Options trading involve a learning curve, so if a trader tries to invest his money into options without understanding the fundamentals of options trading then he might need to face the consequences of heavy losses. Therefore it’s advisable to learn the basics first before getting involved in trading. Below are some important Options Trading Tips to consider before you think of jumping onto the roller coaster ride called options.
Common Mistake: One of the most common mistake that beginners make is the fact that if they believe that the market is bearish and is going to fall they may choose to sell call options, where as they can buy put options instead. Put options are opposite of Call options, in call option if a trader gets a right to buy the underlying asset then in put option a trader gets a right to sell the underlying asset.
Hedging: Traders can use options to hedge the risks their portfolio might have. For example: if a trader has a bullish portfolio but he is worried that if the markets move downward he might be losing money, in that case he can hedge his downward risk by purchasing put options. On the contrary if a trader has a bearish portfolio and he is worried about the market moving upwards then he can hedge his risk by purchasing call options.
Strategy: If profit is what trader is looking at out of his options trading then he may consider some of the popular options trading strategies like Straddle and Option Spreads. If these strategies are employed correctly then trades can have a limited amount of losses but at the same time amount of profits can be unlimited.
Leverage: With option one needs to invest not more than 10% of the money required for investing in same quantity of underlying asset. So by investing in options a trader can manage the same quantity of asset and can leverage upon the unused money.
Options Paper Trading: If you are a beginner or you believe you have a money making strategy, in any case it’s better to test your instincts before you choose to invest your own money into options trading. With options paper trading or online simulations a trader can test his strategy without investing his/her own money.
These are some of the tips that can guide you before you start investing in options or while you are trading in options.