Why Options Trading

The old and traditional way of wisdom suggests us to place our wealth on a profit generating channel that you are mainly familiar with and on investment channel we can get the most benefits.

Given that understanding the rise and fall of stocks is much easier than knowing the basics of options trading, it is a more popular choice for the many.

But the reality is options trading offer several advantages than any other investment medium, including the stock market or even the Forex. Let us look at some:

Leverage

Buying a call option gives the shareholder a respectable option position that is comparable to stock position. For instance, if an investor would procure 300 stocks selling at fifty dollars for every share, he will have to pay $15,000.

However if he would choose to buy 3 $20 calls (each deal representing 100 lots or shares), he would only declare to pay $6,000 (3 contracts X 100 shares/contract X $20 market price). The investor would then have an extra $9,000 to spend or invest on his or her discretion.

The process is noticeably not as simple as that. The investor will have to distinguish which call to purchase to have a good option position, similar to stock position.

However, if you are seeking for a good investment without risking large sum of money at once, option trading is the better alternative.

Limited Risk

Investment is said to be for the risk takers. This is agreeable if your risk inevitably yields to revenue. But that is not constantly the case. In options trading, however, you can have limitless earnings potential and at the same time have limited risk.

options tradingThis is because options trading simply provide you the right to purchase or put on the market underlying asset, and not the obligation. Meaning, if the price is not right at the end of the agreement, you can simply ignore and let the contract expire.

If, on the other hand, you can profit for the change in shares prices, you can assert your right and pursue the contract.

As for instance, you buy a particular call option for twenty dollar (strike price) that will terminate on the third Friday of March. On the expiry date, shares you bought are trading at $25.

Certainly, you can straight away earn five dollars per share and will have to pursue with the contract.

What if the at the expiry date is lower than the strike price?

Let us presume that the shares you have decided to buy gone down to fifteen dollars or even $5 at the end of the contract, do you have to pursue the contract? No!

You simply have to allow the contract expire.

What have you lost then?

The option premium you paid the trader. Nothing more.

Unlimited Profit Potential

For example a certain call option you have acquired is now dealing at $38 per share. You can exercise your right to procure it for the strike price of twenty dollars and make $18 minus the Option Premium you have paid. This is just an example. The cost of shares can go higher than that.

Also if you have carefully selected your call, you can obtain the finest revenue without breaking your bank. Note: if you are planning to pursue the contract and purchase the shares, keep in mind that you have to pay the complete amount. So at the expiry date, be certain that that you retain you the cash.