How can there be any benefits in making trades in the markets, if the biggest word associated with it is ‘risk’ or it’s too risky. But it shouldn’t be that way. There are advantages to trading options that most traders tend to overlook. It should be known that any type of trade has some inherent built-in risk. Trading options in particular however, offers some distinct advantages.
Options Trading Offers More Flexibility
Although trading options isn’t suitable for everyone, it doesn’t change the fact that the trader can mold the trade to work for them in their favor. Trading options offer greater flexibility for both the options buyer as well as the seller.
Most other types of financial trading will not allow you to profit from the underlying asset. (What is an underlying asset? CLICK Here). But trading options however makes this possible. There are also a variety of strategies that traders can use to maximize this as well.
Trading Options Offers More Protection
Options trading, when compared to other kinds of financial trades, particularly trading stocks, offers far better protection to both the buyer and the seller. Significant losses are uncommon since the traders only lose what they’ve initially invested. Also, the investment into the trade are also minimal, as they are only limited to the price of the option itself. This is because a typical options trade is just 10% of the value of the asset.
Options traders can also benefit from a protective put. This is an options trading strategy that involves purchasing the same amount of puts and stocks, so that the stocks are protected from depreciating. Also, an options trader who wants to buy an option at some point in the future, at a certain predetermined price can do so as well. You can look at it as insurance for the options trader, who has say investment on long stock positions. This is particularly advantageous during times when the market is uncertain.
Options Trading Offers Better Leverage
As the options trader purchased the “option” rather than the stock itself, the trader can then profit with a small investment. Although you’ve invested in a smaller amount, you can still control the full value of the stock, because the options contract performs identically to the way the stock performs, but only for a fraction of that stock price. This is a great reason why options trading is extremely appealing to traders with smaller funds.
Options Trading Offers Limited Risks
The limited risks can be seen from two different perspectives. The first, is the duration or period of the option. The second is trading options allows you to pay a minimum amount for the full value of the stock. During the period of the option, the holder can choose to either exercise (buy or sell) the option or not. Any movement in the market that are unnecessary may be prevented, thus protecting the holder. Alternatively, if the option isn’t profitable, the options holder will only endure the loss invested, and for only a short and definite period of time.
Profit From Volatility Trading
When trading in any financial market, you usually profit from the market either going up or down. With options trading, you can trade and profit, even if the market is sideways or dormant.
When you are working within the principles of disciplined option trading, you as a trader have the ‘option’ to buy or not buy a particular option, depending on the market movement. This is a great benefit as you are not obligated to pursue that trade, even if you have already lost interest on it. The only capital you can lose is the payment of the option, which is significantly lower when compared with the price of the actual stock.
Virtual Trade at optionsXpress