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Warren Buffet frequently uses stock options to ease risk in stock and to accumulate equity at a lowered expenditure. If he is using equity options, they ought to be lower exposure as compared with just owning equity. You can directly trade stock options in your IRA. That is the frank answer, just the same keep on reading to appreciate why this is factual.

On a dollar for dollar frame of reference, equity option trading involves less exposure as compared with equity trading over a given duration . For example, if you expect Microsoft is going to multiply in market value over the next two months subsequent to announcement of Vista, you can either procure the stock for around $29.50 per share or obtain a $30 strike price Jan '07 call for $0.70 per share. As a equity option covers a hundred shares, the option pay out is $70.00 to have control of 100 shares versus $2950.00 to hold 100 shares. If the equity moves to $30.00 per share the option will be at roughly $092. You can compute this using a equity option implied volatility calculator. That limited flux in the equity realizes a 30% gain on the equity option and a 1.7% gain on the stock. The term for this is leverage and is a peculiarity of equity options trading. Since the options expire on the third Friday in Jan '07, make believe Microsoft advances to $35.00 per share. By exercising the call option, you can buy into the stock at $30.00 or you can just liquidate 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 but the most forfeited on the call stock option is the grand total you remitted or $0.70 per share. That is much smaller exposure than owning equity if your forecast is mistaken and the stock goes down.

When you are long (buy) a equity option your exposure is at every turn confined to how much you spent and is at all times much less risk compared with owning the stock. The high exposure in equity option trading occurs when you short (sell) options and you do not own enough stock to meet the obligation of the sold call option or have the hard cash for a put option you sell. Avoid this type of trading to limit your risk.

Would it interest you to know that option trading can even cast off the need to forecast whether a equity is about to move up or down? You can do direction neutral equity option trading, such as strangle trading, to bring about income if the stock moves either up or down. The risk in these trades is limited to your beginning cost. Occasionaly you can frame some direction indifferent stock option trades for a credit in your account.

Stock options can among other things be used to lessen your exposure in stock ownership. If you have a stock that is not in motion, something that most stocks do almost 80% of the time, write a call option with strike price greater than stock cost and cover the option with that flat stock your stock 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 bag a total of $3.00 per share ($2.50 on stock and $0.50 on option). If the equity goes down or does not move above $27.50 by expiration, you get to keep the stock and the premium you were paid when you sold the call option. That is not unlike generating your own $0.50 per share dividend. Correspondingly it reduces your cost in the stock by $0.50 per share. Consequently the most you can forfeit on that stock is 24.50, not the original $2500.

So to answer the question, equity option trading completed correctly is eminently less exposure than stock trading. Stock options allow you to diversify a deal better with same amount of capital. The exposure in equity option trading that is not present with stock trading is their bounded lifetime. Stock options do expire. This means your forecast for the equity movement has to develop within the time format of the options you use. This can range from 1 day to almost 3 years.

Go online and inquire into stock options trading and the even lower exposure found in implied volatilitytrading.