secure investment in buying a lot of options than 100 shares of stock because of the limited downswing.  A lot of options may cost just $100 while 100 shares of stock costs $5000.  This kind of differential seems ridiculous especially considering that option investing has a limited downside.  If a stock were to go from $50 to $45, the option investor would be out $100 compared to $500 with the same upside potential.

While the VIX is down from its highs of 26 just a few months ago, it still sits at 16 which is substantially higher than average.  A VIX reading of 10 would suggest a very stable market, 25 a very volatile market.  Though 16 is seemingly in the middle of volatility readings, the price of commodities is sending the stock market on daily up and downswings that are much greater than normal.  Very rarely does the market rally in one direction, instead we’re seeing a sideways market by virtually all definitions.

The market of today is certainly different than jut a few years ago.  Investors react to negative news negatively and positive news, well, negatively.  There was once a time during the bubble of 1999 very stock prices moved up without regard to any news.  Now were in a point where stocks move down for whatever reason, certainly a sell off is occurring.

It should be made the goal of an investment to protect wealth as much as to generate wealth.  Options investing in this market allows investors to hold positions deep in the red without any added cost.  Though the causal investor is usually turned off from options because of their “speculative nature,” when utilized correctly they pose no added risk.  In much the same way that credit cards have been labeled as the way to large debts, options have been almost ridiculed as a dangerous investment.  Remember to invest responsibly on any level, you should never consider buying more options than you would stock just because of the lower cost of entry.