Stock trading is appealing to investors because there is cash to be made. Options trading have been around since 1973, but have a bad reputation as a risky investment. Seasoned traders are familiar with how options work and how lucrative they are. It is the improper use of option strategies that lead to issues and add Value To Your Portfolio.
New investors need to gain options education before they go on board in this field. SteadyOptions is a great platform that educates candidates about the basics and strategies associated with options trading. Options are derivative contracts that offer investors a right but not an obligation to sell or buy a specific amount of underlying instrument at a fixed price before a particular expiry date.
How trading options can add value to your portfolio?
‘Dangerous’ and ‘Risky’ have been wrongly attached to options, so amateurs must understand it in-depth before they ignore trading options.
Cost efficiency & Capital outlay
Investors can trade options just like stocks but at significantly low rates. For example,
- 200 shares at $80 = $16000
- Two $20 calls [each contract represents 100 shares] = $4000
It means investing in options is more cost-effective than stock trading. You can choose the option to simulate the stock position closely. However, it is not that simple. The call to buy option has to be right to simulate stock position properly.
Less risky if properly used
Buying options is more dangerous sometimes in comparison to owning equities. However, options can even be used to lessen the risk. Options are less risky as investors need less cash commitment than equities. They can be less risky because of their relative inflexibility to the potential impacts of gap openings.
When used as hedging, options are safer than stocks. A stop-loss order is set, when investors buy stocks to secure the position. Stop order helps to stop losses when the rates drop below the predetermined price identified by investors.
Some trading strategies are too risky because of their speculative nature. It is a known fact that the higher the potential return higher the risk level involved. The great thing is you get to choose a risk level you can handle and trade accordingly.
Flexibility
Options are flexible as there are multiple ways to use options and create other positions. These positions are called ‘synthetics’. It facilitates investors to attain the same investment goals in multiple ways. Synthetic positions are regarded as advanced strategic alternatives.
For example, investors can trade not just stock movements but even on movements and time in volatility. Some stocks are not volatile and you can leverage the stagnation feature to determine if the option will reach a specific financial goal or stay stagnant.
The advantages are obvious, so trading options are gaining popularity even among home traders and casual investors. However, it also has its disadvantages. Mastering options trading can be a challenging task as it is somewhat complex. There is a lot of money involved but to earn profits needs commitment and time to learn how.
