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Inherent Diversification

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Options are inherently diversified because their price is affected by more than just the directional movement of the underlying. Options are affected by the following:

  • Directional movement
  • Time decay
  • Changes to implied volatility

Stocks, on the other hand, are only affected by its directional movement.

In addition to being inherently diversified, options can be further diversified by utilizing different strategies, different durations, and different strike prices (deltas). This gives options the edge over stocks which can only be diversified by adding more stocks to the same portfolio.

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