Options trading is a popular way of making money in the stock market. It’s so popular that many retail investors have been attracted to this form of investing. Rather than buying shares outright, which requires a lot of time and study, people are now seeking alternatives to investing their hard-earned cash. One such alternative which has proven quite lucrative is options trading.
What is Options Trading?
An option is one or several contracts which give buyers the rights but not the obligation to buy or sell something at a particular price within a specific time frame. This special price is known as the strike price or exercise price. The item being bought or sold may include stocks, commodities, or forex markets.
How to Trade Options
Trading options can be somewhat risky in terms of how you manage your assets, so it’s important to know what you’re doing before you dive into the market. Here are simple steps that will help traders when exploring their options:
Determine your investment amount
Set up an account with a brokerage firm and choose a minimum deposit limit based on your personal preference. Never invest more than you can afford to lose, as there is a chance that your investment can go to zero.
Determine asset selection
There is no single best choice, and everyone has their own set of preferences. The important thing is to choose one that fits you the most given the state of the market, your expectations for it and the planned time frame. Choosing wisely can help you bring in more profits than deciding on random stocks or commodities.
Once you decide how much to invest and which assets should be bought, buy them through your brokerage account before time runs out (which varies from contract type). Brokerages typically provide free platform tools to make trading easier as well as educational content for beginners. This may sound like a lot of work, but it can be an extremely profitable method to boost monthly income, especially if you trade options with a high success rate and low risk.
Types of Options
The following options are available in trading, each with its own set of benefits, risks and characteristics.
European style options
Traders cannot exercise European options before expiration unless it is a day one option. You can only exercise these options on specific dates, which are written in the terms and conditions.
Japanese style options
Japanese style options, however, can be exercised anytime during the life of the contract so long as it does not violate any rules laid out by stock exchanges.
American style options
American style options give buyers total freedom as to when they want to exercise the option instead of European or Japanese style contracts where you must adhere to certain limitations imposed by third parties (stock exchanges).
A call option gives its holder the right but not the obligation to buy something (in our case, shares) at a predetermined price before the expiration. You can use it to buy shares outright because it is cheaper than actually purchasing the stock. The call option will only become worthwhile if the share price goes up. On the other hand, if the share price falls or stays neutral, you lose all of your investment in that contract.
Put options give holders the right but not the obligation to sell something (shares) at a predetermined strike price anytime during or before expiration. Put options allow you to profit from falling prices should they drop below that specific strike level.
Take advantage of option trading by using these guidelines. The first step is choosing if it is the right fit for you and knowing how to trade options successfully. It is recommended to work through a reputable online broker for the best advice and lowest commissions. Try a demo account and learn to trade before investing your own money. For more information on options trading, click here https://www.home.saxo/en-sg/products/listed-options.