Perhaps among the most difficult and possibly the riskiest type of trading is option trading. Many experienced traders realize that option trading doe...
Perhaps among the most difficult and possibly the riskiest type of trading is option trading. Many experienced traders realize that option trading does not suit all traders. It selects its own type of people,
generally the risk takers. And the trade itself requires skills and knowledge unique only to people who won't fold under extreme risks. Most seasoned traders recommend this type of trading only to those people who have enough risk capital as it carries with it large risks.
By default, it is also speculative. So if you are a person who doesn’t want to speculate too often, you should find a different kind of security which will work better for you. However, stopping the idea of entering this trade right now is as risky as not knowing anything about it. It carries with it risks, that’s true,for sure, but it is also a very rewarding venture. You should try to learn something on it such that you would be able to decide whether to go for options trading or not.
While it is inherently risky, option trading also offers advantages that may not be available with other types of trades. Among its wonderful advantages is the flexibility it lends its investors. Each lender has the option to trade at a certain price within a predetermined period.
It is also, by comparison, a more advantageous kind of trade due to its high leverage it offers. Depending on the location, each option may encompass a few underlying assets. In the U.S.A., for example, each option may represent for 100 underlying assets. Thus, this principle lends the holder the ability to gain from many assets within one option.
So tell me about an option?
An option is a kind of security, generally closely comparable to bonds and stocks. It is, on its own, a binding contract, that is monitored by and through strict terms and conditions. Basically, options are contracts that owners could buy or sell at a specific price prior to or on a specific date. An option is typically an additional price tag to a certain asset or item because it is a reservation for the purchase or sale of a specific asset.
Options are also occasionally called derivatives. This is due to the fact that the value of an option is derived from the value of the underlying asset.
To give light on this topic, consider the example below:
Say you have considered purchasing a real estate property which is valued at several hundred thousand dollars. However, when you first negotiated with the owner, you did not have enough money to buy the property right there and then. So you made a deal with the owner to pay an extra $5,000 to reserve the deal for you for the duration of two months. The additional money you put in is referred to as the options. In case you don’t want to pursue with the sale, the owner of the real estate can neither force you to buy the property nor can the law impose the sale on you. However, you would still have to pay the price of the option.
In conclusion, when thinking about purchasing a property with an enclosed option, you will have the right to continue with the sale or to discontinue the sale. You are not obligated to do either of the two. However, you could lose 100% of your total investment in options trading which is the value of the option itself.
