When you embrace the fact that options are highly versatile, it is easy to see how traders can step into this arena and see viable returns on their investments. Not only do you acquire the true power of leverage, but you also engage with a world that has incredible potential when it comes to what your capital can do. This staying power should never be discredited, but there are certain things that all options traders must know in order to yield successful results. These are discussed below.
What Options Really Are
So, what are options? Well, in a nutshell, options are derivatives. Any options contract serves to offer the ‘owner’ a legal right to purchase or sell the asset that underlies said derivative. These contracts are guided by expiration dates which dictate by when the trader must act. There is no obligation to honor said contracts, and the opportunity for creating sustainable profit is vast. James Cordier’s complete guide to option selling explains the ins and outs in clear detail for anyone hoping to step into this environment.
What Are The Types of Options Available
Options became a verified and viable thing in the latter half of the 1970s, as a direct result of the input from the Chicago Board Options Exchange. In 2023, there are various terms that you need to get to know if you want to formalize a strategy that is actually going to work. Here are the main takeaways.
Calls
When you hear the term ‘calls’ and it is related to options, this has to do with buying. So if you purchase a call contract, you have the right to buy the derivative at the stipulated strike price by or on the expiration date. If you decide you are going to exercise your right to buy, the seller must oblige and hand over the investment, whatever shape that may take. When you buy a call contract, you pay money for it and this is the most capital at risk if the trade doesn’t come to fruition. There are two ways you can access calls and these are known as long calls and short calls.
Puts
A put contract has to do with selling. So if you purchase a put contract, you have the right to sell the derivative at the strike price on or by the expiration date. Simple, right? Well, this is a really condensed version of what options contracts actually entail, but it’s useful to have the framework to move forward from.
The Key Difference Between European and American Options
You should also get to know what the difference is between the European Options and the American ones. With European options, the contract you purchase or want to sell can only be ‘exercised’ when the expiration date comes around. Conversely, American options can be exercised at any point before the expiration date is due. Typically, American options have the bigger appeal factor because of the potential for increased profit.
The Primary Benefits of Options Trading
You gain some significant advantages by Options Traders. These are explored in more detail here.
First: Options Give You Leverage
More so than any other investment asset, options give you leverage power. This is highly appealing for any trader because it means you are far less at risk of losing capital and the control factor is significantly increased as well. It is always better to have leverage and options contracts certainly manifest it.
Second: Options Are Growing
The next benefit to options contracts it that this market is definitely expanding. There are more options now than there have ever been, and it has quickly become one of the more defined, viable ventures in the world of investments. Where there were doubts before, this has since been replaced by wholehearted support and even a general embracing of this kind of contract. This is only set for more growth in the future, so if you learn the trade, there will be better things yet to come.
Third: Options are Flexible
With options, you are never bound to a contract unless you choose to honor it. This means you don’t have to mitigate significant losses because you are purchasing a right and not an obligation. Unlike stocks, there are fewer risk factors to process and this is great when it comes to how you are able to lay down the roots for success.
The Disadvantages Worth Noting
However, there are always disadvantages to discuss as well and for the sake of parity, this is a rundown of the major talking points.
First: Options are Exclusive
While there may be a high number of contracts on the open market; the fact is that options traders are an exclusive club. To gain membership you have to be able to show that you know what you are doing; and that you have enough capital to actually invest. Alongside this, there are clear screening guidelines that all brokers must follow in order to accept new traders into the arena and you have to pass these with flying colors if you hope to start trading.
Second: There Is A Lot to Learn
Options are not for a beginner trader in any way, shape, or form. The ability to trade in this environment is one that is earned and not given. This means you have to be able to demonstrate that you know how to navigate the ropes and to do this; you will need experience. There is no way to get around this fact; and it will take time to learn all of the language along the way.
Options Are A Viable Investment
But only if you know what you are doing! To make a profit with options contracts, you must embrace the whole picture with open arms. Learn everything, lean on the experts, and do not stop until you get the answers you are looking for.
When you begin your options trading venture, there are certain things you cannot go without knowing. Having the right information is crucial when it comes to how successful you can truly be. Viable portfolios are only possible when you invest in both learning and smart strategies; so these are your key pointers to get going with.