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Published on 7/10/2021 12:50:34 PM | Source: .

Pros and Cons of Options Trading

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A Brief Overview

With options, it is possible for you to diversify your sources of income. That being said, options bring with them a fair number of risks which also implies that the potential for accruing rewards is equally pronounced. Prior to assessing the merits and shortfalls associated with options trading, let’s first examine what options trading entails.

 

What is Options Trading?

Options provides you with a choice to buy or sell specific securities at a specified price on a specified date and time. While buying an option entitles you to trade the underlying asset that is tagged to, you aren’t obligated to do the same. Should you decide to trade, you exercise your option.

If you as a trader decide to invest in options on your own with the aid of a self-directed account such as those available on Angel One, you are given the reins to control each of your trading decisions and transactions in their entirety.

 

Examining the Merits of Options Trading

Options trading brings a number of advantages that make it stand out – especially when set against futures and cash. Read on to understand some of the more pertinent pros associated with options trading.

Cost-Efficient – The leverage potential, options bring with them is significant. Traders and investors alike can get options positions that amount to the same as stock positions but at a significantly lower margin. Take for instance the following example. Such that investor A can buy 200 shares of stock X at a price of INR 80, they must pay INR 16000. However, should investor A seek to buy call options amounting to the same, the premium required would amount to approximately INR 4000. This provides a good understanding of options cost efficiency.

Potential forReturns – Options trading allows traders to potentially generate returns that may exceed those generated via shares bought with cash. That being said, there are no guarantees and traders need to proceed with caution and. They must always consider what their budget is and what medium of purchase works best for them.

Lower Risks While investing in options might be riskier than investing in equities, there are instances in which options may be used to avoid risks. With options, it is possible to hedge positions. Risks associated with options are predefined owing to the fact that the maximum loss applicable can amount to the premium paid when availing of the option. Consider the example listed below.

Investor A has 1000 shares of Company ABC whose current price is INR 500 per share. Owing to investor A being bullish about the share price but not wanting to suffer a loss in the long run, investor A decides to use an option. He  pays a premium to investor B at a strike price of INR 490 with the option contract expiring after 90 days.

On the date of expiration, the price share drops by INR 50 per share such that each is valued at IN 450.  Investor A can now protect himself from a loss and can nudge investor B to buy the shares at the strike price of INR 490 thereby minimizing his losses even in instances of bearish trends.

Numerous Strategies on Offer – There are a number of strategies available within the options market that pertain to trading them. Trades can be accumulated such that a strategic position can be established with the aid of call and put options pertaining to varied expiration dates and differing strike prices.

 

Examining the Shortfalls of Options Trading

The drawbacks associated with options trading are as follows.

Lower Levels of Liquidity for certain OptionsOwing to the fact that certain stock options aren’t as liquid as others, traders might find themselves in a pickle when trying to enter or exit from such trades.

Commissions are MoreIn comparison to futures or stock trading, options trading is more expensive. That being said, a number of discount brokers provide traders with the opportunity to trade at commissions that are lower.

Decay Over TimeThis serves as one of the most telling drawbacks of options trading. The value of an option premium falls by certain percentages with each day that passes regardless of the movement of the underlying asset.

All Stock Options aren’t AvailableNot all stocks registered on exchanges feature options contracts.

 

How to Trade Options:

Options trading can be simple.  When you expect either the index or the stock to go up you buy a call and when you expect the index or the stock to go down you buy a put .This allows you to take a position and make a profit at a lower margin.  You have platforms which allow you to take trades quickly to ensure you are able to capture the market movements and profits within a few minutes.

 

Conclusion

Knowing each of the prominent advantages and disadvantages associated with options trading, should you be willing to explore the world of options trading and hedging your bets, consider visiting Insta Trade and downloading the Angel One application on your smart device today.  Insta Trade allows you to trade options in a simple manner, with all the tools and information you need on the same screen.

 

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