What is Options Trading?
Trading with options provide a venue for traders to speculate on the market movement of asset prices. Opening positions are executed with very simple terms, a Call trade where investors can profit from an increase in prices; and opening a Put position, for declining asset values.
Advantages of Options Trading
Options trading is similar to trading over other financial instruments and it is always compared and contrasted with traditional trading. However, there are several notable advantages not previously available to traditional brokers.
1) No commissions or broker fees. Compared with traditional trading where broker fees and commissions are always a part of a trade, options trading will not cost you anything for fees and commission. Normally, traditional brokers will bill a very high premium just to buy one share of stocks. With options trading, the minimum investment amount that traders will spend is at least $10. And with trades finishing in-the-money, profits earned are immensely huge compared to your initial investment.
2) Variables. In regular trading, there are variables to be considered and each should be set accordingly if traders are expecting huge returns. To have a reasonable profit, assets should appreciate by a certain percentage. When you trade options, you only need to appreciate market values that are most likely to increase or decrease within a prescribed time period.
3) Investment amount. Traditional trading would require huge investment amounts to lock in trading profits. However, options traders can earn as much as 75%-92% of their small investment amount. Traders can magnify their gains, which makes trading with options friendly to small investors.
How to trade Options
The process is relatively simple and can be broken down into four easy steps:
Select an Asset. Each asset is different and has a dynamic nature. Choose one that you understand and restrict trading what you already know.
Analyze the direction of the asset. Using fundamental and technical analysis, speculate on which direction the asset prices are headed for. Other methods such as news research, earnings reports and dividends reports are helpful tools that you can use. If you anticipate that prices are likely to increase, then enter a Call trade. Enter a Put trade for declining prices.
Select appropriate time frame. Your price forecast should be set within an appropriate time frame for your predictions to be correct and earn profits. If you think that the asset prices of your chosen company will increase at the end of the day, then select one trading day as your expiry.
Specify the Risk. Finally you are ready to specify the risk percentage of your investment size. There are high profits in options trading so identify the best combination of choosing the right options and set the position size accordingly.
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