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What is Options Trading?

People tend to go more safe with their investments. Investing in mutual funds, buying a property, savings account or retirement savings. People who are immune to risk invest in stock trading, forex trading and options trading.

You must have an idea about stock and forex trading. But do you know what is options trading? If you don’t, no issues by the end of this article you will learn about them. So what is this options trading? Options trading is all about buying and selling options contracts in public exchange. Simply put, You purchase options and sell them at a higher price. Options trading is more versatile compared to stock trading.

Options provide a wide variety of securities to invest in. They are used by traders to speculate the price movements of individual stocks, commodities, foreign currencies, indices. There are some many option types you can choose from. This offers more versatility compared to stocks and forex market. You either take a long position or short position in stock marketing. But with options trading, you have more ways to make money. All of this may seem confusing to beginners but once you get a grasp on fundamentals everything will get easier.

All about option trading

These options are also an asset class like stocks. But when invested properly they have the capacity to generate more profits than stocks and ETFs.Options are easy to purchase with brokerage investment accounts the same as any other asset class. This trading option is powerful enough to enhance the investor’s portfolio with income, leverage and protection. There is no trading option without the risk involved. As we say risk rewards, the risk you take can also bring great profits or huge losses depending on the market.

Options come under a group of securities called derivatives. Most often come off as an excessive risk-taking group and they also have the power to destroy an economy. Derivatives mean that its price is either derived or depends on something else. Since options are derivatives of financial securities so its value completely depends on other asset class. Puts, Calls, swaps, futures, forwards etc all come under derivatives.

Options trading is more attractive and useful for small traders. By investing in options they can reduce cost significantly. To explain it in simple terms your cost of investment amounts to only 3% to 4% of stock trading. One of the best features of options is it limits your risk.  Options traders are mostly self-directed investors. As they don’t take any help from any financial advisors, they manage their portfolio by themselves. They have complete control over their portfolio. But there are online forums where like-minded option traders gather and discuss on current market and option trading strategies.

Types of options

As you know, these options are basically contracts that give the owner, right to sell or buy an asset at a fixed price for a specific period of time. Here that specific period of time may be a day or couple years. The time period depends on the type of contract you’re entering into.

In options trading, there are two types of contracts. A call option, put option. A call option allows the owner to purchase specified security at a specified price within a specific time period. A put option allows the owner to sell a specific security at a specified price within a specified time period. Here it is important to note that the owner is not obligated to sell or buy their assets.

Risks

Options are all about calculated risks. As a trader, you should concentrate on two types of volatility. Historical Volatility is all about how much the stock price has fluctuated over a year. Whereas implied volatility is all about the stock’s volatility in the future. Implied volatility is important for traders to understand as it helps you in determining whether options will reach the specific price in that specified time or not.

 

Options use Greek symbols delta, theta, and gamma. These symbols are used as references to any expected price changes in the market. It is not 100% sure that these forecasts are correct. So traders should think twice before considering them. Options traders have the best understanding of the financial goals and their desired position in the market. So the way they approach the market had an impact on their options. So it is best for the traders to identify their financial goals and understand risks and opportunities before investing in options.

 

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