Trading options has many benefits when compared to other investment vehicles. Option gives a trader liberty to invest in favor of a specific direction in which market will move. For example a trader can forecast that a financial security will be trading above or below a particular price 5 months from now and invest in options accordingly.
In United States an option contract includes 100 underlying asset’s units, so with very little amount of investments a trader can control good number of underlying asset position. Because of this reason trader loves the leverage that options provide and that remains to be one of the top reasons why traders would choose to invest in options over any other type of investments.
There is a learning curve involved and because of this reason a trader requires to be careful before investing in options. So by investing in options if one can make a fortune then there is also a possibility that one can lose huge amounts of money by investing in options. Therefore ignorance is not bliss in case you are considering investing in options.
If you are aware about the fundamentals of options you can begin learning some strategies that can be employed while trading options. Firstly, there are call options for the traders who are bullish about overall market or a particular asset; on the contrary, if a trader is bearish about the markets or a particular asset he/she can invest in put option. Straddle and Option Spread are the two strategies if used correctly can help the trader to put a limit on the losses that he/she can make and at the same time trade can give unlimited returns.
Option pricing is based on the performance of the underlying asset it is representing. Usually the price or premium to be paid for an option contract is not more than 10% of the investment of the actual asset price. So even if a trader wants to invest in a particular stock he can select a strike price and can invest in options which would be 10% of the total investments and he can use the remaining money to invest in something else until the contract end date.