Warren Buffet oftentimes employs stock options to reduce risk in stock and to purchase stock at a lesser cost. If he is using stock options, they should be lower exposure compared with just owning equity. You can after all trade equity options in your IRA. That is the candid reply, in any event go on reading to discover reasons for this being factual.

On a dollar for dollar position, equity option trading exposes far less risk than equity trading over a stipulated epoch of time. For example, if you guess Microsoft is getting ready to climb in market value over the next two months after release of Vista, you can either buy the equity for roughly $29.50 per share or purchase a $30 strike price Jan '07 call for $0.70 per share. Considering a equity option covers one hundred shares, the option price is $70.00 to have under control a hundred shares counter to $2950.00 to own one hundred shares. If the stock goes up to $30.00 per share the option approaches roughly $092. You can estimate this using a equity option pricing calculator. That little movement in the stock leads to a 30% gain on the stock option and a 1.7% earnings on the equity. This is refered to as leverage and is a peculiarity of equity options trading. Since the options expire on the third Friday in Jan '07, postulate Microsoft moves to $35.00 per share. By exercising the call option, you can purchase the equity at $30.00 or you can just convey your call for $5.00 per share, generating a 700% pay off on the equity option.

What if Microsoft drops? If it drops by $5.00 to $24.50, you have lost $5.00 per share on the stock although the most given up on the call equity option is the gross amount you remitted or $0.70 per share. That is much less exposure than owning stock if you are in error and the equity goes down.

When going long or buying a stock option, your risk is rigidly constrained to how much you spent and is all the time much less exposure than owning the stock. The high exposure in equity option trading occurs when you short (sell) options and you do not have title to the equity for a call option you sell or have the money for a put option you sell. There is plenty of money to be made without engaging in this type of trading.

Were you aware that you could even do away with the need to forecast whether a stock is about to move up or down? You can employ direction nonspecific equity option trading, such as option backspread trading, to produce income if the stock moves either up or down. The exposure in these trades is limited to your original cost. Sometimes you can even layout some direction neutral stock option trades at no cost.

Equity options can additionally be applied to reduce your exposure in stock ownership. If you hold a equity that is not moving, something that most stocks do close to 80% of the time, write a call option with strike price greater than stock cost and cover the option with that flat stock your equity cost. For example, postulate you paid $25 per share for equity and sell a $27.50 strike call option for $0.50 per share. If the stock goes to $27.50 at expiration of the option, you are obligated to sell the stock at $2750. You would make a total of $3.00 per share ($2.50 on stock and $0.50 on option). If the stock goes down or does not move above $27.50 by expiration, you get to keep the equity and the premium you were paid when you sold the call option. That is not unlike generating your own $0.50 per share dividend. In addition it reduces your cost in the equity by $0.50 per share. Consequently the most you can lose on that equity is 24.50, not the original $2500.

So to answer the question, equity option trading completed correctly is a lot less risk than stock trading. Stock options allow you to diversify much better with same supply of capital. The risk in equity option trading that is not present with equity trading is their fixed lifetime. Stock options do expire. This means your forecast for the equity swing has to come about within the time context of the options you apply. This can range from 1 day to bordering on 3 years.

Go online and analyze option trading and the even lower risk found in implied volatilitytrading.