Options trading has been gaining popularity among equity trading investors in recent years. However, options trading is considered complex and risky, especially for amateurs and beginners.
Here is your helpful guide to options trading for you.
What is Options Trading?
Options trading is the trading of instruments like stocks, commodities, index, forex, and exchange-traded funds (ETFs) at a specific price within a particular date. It gives you a right to buy or sell at that price before the expiry of the options contract. However, there is no obligation to buy or sell – it is just the right you hold or exercise
You can do options trading in the Indian as well as US stock market. There are four standard terms you should know in options trading for clarity:
The buyer of the option has Limited Risk and Unlimited Profit.
The seller of the option has Limited Profit and Unlimited Risk.
Why is Options Trading Risky?
The option trading is high on the risk meter for the following reasons:
The market is usually more vulnerable to volatility near the expiry date. So, you may not get an accurate picture of the prices. Volatility can be detrimental for both buyer and seller, depending on the direction in which the trade market is moving.
Options trading requires a deeper understanding and experience of the stock market. Usually, it is preferred by investors who have deep pockets and financial margins to bear the losses. You should do options trading only for leverage and hedging instead of speculation. It allows you to get control over the shares without buying or selling them outright. You can also use them to safeguard against price fluctuations.
If you are looking to do options trading, investment in bonds, or any other stock market instrument trading, it is advisable to avail the services of a professional investment and portfolio management company. Such a company will guide you on making suitable investments and help you strike the right balance between risk-return trade-offs.
Also read: 5 Best Investment Options For Youngsters