There are many different choices when it comes to investing. Most people have heard about stock trading, but there’s another type of trading that is relatively unknown: options trading. But what is options trading, and more importantly, is options trading worth it?
In this article, we’ll explain exactly what options trading is, how it works and the advantages and disadvantages of options trading.
Is Options Trading Right For You?
Although many people enjoy the benefits of options trading, it isn’t right for everyone. Some people find that they benefit more by trading stocks or cryptocurrency.
To establish whether options trading is indeed the right trading option for you, you’ll first need to understand how options trading works and evaluate the pros and cons of options trading.
Continue reading to learn whether options trading is right for you.
What Is Options Trading?
Before we discuss exactly what options trading is, you’ll first need to understand what an option is.
An option is a contract which gives you the right to buy or sell an underlying asset for a predetermined price over a set period of time. Call options allow you to buy assets whilst put options allow you to sell assets.
For example, imagine that you believe that the share price of a company currently trading at £50 is likely to rise to £60 in the near future. You choose to buy a call option that gives you the right to buy shares at a £55 premium at any time during the next month.
If the share price of the company exceeds £55 before your option expires, you have the opportunity to buy the shares at a discount. If the price remains below £55, you allow the option to expire without using it.
Pros and Cons Of Options Trading
To understand whether options trading is right for you, you’ll need to carefully weigh up the pros and cons of trading in this way.
|✅ High return potential||❌ Low liquidity|
|✅ Lower risk||❌ Time decay|
|✅ Cost efficient||❌ High commissions|
|✅ Wide range of strategies available||❌ Complicated nature|
Advantages Of Options Trading
Options trading can offer a range of benefits that aren’t available with other forms of trading. Here are some of the advantages of options trading:
High return potential – With options trading, you don’t pay the current market price. Instead, you pay a pre-determined premium value which is less than the price of the stocks. This means that the profit margins are typically greater with options trading.
Lower risk – As the price of stocks is fixed for a limited time, you have the time to consider whether to buy stocks before your contract expires. With options trading, you aren’t committed to buy the stocks, so you can leave the option to expire should the margin not be high enough.
Cost efficiency – As options trading brings higher profit margins, a trader or investor can purchase greater quantities of stock for a lower price. This makes options trading highly cost efficient.
Wide range of strategies available – There are many different strategies available in options trading. For example, you can use call options to add stocks to your portfolio or use put options to sell partially or completely. There are a wide range of unique trading strategies to increase your profits and minimise losses with options trading.
Disadvantages Of Options Trading
Although options trading offers higher profit margins, it also increases risk. If you aren’t familiar with the strategies involved with this type of trading, you could end up making poor decisions which lead to losses. Here are some of the disadvantages of options trading:
Low liquidity – Many options traders struggle with low liquidity. This means that the volume of stocks is often low, unless you’re dealing in popular stock choices. This could make it difficult for traders to make entry and exit from trades.
Time decay – Time decay can be a problem in options trading. This is because the value of option premiums decreases significantly each day, irrespective of movement in the markets.
High commissions – Fees are usually high with options trading in comparison to stock or future trading. This makes options trading one of the most expensive types of trading.
Complicated nature – Options trading is complex in nature, meaning that it can take a while to understand how it works. This also means that you’re more likely to make mistakes with options trading, increasing the level of risk involved.
Options Trading Vs Stock Trading
You might be wondering the difference between options trading and stock trading. The difference is simple: whilst stock trading involves buying and selling shares in a company, options trading involves buying and selling opportunities. These opportunities give you the option to buy a share at a set price, but you are not entered into a contract to do so.
Should You Give Options Trading A Try?
Options trading can be tempted thanks to its high levels of potential return and wide range of trading strategies available. However, it can be difficult to get started with options trading and the risks can be high for beginners.
If you’re looking to get started with trading, copy trading is a great place to start. You can choose an established trader to follow and begin making trades right away, whilst learning about the market and building your own experience.
Can Options Trading Make You Rich?
Options trading certainly has the potential to generate large profits. However, it’s important to also be aware of the risks that come with options trading. As with any type of trading, profits are not guaranteed and your capital is at risk. Options trading comes with high levels of risk due to its complex nature, meaning that it can be easy to make mistakes and lose money.
Can You Make More Money Trading Options Than Stocks?
How much money you can make trading either options or stocks will depend on the trade that you’re making and the financial market. When done correctly, options trading has the potential to be more profitable than traditional stock trading, but it can also carry a higher level of risk, especially for beginners.
Learn To Trade Through Copy Trading
Options trading can be a tempting way to invest money as it attracts high profit margins and a wide range of unique trading strategies are available. However, options trading also carries a high level of inherent risk, especially for those who are novices to trading.
If you’re looking for a way to begin trading whilst limiting your risk, copy trading may be right for you. This type of trading allows you to learn about trading stocks from a more established trader, using their experience and knowledge to build your own passive income stream and develop your own skills.
I’ve put together a guide to the top 3 rated services to help you along the way. It’s the perfect place to start if you’re looking to give copy trading a try. In this guide, you can learn about some of the best copy trading platforms and discover which one is right for you.
I’m Jon, owner of Trade Wise at https://tradewise.community/ and https://www.youtube.com/channel/UC7VmOx8DbvX4Rbrac2pPcjw
I review forex and crypto trading products and services to find the best of what’s out there for creating a passive income without becoming a full-time trader.