Options As A Trading Tool
Options As A Trading Tool
Options are financial instruments used for hedging against adverse price movements in the underlying asset class like index, stock or forex. However they're widely used as instruments for speculation by traders all over the world.
The total turnover of options is far higher than the actual turnover of the underlying which reinstates the importance and popularity of the options .
Options trading can be very rewarding if done properly and with right risk management . You will find hundreds of articles on the technicalities and terminologies of options on the internet. In this article I will try to focus on the positive sides of options rather than providing definitions of terms like calls, puts, strike price, moneyness etc. If you want to learn them simply google or you can check out my YouTube channel https://tinyurl.com/tradetogether for video on option basics.
Why will I trade options:
1. Options can be bought with almost one tenth of margin required for taking futures positions.
2. Selling naked options requires similar margin as that of futures but with hedging the margin can be lowered.
3. The max risk involved is the total premium paid for buying. Even in reality the total risk is way lesser than that as no one will wait for his option price to go to zero before selling off. Generally we will exit once the price falls by 60 to 70% understanding that the market is not performing the way we predicted.
4. Options fall in price (decay) way lesser than a future contract. Lets say you bought 250 shares of TCS at 2300 and next day it fell to 2100. Your net loss will be 250x200 =50000. But if you had bought a call option of TCS which is at the money or slightly out of the money then your loss will be lesser.
5. Buying options in situations where there's an increase in volatility after you buy will benefit the buyers to a great extent.
6. There's a whole lot of advantages when you sell options which I will discuss another day.
Trading in options is risky as the price can drop by 100 percent in a single day or in few minutes. So first learn thoroughly about options and know how to manage risks before trading options.
If you liked my article then subscribe to YouTube channel https://tinyurl.com/tradetogether .
You can connect with me on Facebook regarding markets on www.facebook.com/greyswann.
Options are financial instruments used for hedging against adverse price movements in the underlying asset class like index, stock or forex. However they're widely used as instruments for speculation by traders all over the world.
The total turnover of options is far higher than the actual turnover of the underlying which reinstates the importance and popularity of the options .
Options trading can be very rewarding if done properly and with right risk management . You will find hundreds of articles on the technicalities and terminologies of options on the internet. In this article I will try to focus on the positive sides of options rather than providing definitions of terms like calls, puts, strike price, moneyness etc. If you want to learn them simply google or you can check out my YouTube channel https://tinyurl.com/tradetogether for video on option basics.
Why will I trade options:
1. Options can be bought with almost one tenth of margin required for taking futures positions.
2. Selling naked options requires similar margin as that of futures but with hedging the margin can be lowered.
3. The max risk involved is the total premium paid for buying. Even in reality the total risk is way lesser than that as no one will wait for his option price to go to zero before selling off. Generally we will exit once the price falls by 60 to 70% understanding that the market is not performing the way we predicted.
4. Options fall in price (decay) way lesser than a future contract. Lets say you bought 250 shares of TCS at 2300 and next day it fell to 2100. Your net loss will be 250x200 =50000. But if you had bought a call option of TCS which is at the money or slightly out of the money then your loss will be lesser.
5. Buying options in situations where there's an increase in volatility after you buy will benefit the buyers to a great extent.
6. There's a whole lot of advantages when you sell options which I will discuss another day.
Trading in options is risky as the price can drop by 100 percent in a single day or in few minutes. So first learn thoroughly about options and know how to manage risks before trading options.
If you liked my article then subscribe to YouTube channel https://tinyurl.com/tradetogether .
You can connect with me on Facebook regarding markets on www.facebook.com/greyswann.
Comments
Post a Comment