BENEFITS OF OPTIONS TRADING
Trading options is a very common method of hedging risk. As it is a great tool to have in a trader's pocket. However, there are certain criteria that must be met in order to successfully trade options.
1. Call options
An option contract that allows the buyer to purchase an underlying asset at a specific price before or on a specific date is called a call. A call is purchased when the buyer believes the price of the underlying asset will rise, and it is sold when the buyer believes the price will fall.
2. Put options
An important thing to remember when trading options is that puts give you the opportunity to be on the other side of the trade. That means that instead of having to buy an asset at a certain price, you can sell it at a pre-determined price.
HOW DO CALL AND PUT OPTIONS WORK
If you buy a call option, it gives you the right but not the obligation to buy an asset at a certain price within a specific period.
The right and obligation to sell an asset is then transferred to the seller of the contract, if they decide to take it up on this offer. A put option gives us the right but not the obligation to sell an asset for a pre-defined price within a specific time frame. As with many other financial instruments such as stocks and bonds, you may also sell these kinds of options before expiration.
For example, when you buy a call option, the price of the option goes up when the price of the underlying stock rises. You don’t have to own the stock to make money from this movement. Similarly, when you buy a put option, the price of the option goes up when the price of the underlying stock declines. Again, you don’t need to own the stock to profit from this movement.
BENEFITS OF OPTIONS TRADING
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Options give investors the ability to be strategic when it comes to how they use them. They can choose to immediately exercise their right to buy or sell the underlying security, or they can wait and see how the market changes. They can also purchase a call or put option before it expires and then sell it to another investor if the value has increasedInvestors have a number of different options when it comes to strategic moves. For example, they can choose to exercise their option and buy shares to add to their portfolio. Or, they can exercise their option, buy shares, and then sell some or all of them. Additionally, investors can sell their "In The Money" options contract prior to expiration to another investor. This way, they can potentially make back some of the money spent on "Out Of The Money" options. Finally, investors can simply put their option back on layaway with a new In The Money Options Contract. This is a great way to keep you in your strike price while still generating income.
OPTIMIZATION BENEFIT
Options are great for investors because they remove some of the stress associated with large money investments on a company. If you buy stock, your money is locked-in. But with an option, if things don’t go as you had planned for it’s no big deal. Options can help you reduce risk and make more money for your portfolio. Options allow you to buy a security without purchasing the entire thing, allowing you to limit your financial commitment and risk if the asset in question goes down in value.
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DIVERSIFICATION BENEFIT
Another plus of investing in stock options is that they provide you with multiple opportunities; this is because these assets are spread out not only in terms of stocks but also in terms of companies. As each individual share represents ownership of only one company, these investments tend to carry higher risks than other investment forms like index-based exchange traded funds, but by combining purchased shares into options positions, the investor can effectively diversify their assets across a wider range of holdings that produce better risk / return profiles.
Cost Efficiency
Options trading has some benefits when compared to more common investing strategies:
- Options trading is a great way to save on commission fees. You can expect to pay between 0% and 2% in commission fees, compared to the 4%-6% charged by mutual fund managers. This leaves more of your capital available for growth.
- There are a few benefits to options when it comes to taxes. For one, since they’re sold off-exchange, they aren’t subject to federal income tax. However, it’s important to note that state sales taxes may still apply. Secondly, options can help you avoid paying capital gains tax on your investments.
- Options give you the ability to choose how much you want to focus on your returns, which can make managing your investment easier. With stocks, you generally have to constantly monitor them to ensure you’re getting the best return possible. However, options provide more flexibility in this regard, giving you the opportunity to focus on other things if you so choose.
- You get to see your hard work pay off almost instantly. When you make a successful trade with options, you’ll see the results of your decision immediately. There are no drawn out waiting periods between making a purchase and then seeing your profits – it all happens in real-time.
Less Risk
Stocks might be riskier than buying call options, but it really depends on how they’re used. You can find it with less financial commitment and also with its relative resistance to the catastrophic effects that happen when an offer gaps. When an investor buys options, he or she frequently sets up stop loss orders to protect the position.
Stop orders are set up to automatically trade stocks when they fall below a certain price, which is decided by the investor. The problem with these orders is that they can get executed when the stock trades at or below your threshold price, which may not be what you want. This problem can be pressure available for internal analysis when they trade next.
Higher Potential Returns
Options are one type of investment that help companies increase their profits without putting too much money at risk. They may also be called equity or convertible bonds, and they don't always act like common stocks. If they "pay off" in the end, options usually offer investors a higher percentage return than what was expected in the market, after factoring in taxes and transaction fees. This is especially true for stocks that don't have much volatility and don't follow any major market trends.
More Strategic Alternatives
Options provide more investment opportunities because they can be used in many different ways. For example, options can be used to create other positions, which we call synthetics. Using options to create synthetics is a versatile way to invest that can provide more opportunities for profit.
Synthetic positions are like having a couple of different sets of training wheels for your bike. They offer investors multiple ways to achieve the same investment goals, which can be extremely useful. Although synthetic positions are considered an advanced option topic, options offer many other strategic alternatives. For example, when an investor wants to short a stock, many investors use brokers who charge a margin. The cost of this margin requirement can be quite prohibitive.
When investors purchase puts, it allows them to play the market's downside. This is a definite benefit that options trading has over traditional brokerages, who would not allow their clients to short stocks. By being able to trade in this way, investors are no longer limited to just a black-and-white world, but can now consider all the different shades that the market has to offer.
