Our trading preference is stock options.

But you have probably been told or read that options are risky. Even worse, that you can lose your shirt trading them!

How do you know which is the truth?

I want to take a few minutes and look at stock ownership. What are the possibilities when you buy stock?

The stock price goes up.

The price can go down.

The stock prices moves sideways.

Clearly if the price goes up you make money. Just as clear, with the second scenario you lose money.

However if there is sideways movement you will not directly gain or lose money. You will however incur costs through brokerage fees directly and indirectly lose money through what is know as "opportunity cost."

Opportunity costs result due to your inability to invest in other opportunities hence the loss of the opportunity to make additional profit.

As you can see if you buy stock the only way to make money is for the stock price to go up.

Now some of you may be thinking, "But what about shorting?"

Again this is another possibility but is does involve some complicated strategies coupled with uncapped risk. Based on this it is not an approach we would recommend.

You see, when you short a stock, you actually sell a stock that you don't own. And your intention is to then buy the stock back at a lower price. The price difference is your profit per share.

Do you see what the risk is?

Well what happens if the stock price goes up? Particularly if it goes up a lot?

Having traded the stock at a lower value when you have to buy it back it costs you more resulting in losses which can be catastrophic.

So, to summarize, when you trade stock you can really only make money if the price increases.

There is another consideration when trading in stock which is the high cost of owning stock.

Consider buying 200 shares at $25 the cost would be $5000. Should you buy at on the margin it will still cost $2500.

That is a lot of money to outlay. And, more importantly it is a lot of money to put at risk. Especially seeing that you only have a one in three chance of the stock moving in the right direction.

Plus as stocks don't trend all that often you not only need to pick the right direction, you also need to be able to pick the right time.

So we can say that trading in stock is not all that easy and it can be expensive.

A good alternative is buying options.

For a start you only have to invest about 2% of what the stock was worth and yet you still control the same 100 shares.

So in the example above, instead of investing $5000, we might only have to outlay $100.

Add this to the fact if you get your game plan right you can profit no matter which way the stock price moves.

In addition to this you are reducing your risk. The most you can lose is your initial investment of $100.

But the best thing of all is the leverage that options provide.

Taking the example above if the price were to go up by 10% then your profit would only be 10% or on margin 20%.

But with a similar increase in prices the value of your option may increase by 100%. This would give you a profit of 100% - this is ten times more profit than on the standard stock trade.

In conclusion don't limit your options by accepting the standard view that stock ownership is the safe way to go and trading in options is the high risk game. By understanding options and the ways to trade them you can see good returns on your investment.

This article is offered for educational purposes only. It is not intended to provide you with financial advice. The information shared is gained through personal experience of what has and has not worked. Should you be considering trading or investing in stock you should seek the advice of a registered licensed advisor.