What is options trading- A Strategic Guide

by anne jane in Finance on 22nd November 2018

While investing, many think of investing only in stocks through stock markets, but people are unaware about the terms such as options. Purchasing stocks for long-term profits is one among many common strategies in investment. It is also one of the perfect ways to invest, providing there is enough knowledge, about the stock. There should be some idea about what stock to buy and what not, or opting a broker who could provide direction on such matters.
This Method is called as hold and buy approach and help in increasing the wealth. In the day-to-day business, investors are going for active investments to get immediate results. They are many financial instruments out there in the market which can be actively traded. Options are one among them and options trading is what investors are actively looking for investment options. There are even people who trade online and made this as either a full time or part-time basis.

What are Options?

Options are financial instruments and a type of derivative security. This means the price of the options is intrinsically determined by something else. Thus, the price of the option is linked to the underlying stock.  


A stock option is an agreement between two partners where the holder purchases the right from the seller. There will not be any obligation to buy or sell the stock at a predetermined cost or price within the fixed time intervals. These are the trading instruments for those who don’t like to invest mostly in stocks. Through options, traders have an opportunity to practice a different range of approaches with limited or unlimited risk or profit potential. The investors can create hedging and speculative trading opportunities.

Stocks vs. Options

Stocks don’t have an expiration date but Options can expire within a week/months/years depending upon the type and regulations that are practised.
As the options are a type of derivative category, they derive their price or value from other things, unlike the stocks.
There is no need to think of losses when there is a price drop, There is a profit from all the directions depending on the kind of strategy it is. Stocks have some losses and risks involved when there is a price drop.
Stocks are definite by numbers, unlike the options. The owners of the options have no voting or dividend rights in a company when compared to stock owners.

Call and Put options

When considered about the type of options there are many kinds of options which can be traded and can be categorized in numerous ways. But in a broader sense, there are mainly two type: Call and Put options
Call – This allows the investors to purchase a stock for a particular price. It gives the trader the right to purchase the underlying stock or asset.


Puts – This option allows the investor to sell aways the stocks at a specific price. It gives the right to the buyer for selling the underlying asset.
Along with this, they are various types which are classified as American and European style, irrespective of the geographical location.
They are also categorized depending on the method which is traded, based on the expiration cycle or the underlying asset they related to.
They are also other categories which are a kind of exotic options and another comprehensive list are Exchange Traded, Over The Counter, Employee stock options, and Cash settled options.

Why trade options?

There are various benefits to this form of trading. These derivative investments are continuing to increase in popularity, not only with the professional traders but also with casual traders. When compared to other financial instruments, trading options are simple and can gain profits while trading this.
Options trading has many benefits and is many reasons why one should trade this form. It is worthy to consider for anyone who is looking for investments. Below are the main reasons why trading options is a good idea.

Capital outlay and cost efficiency
One of the best advantage trading options can give is the fact that, there are opportunities for making profits without investing much amount. So, it is ideal for investors with less starting budget and those with more considerable capital. The potentiality of earning large profits with fewer investments mostly depends on the use of leverage. There is a possibility of using the leverage and get extra trading power from the money invested.

Rewards and risks
In trading options, there are proportionately higher returns from the similar capital invested. There is a much better offer of risk vs reward ratio if the correct trading strategies are employed. It should be clear that for any investments there are risks associated with this. The rule for any trading investment is that, the higher the return, the higher the risks involved. The particular advantage in trading options is that investors can select the number of risks they wish to exercise and trade accordingly.

Apart from this, there are many advantages which make the options attractive instruments for trading. Even options give the investor or user for not exercising the right. This way, the holder of the option can restrict the losses and multiply his gains.

Conclusion

On the whole, options can provide the opportunity when it is used rightly and at the same time, harmful when it is used without knowledge. Thus, it is an option which gives the buyer the right of course not an obligation to buy or sell the underlying stock or asset. Having said that, there are different types of participants in the market, known as buyers of calls and puts, sellers of calls and puts options. Buyers are often known as holders and sellers are known as writers. So this session also gives an idea of why to invest in options and what are the benefits a trader or investor reap.

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