November 5, 2019, 9:52 am

Advantages and Disadvantages of Options Trading

by: The Financial Blogger    Category: Investment, Market and Risk
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Image by Gino Crescoli from Pixabay

When engaged in strategically, options provide traders with a profitable opportunity to engage in buying and selling of stocks. Options can also be used to reduce the risks of losses occurring. In this article, we will be looking at some of the benefits of engaging in this trade. We will also look at some of the drawbacks.

Let’s kick off with the advantages.

Benefits of Trading Options

  • Options trade require a low financial commitment

This is just one of the many advantages of options trading over stocks trading. The cost of purchasing an option is way lower than the amount that would be required to pay for shares. Traders who have invested in options make payments that are way lower compared to stocks but if the trade works in their way, both traders stand a chance to reap equal benefits. 

  • Options Investors are allowed to fix stock prices

Options contracts give the trader the freedom to fix stock prices at a certain level for a specified duration. This allows the traders to be able to buy/sell contracts at the desired price before the contract expires.

  • Flexibility for traders

Options traders benefit from the flexibility that the trade offers. Before the expiration of a contract, the traders are given several strategies which they can put to use. The strategic moves include; buying shares and adding onto them into your portfolio or buying shares and later sell part or all of them. This and other moves can help you to reduce the possible risks of an options trade.

  • Losses are limited to whatever is paid for

Whenever you call or put an option, you are not compelled to follow the trade through to the end. The case is different while trading in stocks. If your predictions in an options contract are incorrect and a loss occurs, you only make losses on the contract and the trading fee.

Downsides of Trading Options

  • Traders must meet set requirements

Some set requirements must be met before traders can start this trade. Options traders must maintain a minimum balance of $2,000 in their accounts. The first requirement is that you apply for approval from your options broker. To grant you this approval, the broker will ask several questions aimed at verifying your financial and investment experience. 

Choose a broker whose terms are favourable to you.

  • Limited time to make the next move

Although it has many alternative strategies, options trade is short term in nature. Trades normally take place within days or months and investors have to capitalize on the prevailing price movements. Traders have to study the trends and make the important decision of whether to buy, sell or walk away from a trade before the contract reaches the expiry. 

Things to Do That Can Help Minimize the Drawbacks of Options Trading

  • Never stop learning.

Keep doing your research on trading as you wait for the trade hours to clock in. This will expose you to new techniques and tricks. It will also prevent you from making uncalculated trade decisions. Learn from trade webinars and read informative trading media.

  • Delve deeper into specific patterns

Note down all indicators and all the elements that come with it. Scroll through past charts to see how the two affect each other.

  • Initiate trading chats

Got some questions? Consider discussing them with fellow options traders or your broker. There is a lot that you can learn from other traders. Use this as a chance to educate yourself and to develop your skills further.

Summing It Up

It is important to choose an options broker. Apart from offering you a platform where you can trade in options, a broker offers you the professional advice that is required until you can make trade decisions independently.

The broker will give such advice like which trades to place and setting the appropriate expiry time. He will also give you a breakdown of the potential gains.

To make sure you develop your skills, the brokers have a platform where you can gain experience by practising trading on a demo account.

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