Option Trading Basics - Option Trading Made Easy
Option trading is another investment vehicle that can give you large returns when practiced carefully
. To start learning some option trading basics, you must first know what options are and how option trading works.Options are basically contracts between the buyer and seller of an asset like stocks or futures at a specified price and period of validity. Small investors are easily attracted to trading options because it allows them to trade a very big exposure with just a small amount of money as capital. However, big risks come with it, so when investing in this business, do not invest more than what you can afford to lose. Experts suggest that it is wise to invest only in options trading with risk capital.
Enough knowledge and experience on option trading basics is what you need before embarking on this very risky form of investment. You can be a good option trader if you know how to analyze stocks. Important and useful information on option trading basics can be found on different books as well as web resources, but all information cannot be learned overnight. Seminars on option trading basics can also be of great help to ensure that you can make good money out of this investment.
The basic concepts of trading options are the put and call options, short and long positions, intrinsic and time value, and speculation and hedging. Options have more risk than stocks because their initial value declines as day passes until it becomes worthless when it expires thus, the sooner you sell them the better. Remember also that those that are always nearest to the money trade have the lower risk and the ultimate power of options lies solely in their versatility.
On the other hand, trading options also offers plenty of advantages compared with other forms of investments. Compared with stock trading, option trading offers a limited risk with unlimited profit potential. Many investors also use options for the benefit of portfolio insurance. They benefit from option contracts to protect their downside risk in case of a stock market crash.
Another thing that you should know about option trading basics is where to trade option contracts. Though most options are traded through public exchange houses, they can also be agreed between two parties or what is known as the over the counter market.
To begin your venture in trading options, the most important thing that you must remember is to select an area of this business and be very good at it. You should also choose stock options or an index that has a lot of trading volume and has high liquidity. When setting goals for your investment, make sure that your expectations are realistic. Never underestimate the risks and losses that you are about to face.
In addition to the option trading basics information discussed earlier, an option trader should also learn different option strategies. Option pricing can be used to test the risk and reward profiles of different option strategies that will help you understand the business of trading options better. For retail trading, only a simple option strategy is needed.
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