Understanding Options Trading
November 19, 2019 (Investorideas.com Newswire) Investing in securities gives you several choices which you can try out. When securities are mentioned, what crosses the mind of many people is the idea of buying stocks. Very few people are versed with other investment alternatives such as options trading.
What Is Options Trading?
To understand what is options trading, you need to first understand what is meant by the term options. In foreign exchange, an option is a term used to refer to a contract which allows a trader or investor to buy or sell an underlying instrument at a set price over a specific period.
Options are different from stocks in the sense that they do not symbolize ownership in a company. They also involve lower risks because as an investor, you can always walk away from or withdraw a contract option whenever you feel like you want to.
Trading in options (buying and selling) happens in an options market. Here, trade contracts are based on securities.
Options are either defined as a call or put.
This is an option that allows the buyer of the contract a right to buy the asset at hand in future and at a price that is normally fixed in advance.
This is an option that gives the buyer a right to sell the asset at a later date and the pre-determined price.
Options can be used in several ways that either speculate or reduce risk. They are also used to trade on different types of underlying assets. The popular underlying securities used in options trading include indexes, equities and exchange trade fund.
Options are described as derivative securities because their price is normally based on something else which could be the value of the underlying asset in the market or other underlying instruments.
4 Key Advantages of Trading Options to an Investor
As mentioned earlier, many people have had the belief this is a sophisticated trade. This trend is changing gradually and investors and financial media are now giving this trade the deserved attention. Let's look into some of the advantages options trading has to an investor
- Lower risks
When used correctly, options can reduce risks. Options require less financial commitment and therefore call for lesser risks when compared to other investments such as equities. Options also reduce risks because they do not close when the market shuts down. You are insured 25/7.
- Offers you a variety of alternatives
Options trading offers the investor several strategic investment alternatives. This is because they are more flexible and have a versatility that can be used to create other positions which can help attain the initial investment goal.
In Hong Kong, options investors are using brokers who offer professional advice on the most suitable alternatives to use in options trading to ensure that the risks are reduced.
- Options are cost-effective
Options have a higher leveraging power. An investor can be able to acquire an option that is the same as a stock position but at a more favourable cost. Here is an example:
To purchase 100 shares of an $8 stock, as an investor you must pay $800. But, if you were to purchase $2 calls, the final outlay would be $200 (each contract represents 50 shares and you would need only two contracts of 50 shares for $2 per call).
With options trading, you will be left with an extra $600. Choosing the right call to purchase will help you enjoy the benefit of cost-effectiveness.
- High possible returns
Options provide an opportunity for investors to gain better returns and from lesser investments. If the trade goes well, then the option trader will have equal benefits as the one that had made a higher investment in stocks.
With a clear understanding of your financial goal, you can reach your desired heights in options trading. Use the services of an online broker who will not only help you gain access to options markets but also guide you and provide you with professional help whenever you feel stuck. Take the initiative today.
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