Option trading makes money through speculative action. Speculation, in turn, although attached to a negative connotation, is actually nothing more than educated betting on securities movements. Options are versatile. You are not restricted to profit generation through markets going up. Even when the market goes down, there is still the potential for profit. Anyone who makes a guess correctly will make money!
Option trading Risk
Options are big money territory, but the stakes are high. Much money is made, but this money is also easily lost. This why the options market have the reputation of being risky. After an option is bought, there is then the requirement of knowing the market well. Will it go up or down? This takes study and tools. Software dedicated to the analysis of markets is used for this reason. Similar to Forex trading, the options market avails traders of a wide variety of products that will help them to make correct predictions based on market movements overtime.
Option trading Dynamics
The direction in addition to the timing and dynamics of this movement. This is typically where the difficulty of prediction will incur risk. The stock will go up or down, but price change and time frame should be precise. There is also the factor of commissions once these predictions are made. Why do people speculate with options if despite the high risks involved? Leverage is high in options. The control of 100 shares can make small price movements generate significant profits.
Trading vs. Stock Purchase
There are other reasons why trading is cheaper and more profitable than buying stock itself. The price of a stock or index that is likely to move around frequently is a suitable investment for beginners. You will earn back higher return percentage and there is no need to invest in a stock for a lengthy period of time. Traders should always be familiar with the markets that they are trading in, however trading options also provide a way for new investors to earn some money by simply making some apt predictions at the right time.
If you are uncertain of product picks hedges are recommended by option critics. However, this shouldn’t be a replacement for a good trading strategy and knowledge of market movements overall. While there is no doubt that hedging can be useful, they aren’t necessary when an individual knows how to make an informed trading investment strategy work for them. For example, the use of options allows you to restrict the downside while benefitting from the upside in a cost effective manner. There is once again, more control given to the individual that is able to define these types of parameters in their trading strategies.