Traders are required to make and honor different types of contracts when they are trading in any financial market. An option is a type of contract that gives a trader right to buy or sell underlying assets in future. For instance, when someone buys a call option in an open market, they are just buying a right to purchase an underlying asset at a particular price and at a particular date. This predetermined price is known as strike price. And the future time at which the purchase is to be made is known as the expiration date of the contract. Options like binary options have given new ways to traders to speculate the prices of certain assets in market.
When a trader buys a put option, then they are essentially selling in the market, and when they buy a call option then they are buying in the market. There are different types of assets associated with different options. When a trader is trading in a forex option, then the asset could be a particular currency or pairs of currencies. On the other hand, if somebody is trading in a stock or equity based option, the underlying asset in this scenario could be an ETF exchange-traded fund (ETF) or some other similar financial product.
The worst case scenario for a trader is when the market doesn’t reach the strike price of the option on the expiration date. Then the trader is obliged to buy or sell the underlying option at the specific strike price regardless of whether they are making a profit of loss.
|Advantages of Options Trading||Disadvantages of Options Trading|
|Flexibility: Options trading gives lot of flexibly to traders. Traders can formulate their own strategies and use a conservative or aggressive approach while dealing with different assets.||Expenses: Sometimes, the cost involved in options trading can go up very high and may eat up the profits to a great extent. The cost could be in the form of commission or premium to be paid for a particular contract.|
|Leverage: While trading in options, the traders can also gain without having to commit to a trade. The difference between the market price of a particular option and strike price of options is a trader’s equity. The right to purchase or sell an option at a fixed price creates leverage for a trader.||Complexity: Options are complex, especially for new investors and requires a great deal of knowledge, observation and maintenance in order for the investor to get profit from the trade.|
|Limited Risk: Probably the greatest advantage of options trading is that the risk percentage is known to the traders before they place the investment. For instance, a trader buys a call option by paying a premium. In this scenario, the trader knows the exact value of premium that he might lose down the road.||Risky scenarios: Some options involve a great deal of risks and may affect adversely on the financial condition of the trader.|
|Array Of Choices: Those who trade in options can choose to trade in different types of assets like currencies, stocks, commodities, indices etc. This gives them an opportunity to choose their underlying asset based on their knowledge.||Lack of information: Many a times, traders become unsuccessful in their trade because of insufficient or no information about certain events or economic development. This can prove to be quite disastrous for an investor in some cases.|
All in all, options give a good opportunity to both new and experienced investors to take advantage of volatility of underlying markets and the price direction of underlying assets. The risks associated with options trading can be minimized by making well informed decisions about trading.