Options as Three Dimensional Trading

Trading an underlying asset only gives you flexibility and leverage relative to price increases or decreases in that underlying asset. In other words, you are trading the price, and depending on whether you long or short that underlying asset, you will make or lose money when the price goes up or down.

Options provide you with the flexibility to not only participate and profit from a market's price, but also allows you to use other factors such as volatility and time. You are able to take advantage of the effects of an underlying asset's volatility on option prices. Because options are contracts that expire, an option will increase and decrease in value depending on when it expires, and how close the strike price is to the underlying asset price at any given time during the contract period. Being able to trade opportunities provided by price, time, and volatility offers more potential for profit than just trading price.

In addition, there are many studies that can be used to identify profitable options positions, analyze them for risk and profitability, and monitor and track positions. This means that your risk/reward ratios are more manageable, and you are trading with more information, which allows you to make better trading decisions. The many contributing factors affecting an option, and the underlying asset on which it is based, provide an options trader with a myriad of opportunities and profit potential, as well as limited risk, flexibility, and leverage.