In the personal finance sector, options trading is a term that is going high in trends every single day. If you are looking to get some real success in stocks, mutual funds, or trades, having options will surely help you a lot. With this investment strategy, you can not only find lots of options for you but also have a more clear view for taking your next step.
The risks are a bit higher in this strategy as compared to other types of strategies and so is the reward. Starting your trading career with options trading might seem a bit difficult for you. But in reality, you should definitely give it a try, but only if you know how.
In this unique guide, we will take you through a short yet informative journey where you will learn what options trading is and how you can get great benefits from it.
What is Options Trading?
If we want, we can present you with a complex definition of options trading that will just go over your head. But we won’t do that!
In simple words; options trading allows you to trade instruments that give you the right to buy or sell a security within a specific time period and a specific price range.
The securities here can be stocks or other similar securities and they are linked to a contract called an options contract. These contracts are set for a time period that can be either for a day or a couple of years as well.
Also, buying an option gives you the right to buy or sell the particular security but you are not obligated to it as well. When you buy or sell it, it’s called exercising an option.
What are the Types of Options Trading?
If you dive deeper into the ocean, you will find plenty of types of options trading you can follow. But that’s for the experts. Being a beginner, all you want is to get familiarized with the term properly.
For you, there are two basic types of options trading you need to be familiar with. They are Call and Put. Let’s take a look at these two types in a bit more detail.
With a call option, you get the right, but not the obligation, to buy an underlying security at a specific price within a specific time period (expiration date). The price you will be paying to buy the underlying security is called the strike price.
A put option gives you the right, but not the obligation, to sell the underlying security at a strike price within a pre-decided period (expiration date). In simple terms, you will be sending the security away from you.
Note: There are two trade styles for both call options and put options; the American style and the European style. In the American style, you can exercise your options anytime prior to the expiration date. And in the European style, you can only exercise your options on the date of the expiration.
Benefits and Risks of Options Trading
Like any other investment strategy, options trading also brings some risk along with it. In this, it becomes very important that you are well aware of the dos and the don’ts of the thing. Here are a few things from us that will help you take better steps.
- Options trading offers you flexibility as well as liquidity
- It allows you to invest small amount of capital as compared to other types of investments
- You can use it to create downside risk percentage and diversify your portfolio
- If invested properly, you can get handsome returns from options trading
- It brings much more risk than investing in individual stocks
- It becomes quite hard to predict market movements. In case one of your predictions goes wrong, you might be exposed to major losses.
Due to these ups and downs, options trading becomes good for those who are patient enough to learn it in the proper way.
We Still Have a Lot for You
This was just a brief intro about options trading, its types, and the benefits and risks involved. After going through this short yet precise guide, you would have understood that it can be quite beneficial if done in the right way.
But is this so easy? Definitely not! But you will never find yourself alone as we are coming back with a detailed guide on how to do options trading very soon. Subscribe to our newsletter to be updated!
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