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Basic Principles of Option Trading Introduction |
Basic Principles of Option Trading Introduction
Option trading offers investors a possibility to get exposed
to a
certain stock or sector movement for a specified period of time. The
flexibility of option trading system lets you gain access to the market
in that very direction and volume that you need to profit from the
anticipated movement of the share price.
Basic principles of option trading presuppose
isolated use of options or their use as a supplement to share
investment.
The advantages of participating in the risky business of option trading
include earning additional income, leveraging returns, hedging your
shares, and winning more time for decision-taking.
Writing call options against your shares, for example, can help earn
income that will exceed dividends. In this case, it is in your
interests that the underlying falls in price a bit or remains steady,
providing extra returns from your stock portfolio at least in the form
of premium. You can also use the shares purchased on margin. Remember
the holder can exercise her option at any time and you'll be under
obligation to deliver the shares at the previously agreed price.
Another point in favour of option trading is that increase in share
value will result in higher return on the call option purchase in
percentage as compared to return on purchase of the underlying. On the
other hand, you can profit from price falling in a similar way buying a
put option. Option trading requires smaller investments than stock
trading, too, but it does not equal to risk lowering, however.
Going into option trading is also a good way to protect the value of
shares you own from potential decline. Having purchased a put option
you ensure the sale of your shares at the price which is not less than
the one you've determined to be the strike price. Thus, option trading
can be a way of insuring against considerable cheapening, being one of Option Trading
Solutions.
Another article of our site that will help you get a better grasp of
the intricate option trading
topic is Option
Trading Definition.
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