Enjoy The Benefits of Options Trading

Options trading are contracts that allow the trader to buy or sell his stock at a specific price before the contract expires. Options trading are one of the most creative and flexible financial derivative instruments that has made been available to the investors. Options trading are truly one of the most flexible, speculative and hedging tool there is. Basically there are two types of stock options 1. Call options 2. Put options.

The call options is definitely very popular among traders that give the right to sell the underlying stock for a fixed price. Thus it enables you to buy the underlying asset at a price fixed right now no matter how high it rallies in the future for just a small price relative to the price of the underlying stock. Call options are an important flexible and risk limited leverage instruments, call options are also a very sound hedging instruments for any kind of stock portfolio, whereas, in put options will give you the ability but not the obligation to sell the underlying stock at a fixed price by a fixed expiration date. Put options allows you sell the underlying stock at a fixed price right now no matter how low it falls in the future.

Just like any other powerful financial instrument, misuse of options trading will not be the best thing that will happen to you. But were there are risks, there are rewards and if you are able to exploit it’s strengths in your investing strategies then you will get your desired results. Following are some of the distinct advantages of options trading:-

    

    1 ) Cost effective - Options trading has tremendous amount of leverage and a trader can get an option position that will imitate the position of a stock, but at a massive cost savings. For e.g. to buy 200 shares of an $80 stock, an investor has to pay $16,000. Nonetheless, if the trader were to buy two $20 calls (with each contract representing 100 shares), the total amount would be only $4000 (2 contracts x 100 shares/contract x $20 market price). You will be left with $12,000 to use as you desire. However, it is not that simple. You have to select the right call to purchase to imitate the stock position properly. This strategy is not only cost effective but also viable.

     2) Less risky – But it depends on how you use it. Sometimes it can prove to be riskier than having equities. But, it is also used as an instrument to reduce risks. There are less financial commitments involved in options than equities. It is a trustworthy form of hedge and it makes it less risky than equities. And when an investor purchases stocks, a stop loss order is regularly placed to safeguard the position. The main function of a stop order is to stop losses below a predetermined price identified by the investor.              

     3) Unique strategies – Options trading is very unique opportunities for you implement creative strategies to exploit the different characteristics of the market scenarios like volatility in price fluctuation and decay of time. 

     

    4) Low capital requirements – Options allow you to trade with very less capital requirements. It empowers you to do much more in options market with just $1000 but not so much with $1000 in the equity market.