Lesson 1:

Why trade options?

Lesson 1: Why trade options?

Why trade options?

Options trading can seem daunting due to its complexity, but it doesn't have to be inaccessible. Armed with the appropriate tools and resources, options can not only enhance your investment portfolio but also serve as a source of additional income and a safeguard during market declines. Continuous education is vital as you embark on your options trading adventure. Integrating options into your investment strategy unveils a world of opportunities, enabling you to tailor your approach to suit any market outlook — whether you're optimistic (bullish), pessimistic (bearish), or expecting little to no change (neutral). There's an options strategy for every market sentiment.

Lesson 1: Why trade options?

Options trading is anchored in three categories: speculation, income generation, and risk management.

1. Speculation

This approach is all about directional trading — predicting and capitalizing on the potential rise or fall of the market. Through speculation, traders employ leverage to amplify their returns, but this comes with its own set of risks. Typically, buying options is indicative of speculative trading.

2. Generating Income

The primary goal here is to enhance yield. Options can be a standalone income strategy or can complement existing holdings, such as stocks or ETFs, to provide additional income on top of dividends.

They also can be instrumental in acquiring and selling stocks. Income generation in options trading is generally associated with the selling of options.

3. Risk Management

The focus here is on loss mitigation and protection, a strategy often termed as hedging. Options are strategic tools for guarding against market downturns. Moreover, it's crucial that every options strategy is employed with stringent risk management protocols in mind.

Options are different from stocks because they don’t last forever—they have an expiration date. This means trading options involves extra risk and the need for careful management. But don’t worry, you’re in the right place to learn everything about options trading.

As we peel back the layers, you’ll see that understanding the added complexity of options is just another step towards becoming a savvy investor. So, let’s get started on this journey together, and you’ll see how options can become an essential part of your investing toolkit via this course.

Lesson 1: Why trade options?

Key Takeaways

1. Tailor your trades

Options strategies can be designed to match your market outlook, whether you're optimistic (bullish), pessimistic (bearish), or expecting stability (neutral).

2. Broad applications

Master the three core purposes of options trading — speculation, income generation, and risk management.

3. Time-sensitive nature

The limited lifespan of options means timing is crucial, highlighting the importance of continuous learning to navigate the intricacies of options trading effectively.

Click “NEXT” to check your knowledge

Lesson 1:

Why trade options?

Lesson 1: Why trade options?

Knowledge Check

What is the primary purpose of using speculation in options trading?

(Select an answer below)

Lesson 1: Why trade options?

Knowledge Check

Which of the following best describes the advantage of integrating options into your investment strategy?

(Select an answer below)

Lesson 1: Why trade options?

Knowledge Check

Options are known to have a limited lifespan due to their expiration date. What key aspect of options trading does this characteristic highlight?

(Select an answer below)

Congratulations!

You have completed The Foundation - Lesson 1:

Why trade options?

CONTINUE TO NEXT LESSON

“BMO (M-bar Roundel symbol)” is a registered trademark of Bank of Montreal, used under licence. BMO InvestorLine Inc. is a wholly owned subsidiary of Bank of Montreal. Member – Canadian Investor protection Fund and Member of the Canadian Investment Regulatory Organization.