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.

hedgeHedging: 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.

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.

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Option Strategies

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

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.