Options Trading – Advantages And Disadvantages

What is options trading? One option is simply granting someone the right to buy or sell something in the future. In the case of futures options in the Dow, when someone buys a Dow call option they are buying the right to purchase that underlying Dow future at a specified price, known as the “strike price” at a future time , known as the “expiration date.” When an investor buys a put option, which are primarily sold in the market, a call essentially buys the market. Also, the sale of a put essentially buys the market, selling a call essentially sells the market. To receive the opportunity to buy an option on this future, investors pay a “bonus.” If the market does not reach the exercise price of the option, then that option will expire worthless on the expiration date. If the market price reaches the exercise of the option expiration date, then the investor will be assigned the future is based on the exercise price. Advantages of Options Trading Flexibility.

Options can be used in a wide variety of strategies, from conservative to high risk, and may adapt to the expectations rather than simply “the stock will go up” or “the stock will fall. Leverage. An investor can gain influence action without committing to a trade. A limited risk. Risk is limited to the option premium (except when writing options for a security that is no longer owned.) Hedging.

Options allow investors to to protect their positions against price fluctuations when it is appropriate to amend the point guard position. The disadvantages of trading options costs. The costs of trading options (including commissions and bid / ask) is significantly higher in contribution rate of the underlying stock, and these costs can drastically eat into profits. Liquidity. With the wide range of different strike prices available, some of them suffer from low liquidity making difficult negotiation. Complexity. The options are very complex and require a lot of observation and maintenance. Fall time. The time sensitive nature of options leads to the result that most options expire worthless. This only applies to traders who purchase options – those selling collect the premium, but with: Unlimited risk. Some positions in options, such as writing uncovered options, are accompanied by unlimited risk. Overall Options present a good opportunity to make plans that may benefit from the underlying market volatility and price direction. However, for most traders the disadvantages are significant and online futures trading is usually a better option.