The popularity of trading options has been increasing slowly, since its inception in 1973. Even though it has a repo of being risky investment, you may be confused at its surge of popularity all of a sudden. The belief that it is only understood by expert traders is wrong, even a newbie can participate. The only thing is to get proper options education online.
Why learn about options?
Learning about this powerful trading tool is necessary to profit from any kind of market condition. You can gain knowledge on how to apply the numerous strategies, discover trading opportunities, and determine different ways to diversify your investment portfolio.
Over the internet you will find options trading educational resource, which include detailed tutorials, advice, and tips. This will help you understand the intricate financial derivatives sector.
Options trading have a lot of advantages and reasons why considering it for investment is worthy.
Capital expenditure & cost efficiency
With trading options, it is possible to gain significant profits with less capital. Therefore, it is perfect for investors with low starting capital. Undoubtedly, traders with huge budgets can also participate. However, the potential to earn big profits from little investments relies mostly on use of leverage. Leverage can be used to obtain extra trading power from limited capital.
For example, if the stock value of Company A is currently $20 and you expect it to rise. You have $2000 to invest to purchase 100 shares using it. In case, your prediction was right and stock price increased to $25 then the total profit will be $500 ($5 per share). It means you earned 25% ROI.
On the other hand, if you selected to buy the call options on Company A stock, when its strike price was $20 and call options was trading at $2 each. With $2000, you could buy 1000 options (means you buy 1000 shares). When the stock price increased $5 per share and you sell them, then your profit total is $5,000.
After you deduct the original investment of $2000 used to buy options, you still have $3000 left as profit, so the ROI is 150%.
This shows clearly how trading options is advantageous over other financial derivatives. The trader has to be cautious about picking the right call for buying, so as to resemble stock position properly. This stock replacement strategy is not just practicable but cost efficient.
Risk & reward ratio
The advantage of risk versus reward provided by trading options is linked closely with the above points. Using the same example, investors can gain big returns with same capital, using appropriate trading strategies. Risks accompany any kind of investment you make. A golden rule to remember is, ‘if potential return is higher, the risk level involved is also high.’ Options are regarded as a dependable hedging form. As you get educated more about trading options and how they are dealt, you will come to recognize the potency of options tool for risk management.
Flexibility & versatility
Options are flexible tool allowing traders to recreate synthetic positions. Investors can trade not just on stock movements but on time and volatility. Using it as hedge on existing positions is helpful in uncertain times. You can profit from stagnant market conditions, which is impossible, while trading stocks.
Online broker firms provide direct access for options trading with low commission costs. So, dedicate some time and learn the use of options training properly.