Options trading is one of the finest services offered by an online trading platform. It is flexible and helps a trader increase the returns. Though various options trading apps are available, there are some basics about options that you must know before beginning to trade.
Let us explore five key points you must know about options before visiting any trading platform.
5 Important Things To Know About Options Trading
If you are new to options trading, here are the top 5 things that you must know to make sure you earn good returns:
1) Options are of 2 types
There are two types of options available for the traders. The first is the call option, and the next is the put option. In simple words, a call option contract is a “right to buy”. It allows the contract’s owner to purchase a stock at an agreed-upon price, commonly known as the strike price, before or on the expiration date. The owner of a Put option has the “right to sell”. A put holder can sell a stock at a strike price within the expiration period. A Put Option is purchased when an investor expects the market price to fall.
2] Options are time-bound
All options have an expiration date. The one-month option expires on the final Thursday of the month. There are 2-month and 3-month options as well. There are also long-term choices, such as taking a one-year market view on Otions trading app. As the choice expires the time value will decrease until it reaches zero.
3] Options volatility benefits buyer
Volatility in the market is generally a risk for the buyer. But that is not the case with the options. Whether you opt for the call option or the put option, you will gain benefits if you are the buyer. Positive volatility is advantageous and negative volatility is covered by the option premium. As a result, volatility always favours the option buyer against the option seller.
4] Buying option is right, and the selling option is an obligation
In options, buying is right, and selling is an obligation. Based on expected stock price movement, an option buyer can purchase a call or a put option. For an option buyer, earnings are unlimited, but losses are restricted to the premium paid. Option sellers will sell call options if the price rise above a level is unexpected and put options if prices are expected to fall below a certain level. The potential losses for option sellers are unlimited, while the possible gains are restricted to the amount of premium received.
5] Hedging is the primary purpose of options
The primary aim of using options on a trading platform is to benefit from hedging. By selling greater call options that will expire worthlessly, you can lower your cost of holding. As an options trader, you must first understand and comprehend that options are designed to be used for hedging.
Options are a great choice for traders when it comes to earning profits. But knowing the right options trading app and strategies can help avoid the potential losses. There are five things every options trader must be aware of. They are: options are of 2 types, options are time-bound, options volatility benefits buyers, buying option is right, and the selling option is an obligation, and lastly, hedging is the primary purpose of options.
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Remember these points before you invest your savings on a trading platform.