Trading options are a convenient form of financial instruments suitable for traders looking for short-term investment results.
They are easy to trade in not only for experienced professionals, but also for novice traders. Therefore, many people start their journey into different financial markets with options.
Trading has a number of advantages over alternative methods of investment. For instance, compared to a popular Forex currency market, trading options offer the following advantages:
- minimum initial investment;
- possibility to trade on weekends;
- lower risks and a chance to partial compensation of losses;
- simplicity of transactions;
- quick results.
Primary types of trading options:
Call\Put options — a trader predicts the direction in which the asset price will change, compared to the current price at the moment of purchase of an option. If the price is expected to rise, the trader should purchase a ‘Call’ option, when a decrease in price is expected, the trader purchases a ‘Put’ option.
One Touch\No Touch options — a trader predicts the price either reaching a specified target price (‘One Touch’) or not reaching it (‘No Touch’) by the option expiration time. Once the price reaches the target, further price fluctuations are irrelevant.
In\Out options — a trader predicts boundaries of price fluctuation until the expiration time (‘In’ option) or a breach outside these boundaries (‘Out’ option).
Features of trading options:
Risk manageability — the main feature of trading options is that the trader is precisely aware of potential gains and losses on any option even before commencing a transaction.
Affordability — traders are buying contracts rather than assets, which enables a great number of traders who would be unable to enter the market otherwise due to a high price barrier to benefit from accurate predictions on price fluctuations. For example, instead of spending $1000 to purchase 20 shares, you can spend $20 on 2 trading Call options (see examples below).
Revenues — they may exceed the revenues on investment of the same amounts directly into assets by many times, because the revenue depends mainly on the direction of price fluctuation rather than the actual growth in the asset price.
Simplicity — since revenues on trading options depend mainly on the direction of asset price fluctuation and are less dependent on the actual values of price change, less detailed information on an asset is required to make successful transactions. This makes trading options an affordable choice for less experienced traders.