What is an Option?
Options trading simply sees the holder have the option to enter a buy /sell at an already pre-agreed price. These options come in the form of calls and puts. A call gives the holder the option to buy, whereas a put gives the option to sell.
Those who trade Options favour this at times to stocks as there are no set obligations held to carry forth a position. All that is agreed is the price in which individuals hope to buy or sell at by a set expiration date. Prior to this the trader or investor will always have the ability to remove their option to buy or sell.
Buying and keeping an option to the stock does not give one the physical ownership to said company. Options still act as a derivative, meaning there will be no underlying ownership derived from an option.
Want to know more about Options and how they are traded? We explore this topic further below.
What is Options Trading?
Options trading takes place via contracts, similar to CFDs (contract for difference) and Futures contracts. Trading options are similar to trading any other derivative market. However as it can sometimes be seen as a type of trading which is relatively complex for new traders, which is why most retail brokers do not offer this type of trading and only specialist brokers offer this.
Options trading is mainly divided into 2 parts as are most markets. In Options trading these are called Put options and Call options.
A put option is where the holder of this contract is given the right to sell the designated stock/commodity or underlying instrument at a pre agreed price. This agreed price which is known as the “strike” can be delivered by the already agreed upon time. Trading a put option can sometimes be used by those trading the physical markets as a form of hedging.
So for example an investor in physical on-exchange stocks in Google, may want to trade a Put option in the event they believe their physical stocks are going to be decreasing in value.
On the other hand, a call option is where the holder of this contract is given the right to buy the designated stock/commodity or underlying instrument at a pre agreed price. This agreed price which is known as the “strike”. There is a fee which is to be paid for exercising a call option, this is called a “premium”. Similar to those who use Puts to hedge, the same can be used for a call option. So for example an investor in physical on-exchange stocks in APPLE, may want to trade a Call option as a hedge of there other, longer term position.
Selling or Buying Options?
Irrespective of the type of option which you use, put or call, the overall value to the holder will always be when the markets go up. Here is why.
In order to be the holder of either option you are in fact buying that contract, essentially longing. So the value for the trader is derived from an increase in the assets, whilst merely holding the right to sell (put) doesn’t mean it will be actioned.
The premium paid for buying each type of option is calculated based on the amount of time left on the contract. The longer the days until expiry the higher the cost. Selling or choosing to short the options contract only rewards the seller the rate of the premium.
Now you know the basics, Is Options trading for you, how can you become an Options trader? We explore this and more below.
Guide how to trade Options
Looking for trading opportunities in Options in 2020? There are many online brokers which provide interested investors the opportunity to not only own tokens but also speculate the markets via CFDs. If you are interested in getting involved in this rapidly moving market, below is the easy process to follow to get started.
Step 1: open a broker account
Step 2: decide your investment level
Step 3: deposit and start trading
Is Options trading profitable?
Like any form of trading it can be profitable. Traders looking for huge amounts of possibilities usually believe Options trading is one of the types of trading which can provide them this. The ability to find and use historical vs implied volatility, creates the potential for involvement in fast moving markets. Volatile markets in options usually create higher amounts of opportunities for huge swings in prices. The swings we see in Options trading can be usually big, which is why those seeking the chance for profitability may want to trade options.
When looking at profitability you need to look at this in comparison to the various other types of trading you could choose to do. Relative to other markets like Forex, or even Futures, Options trading provides traders various moves which equates to a larger level of return for those on the right side of any swings.
Profits also vary on other factors such as how much you will be investing into your account, how many trades you will be making etc. However for the average Options trader, who is able to not only find but capitalize on the right trades whilst limiting their losses the potential for generating a profitable income can exist.
What does it take to be an Options Trader?
In order to be an Options trader, there are an array of different skills and resources you are required to have access to. Firstly and most importantly is the education. Understanding what moves the Options market, the out/ call options and which are most valuable based on your strategy. Then comes the processes you must follow, the mentality you must adopt etc.
Once you gain the mindset of an Options trader, you then need the resources. This comes in the form of the capital you wish to invest in order to trade. Options traders usually will have over £15,000 in there account.
Now you have the education, and resources, comes the time commitment. Options traders usually need to dedicate a few hours a day in monitoring their positions. The reason why this time is needed as an Options trader is mainly due to this fact. Although positions are open for longer, you need to constantly monitor upcoming expiries in contracts, and decide if it is still worth holding onto said contracts.
Best Brokers for Options Trading
The best brokers for Options trading will usually have a range of liquidity providers, good execution speeds and be generally reliable. Trading volatile options markets can be risky and expensive, so brokers would need to offer the above and more, to help ease your mind when trading with them at the best cost.
Here is our list of the best brokers for breakout trading: