In the realm of financial markets, there are various strategies investors employ to maximize returns. Two popular methods that often come into play are options trading and leveraged trading. Both offer opportunities for significant gains, but they come with distinct risks and complexities. Although it is vital to always implement risk management strategies, retail investors should take caution around Leveraged trading, and instead focus on Options trading. In my personal experience, I wanted a way to start earning
some extra money on the side but found Leveraged trading to be complex in nature and hard to break into. Therefore, Options Trading emerged as a better means for me because of how simple it can be.

What is Leveraged Trading?

Let’s start with leveraged trading. This approach involves borrowing funds to amplify the size of a position beyond what one could afford with one’s own capital. In essence, it’s a way to magnify potential profits, but it also magnifies losses. For instance, if you invest $1000 in a leveraged position with 10x leverage, your exposure to the market is $10,000. This means that for every percentage point the asset moves, your gains or losses are magnified by a factor of 10 which reflects a double-edged sword (Lioudis, 2024).

While leveraged trading can result in substantial profits in a short amount of time, it also carries significant risks. The market’s volatility can swiftly turn against you, leading to losses far exceeding your initial investment. Moreover, the need to repay borrowed funds adds another layer of pressure, potentially forcing investors to make impulsive decisions.

What are Options?

On the other hand, options trading provides a more nuanced approach. Options are financial derivatives that grant the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified time frame. Each Option, or Contract, controls 100 shares of a specified stock. Unlike leveraged trading, options trading allows investors to control a larger position with a smaller upfront investment, known as the premium.

One of the key advantages of options trading is the limited risk it offers. When purchasing options, the most an investor can lose is the premium paid. This provides a level of protection against large, unexpected losses, making options trading a more conservative strategy compared to leveraged trading.

Additionally, options provide flexibility in market conditions. Unlike traditional stock trading, where profits are solely dependent on the asset’s price appreciation, options allow investors to profit from price movements in both directions. By utilizing strategies such as buying calls, and buying puts, or implementing more advanced strategies like spreads and straddles, investors can tailor their positions to capitalize on various market scenarios.

Why Options Trading?

The main way options trading can be implemented is simply by buying calls and puts when a stock price is likely to increase or decrease. In a sense, this is just like investing in a stock itself but minimizes risk while allowing for large amplified returns (Bryant, 2021). Since we have the right and not the obligation to purchase the 100 shares, we can simply sell back the option for a profit after the underlying stock price moves. With proper research about where a stock is likely to go an individual can purchase the corresponding option. In the event that the opposite happens, an individual would only lose the premium paid rather than the full leveraged amount.

In summary, while leveraged trading may offer the allure of quick riches, it comes with considerable risks that can lead to catastrophic losses. Options trading, on the other hand, provides a more structured approach with limited downside risk and versatile strategies for generating returns in various market conditions. By understanding the mechanics of options and employing sound risk management practices, investors can harness the power of derivatives to enhance their portfolios while preserving capital.