Options Trading – Advantages and Disadvantages


What is options trading?

One option is simply to give someone the right to buy or sell something in the future. In the case of options on Dow index futures, when a buyer buys a call option on Dow, he buys the right to buy that underlying future at a specific price, called "exercise price", at a later time, called "expiry date." When an investor buys a put, he essentially sells the market; a call buys essentially the market. Similarly, selling a put essentially buys the market; selling a call basically sells the market.

In order to buy an option on this future, investors pay a "premium". If the market does not reach the exercise price of the option, it will expire worthless at the expiry date. If the market reaches the exercise price of the option on the expiry date, the investor is assigned the underlying future at that exercise price.

Advantages of options trading

Flexibility. Options can be used in a wide variety of strategies, ranging from conservative strategies to high risk strategies, and can be tailored to more expectations than simply "stocks will go up" or "stocks will go down".

Affecting. An investor can leverage an action without engaging in a transaction.

Limited risk. The risk is limited to the option premium (except when writing options for a title that is not already held).

Blanket. The options allow investors to protect their positions against price fluctuations when it is not desirable to change the underlying position.

Disadvantages of option trading

Fresh. The costs of the trading options (including both commissions and the bid / ask spread) are significantly higher in percentage terms than those of trading the underlying security, and these costs can dramatically reduce profits.

Liquidity. With the wide range of different strike prices available, some will suffer from very low liquidity, making trading difficult.

Complexity. The options are very complex and require a lot of observation and maintenance.

The weather declines. The time nature of the options leads to most options expiring worthless. This only applies to traders who buy options – those who sell receive the premium but with:

Unlimited risk. Certain options positions, such as the sale of uncovered options, carry unlimited risk.

The global options provide a good opportunity to formulate plans that can benefit from the volatility of the underlying markets as well as price direction. However, for most traders, the disadvantages are significant and the online trading of futures is usually a better option.

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