Options are agreements which allow the investor to exercise full authority to buy or sell an underlying asset at a specific price on or before a specific date. The price is generally set with regards to the market trend and pricing at that moment of time.
The main advantage of options lies in the fact that it allows trader to adjust his position after seeing the change in market. This allows them to adapt to any situation that may arise due to market fluctuation.
The 2 common terminologies of the options are call and put. ‘Call’ refers to the ability of traders to buy an asset with a given stock price within a limited time frame while ‘Put’ refers to the ability to sell a stock at a given price within a limited span of time. Options although looks pretty attractive, but has a lot of risks involved because of its highly complex nature. If you are not fully aware of the terms of the options, you are more likely to take a loss rather than a profit.
Options primarily have two applications – speculation and hedging. In speculation, you should be able to correctly predict where will stock prices rise and where will they fall, as well as the timings of the same and the amount by which the change is expected to take place. This is one of the main reasons why the options trading is deemed as risky because losing is easier than gaining. Most traders go for it because of the capital return it provides. Hedging is more like insurance policy. It is used to safe keep your investment against change in trend.
As a whole, Options is a risky affair where incurring losses is easier than gaining profit. The returns are usually mind boggling if correctly used. As well as, if you neglect knowing about usage of options, you might be missing out on the most widely used methods by high turnover enterprises.