What is an option?
Options - is one of the universal exchange instruments, which can be extremely profitable. That's exactly what we're going to talk about today. The cost of options is surprisingly small, and by using them properly, you can reduce or eliminate the risk of your trading strategies.
What is an option?
Option - a flexible investment exchange instrument. Essentially, An option is a contract that gives you the right, but not the obligation, buy or sell the underlying asset (futures or stock) in the future at the price agreed today.
Why do I choose options?
The advantages of options include the ability to use them for a very wide range of strategies that have different risk/return profiles. Some such trading strategies are aimed at generating speculative income (buying Call or Put options), while others are structured to generate profits if certain future forecasts are justified.
People who are unfamiliar or unfamiliar with options tend to think of them that way and miss the potential of using them for more conservative purposes:
Using Options as Insurance
For example, If you buy a Put option for every 100 shares (1 futures) that you own, this gives you protection from below. Thus, if the value of the shares decreases (futures), the Put option increases in value. And, no matter how far the stock price declines, you have the right to sell your stock (futures) at a price equal to the strike of the option.
You can also insure a short position. If you sell, the worst result would be a rising stock (futures) price. To hedge against this, you need to buy call optionBecause when the stock (futures) price goes up, it goes up in value. Again, no matter how much the stock price goes up, you have the right to buy the stock at a price equal to the strike of the option.
You can use options to insure your entire portfolio. There are options on stock indexes. So, buying a Put option on the index that is closest to the composition of your portfolio gives you protection against market risk. When the entire market declines, it's likely that most stocks in your portfolio will also decline in value. But the Put option on the index will rise in value, compensating you in particular or in general for your stock portfolio losses.
Generating income from a stock portfolio
Covered options strategy is very often advertised as a safe way to generate additional income from a stock portfolio. And it seems just as safe as simply investing in a stock. While speculative Call option buyers usually hold their position for a relatively short period of time, the writer of a covered Call option often plans to hold the position until the option expires. It's a good idea to make money during periods when their stock holdings are going nowhere. The income generated can be impressive, up to 20 % annually or more, but you will get it in that amount if the stock rises slightly or stays near the same price.
Additional income on your stock holdings
When you own a stock, you only profit if the price of the stock moves above its current value. But in the case of options, you can make a profit even if the stock remains within a limited trading range. Calendar spreads and short straddle - just some strategies to produce profits if the stock price does not move. This means that an option position can be profitable even if the stock shows very little movement in the time frame. Other strategies aim to create profits if the stock price shares will move in any direction, for example, long straddle. In this case, you really don't care in which direction the rate will move - as long as it really moves. Because options can be used in so many combinations, their scope is very broad.
Saving time
As you can see, options open up many opportunities: opportunities in speculation, insurance opportunities, opportunities for additional income. And they are especially useful on volatile market.
So why are options so often considered more dangerous than stocks? The difference is that Options are time-sensitive. Because they often expire, worthless, you can easily lose your entire investment.
Capital preservation is just as important as increasing from long-term investments. Undoubtedly, every investor would prefer to have consistent profits all the time, but developments are beyond your control, and they can cause a temporary decline in the value of your investment. Before you enter the market, make sure you always know the possible losses as well as the potential gains, and be prepared to accept a loss if it does happen. Experienced traders who are successful year after year will confirm to you that risk management - this is the key to long-term profitability, especially if you limit the possible losses for each trade to a certain (tolerable) percentage of your trading account. Take your time when choosing an option strategy; make sure that you fully understand whatever strategy you are using. Educational trading is one way to gain experience in how options behave. Once you master the concepts and strategies, you will undoubtedly succeed in options trading as well.