Author : , Date : 20 January, 2017

The Advantages of Options Trading

Options trading has several advantages over traditional financial markets, it can be more predictable and safer. First, let’s see, what options are exactly.

What is an option?

An option is a derivative financial instrument, it incorporates the right to buy or sell a certain quantity of an underlying product. The underlying products can be stocks, indexes, foreign currencies or commodities. If you trade options, you will not own the underlying asset itself, so in case of stocks, there are no dividends, no voting rights.

The common thing in options trading and any other kind of investment is that you need to have an idea about where the price of the given product will go, whether it will rise or fall. This will influence how you speculate on the market. The advantage in this aspect is that traders do not have to buy or sell the underlying product itself, they can still make profits from the price fluctuations.

Binary options trading is a special kind of trading, here you need to predict whether the price of the asset will rise or fall during a period of time. Binary options offer pre-defined risks and rewards. If you cannot find out the direction of the price movement, you lose the money you risked, if your prediction is right, you get a fixed return.

How options trading differs from other markets?

An important difference is that an option always has an expiry date. The expiry time can be a few seconds or a few weeks or months.

A significant advantage of options is that the risk is limited, as traders cannot lose more than the amount they paid for the option in advance. In case of most financial markets, there are no opportunities to control the level of risk – apart from the stop order in Forex, but that cannot provide sufficient protection against bigger losses. In options trading, you do not have to take care for stop orders, because you already set the level of risk when you buy the option.

The control is absolutely in your hands, you can see how much money a trade will earn for you, if the price of the underlying product changes as you expected, and how much you lose if it does not go into the direction you predicted. You know the amount of profit or in advance, before you place your trade.

Options trading needs less capital than stock trading. It is much cheaper to trade with options for a given stock than with the real stock.

There are several options strategies that traders can use in case of certain market situations, for example strategies both for outburst and for sideways movement.

Binary options trading needs less time investment than any other trading. It may take less than one hour per day. In cases when you need to make a thorough market analysis, it might require some more time, but still not that much as Forex day-traders spend with opening and closing positions.

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