Warren Buffet commonly uses equity options to lower exposure in stock and to secure equity at a decreased cost. If he is using stock options, they must be lower exposure in comparison with just owning stock. You can directly trade equity options inside your IRA. That is the frank response, but keep on reading to comprehend what makes this correct.

On a dollar for dollar matter, equity option trading involves less exposure by comparison with stock trading over a set epoch of time. For example, if you feel Microsoft is getting ready to build up in market value over the coming two months following release of Vista, you can either procure the stock for about $29.50 per share or procure a $30 strike price Jan '07 call for $0.70 per share. As a stock option covers a hundred shares, the option debit is $70.00 to direction one hundred shares versus $2950.00 to hold a hundred shares. If the equity goes up to $30.00 per share the option advances to nearly $092. You can calculate this using a stock option pricing calculator. That midget increase in the equity leads to a 30% gross profit on the equity option and a 1.7% gross profit on the equity. This is called leverage and is a characteristic of equity options trading. By the third Friday in Jan '07, say Microsoft goes up to $35.00 per share. By exercising the call option, you can get the equity at $30.00 or you can just dump your call for $5.00 per share, generating a 700% gross profit on the equity option.

What if Microsoft declines in value? If it drops by $5.00 to $24.50, you give up $5.00 per share on the stock however the most given up on the call equity option is the charge you remitted or $0.70 per share. That is a lot lower exposure than owning equity if your forecast is in error and the equity goes down.

When you are long (buy) a equity option your risk is at all times confined to how much you paid and is at all times much less exposure than owning the stock. The high risk in stock option trading occurs when you short (sell) options and you do not possess the equity for a call option you sell or have the cold cash for a put option you sell. Avoid this type of trading to limit your risk.

Did you know you could even clear away the need to forecast whether a stock is about to move up or down? You can do direction neutral stock options trading, such as strangle trading, to achieve income if the stock moves either up or down. The exposure in these trades is constrained to your original cost. At times it is possible to build some direction nonspecific equity option trades at no cost.

Stock options can among other things be used to lessen your risk in stock ownership. If you have a equity that is not moving, something that most stocks do about 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 have to sell the equity at $2750. You would acquire a total of $3.00 per share ($2.50 on equity and $0.50 on option). When the stock moves down or does not exceed $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. Additionally it reduces your cost in the equity by $0.50 per share. Accordingly the most you can give up on that equity is 24.50, not the original $2500.

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

Go online and analyze stock option trading and the even lower exposure found in volatility trading.