There is no doubt that options trading can be an appealing way to invest your money if you know how to do it right. If you are a beginner, options trading might seem overwhelming at first. However, it can be rewarding as long as you know a few key points. First of all, you should be aware that options trading can have many advantages over the traditional investments of stocks, bonds, or ETF trading.
Options Trading Defined
Of course, a handy definition of an option is that it is a contract that gives the buyer the right to buy (call) or sell (put) the given asset at a specific time. Investors will use options for a variety of things, including hedging risk, speculating, and simply for income.
An option is also known as a derivative simply because of the fact that these investments will “derive” their value from a medium that has an underlying asset. Of course, if you are interested in stock options, you should realize that they normally will represent 100 shares of the underlying stock.
With that in mind, options can also literally be written on every type of asset from commodities, currencies, and bonds. One way in which options are similar to other investment ventures is that they too can be purchased with a brokerage investment account.
Additionally, many have found options to be a powerful investment vehicle because they can provide leverage, protection, and even extra income. They have a high speculative value as well because some will use this to wager on the direction of a certain stock.
How Does Options Trading Work?
If you’re looking to learn how to trade options, the experts at Money Morning have some solid advice for you: “The investor is simply buying the right to buy a stock, and not the stock itself,” a spokesperson said. “Thus, you will be able to use that leverage, converting what would be the control of ten shares to the control of a hundred or two hundred shares of stock instead.”
The best way to sum this up is that if you were to buy an option on a stock for $50 per share, you are going to have a larger gain if the stock goes up. For example, if it goes up by 10%, it will be amplified across hundreds of shares instead of just the one share that your buying power would normally give you.
What Are The Risks Of Options Trading?
Of course, there are risks to options trading as well. First of all, there is no way of knowing whether the stock you are speculating on will increase or not. This means that you are running the risk of the asset going against your put or call order. If that’s the case, you stand to lose out on your investment. Additionally, there is only a limited time frame for this investment thesis to pan out.
Regular investors will have months, years, or even decades for their investment to pan out, but options traders will only have a few days or a few weeks at most. In short, options trading can bring a lot of rewards, but a lot of risks as well. Make sure that you do as much research as possible before engaging in this exciting trading strategy.
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