Option Buying: Most High-Risk Trade in the Market

Oct-12-2021Blog by – Mr. Dhruv AjmeraRead Time: 3 Min.Word Count: 523
194Option Buying: Most High-Risk Trade in the Market

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:

  • Option Buyers: These are people who buy the right to exercise their rights on the seller (also called a writer). They have to pay a premium to avail of the rights. This premium acts like insurance.

  • Option Sellers/Writers: These are people who receive the premium from option buyers. They have to sell their instruments if the option buyers decide to exercise their rights.

  • Call Option:  This is an option where the holder has a right but not an obligation to buy an instrument at a given price before the expiry date.

  • Put Option: This is an option where the holder has a right but not an obligation to sell an instrument at a given price before the expiry date.

The buyer of the option has Limited Risk and Unlimited Profit.

The seller of the option has Limited Profit and Unlimited Risk.

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Why is Options Trading Risky?

The option trading is high on the risk meter for the following reasons:

  • A majority of options traders rely on speculation. They fail to understand the difference between protecting and speculating. If speculation goes wrong, they can incur huge losses.

  • 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.

  • Some stocks have a low volume of options trading which should be considered a red flag. It means that there is a liquidity issue brewing up behind the scenes. You might have difficulty selling your options.

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

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