|Date Added: March 28, 2012 12:51:55 PM|
|Category: Business: Stock Market|
Before we move on to the pros and cons of options trading, we need to know what options’ trading basically is. So what is an option? It is nothing but a right that is granted to someone through which that person can sell or buy something in the coming future. If we take the Dow index futures options for instance; if someone purchases the call option for Dow, that person is basically getting the right to buy the underlying Dow future at some specific price; strike price it is called. Now, at some point in the future it is also known as the expiration date.
Now, when an investor purchases a put, it means that he or she is selling the market and if that person is purchasing a call; it means buying the market. So I simple words you can buy the market by selling a put and sell the market by selling a call.
A premium needs to be paid in order for the investor to get an opportunity for buying an option on the future. Well, that was just some basic knowledge; let’s move on to the pros and cons of options trading.
With options trading you get a number of benefits including flexibility, leverage, limited risk, and hedging. There is a good variety of techniques that these options can be used in, from high risk to conservative. They can also be altered to meet higher expectations changing the simple meaning of the stock just moving up or moving down. An investor also does not have to commit to some trade while gaining leverage on a stock. Risk gets also limited till the option premium unless you are writing options for some security that is not owned already. Protection of position is also present for the investors against the price fluctuations; this is a big benefit when the investor cannot alter the underlying position.
There are a few downfalls stick to options trading at the same time including costs, liquidity, complexity, time decay, and unlimited risk. There is a great deal of maintenance and observation required since the options can be highly complex. There are some option positions like writing uncovered options; these carry unlimited risk with them. Several options reach their expiry time being worthless and causing a loss.
Generally, options trading can be a great opportunity for making some good money but it surely requires a lot of knowledge and skills.