Ihab Salloum[ad_1]
What is Options Trading?
Folks, options trading is like granting someone the right to buy or sell something in the future. Let’s take the Dow index futures options as an example. When you buy a Dow call option, you are buying the right to purchase that underlying Dow future at a specific price, which we call the “strike price,” at a future point in time known as the “expiration date.”
On the other hand, when an investor buys a put, well, they’re essentially selling the market. And, of course, a call essentially buys the market. Now, if you’re selling a put, you’re essentially going ahead and buying the market. And if you’re selling a call, oh ho ho, you’re essentially selling the market, buddies.
But wait, there’s more! In order to receive the opportunity to buy an option on this future, investors have to pay a “premium.” If the market doesn’t reach the strike price of the option, that particular option will expire worthless on the expiration date. However, if the market does reach the strike price of the option on the expiration date, then the investor will finally be assigned the underlying future at that strike price.
Advantages of Options Trading
My friends, options trading is all about flexibility. You can use options in a wide variety of strategies, from conservative to high-risk, and can gear them to more expectations than simply “the stock will go up” or “the stock will go down.”
And wait, there’s more! You can even gain leverage in a stock without committing to a trade. Risk is also limited to the option premium, except for when writing options for a security that is not already owned. And options also allow investors to protect their positions against price fluctuations when it is not desirable to alter the underlying position.
Disadvantages of Options Trading
Now, we also have to talk about the disadvantages of options trading. Folks, the costs of trading options (including both commissions and the bid/ask spread) is significantly higher on a percentage basis than trading the underlying stock. And these costs can drastically eat into any profits.
Plus, with the vast array of different strike prices available, some options will suffer from very low liquidity, making trading difficult. Options are also so complex that they require a great deal of observation and maintenance. And the time-sensitive nature of options leads to the result that most options expire worthless, which only applies to those traders that purchase options. Those selling collect the premium but with unlimited risk, my friends.
Overall, options present a good opportunity to formulate plans which can take advantage of volatility in underlying markets as well as price direction. However, for most traders, the disadvantages are significant, and online futures trading is usually a better option.
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