While it may seem easier to buy and sell stocks in order to make profits, there are a number of reasons why so many choose to learn options trading. This particular financial tool is complex, yet offers a number of rare advantages that are not available to those trading with stocks. Hence, if you are wondering what to expect from options trading, it is advisable that you learn the pros and cons of trading with options to gain a comprehensive insight into the matter.
Advantages of Trading with Options
When trading with options, you can achieve huge benefits that are not available when dealing with other trading forms. Below, is a list of benefits to start with.
Higher Gains with Lower Investments
When trading with options, there is no need to pay for the current share price, but rather a premium value which is less than the price of the stocks. In short, the price of an option adds up with its premium value and the trading commission banks typically call this chage a margin. This is very low when compared with the cost you pay directly for stocks.
However, when considering the profits, one gains just as much as those trading with stocks in terms of percentage.
The Flexibility of Trading with Unique Strategies
In order to tackle time decay or volatility, traders could make use of unique strategies which can be applied before the contracts for options expire. For instance, one can easily exercise the option while adding stocks to the portfolio, or by selling partially or completely. There are an abundance of strategies available that can help investors to make huge profits or keep them from suffering major losses.
The Privilege of Fixing the Stock Price for Said Timeframe
Using contracts pertaining to options, investors can fix the stock’s value (also known as ‘strike price’) for a particular timeframe. This provides investors with the privilege of buying or selling stocks at their fixed strike price before the contract expires.
Risks of Option Trading and their Disadvantages
With higher gains, risks double as well. The same applies to options trading. If you are unfamiliar with the strategies of the trade, you may end up making some extremely bad decisions. Hence, investors should ponder the possible risks and prepare accordingly before jumping into options trading.
Liquidity is Comparatively Lower
In options trading, investors often struggle with low liquidity. In other words, with different strike prices and expiration periods, the volume of stocks is not always impressive unless you opt to trade with popular stock choices. However, this will not pose a problem for those already trading with less volume.
Low Liquidity Results in Higher Spread
Another challenge when it comes to trading with options is the higher spread. Due to low liquidity, options tend to offer greater spread which results in an increase of the indirect cost when giving up the spread while trading. For some, this indirect cost may result in a considerable deduction that exceeds the actual profit gained.
If you are a beginner, you may expect a lot of twists and turns while you trade. It takes time to figure out how options trading works. Given its complexity, many prefer to ignore the benefits this particular trade form has to offer. In addition, the available information related to quotes, implied volatility, etc. is not accessible right away which complicates the process of trading with options.
Options trading is a very lucrative alternative for investors. However, for beginners, it might be too risky to dive into the action without sufficient preparation. Therefore, if you are interested in the benefits of this financial tool, you must not forget to do your homework and get ready for the risks it involves.