What IS Option Trading

Introduction

There are many of you who think that we cannot reduce our losses in trading.

So, this is their wrong thinking, there is such a way where we can reduce our loss to some extent while buying and selling shares. I am talking about options trading where you can reduce your loss while buying your shares. Let us know what is options trading.

What IS Option Trading
What IS Option Trading

 

What Is Option Trading?

Options trading means that it gives you the right to buy a share at a specified time at a lower price.

In simple language, options trading gives you the right to reserve the share by charging some premium, whether the price of that share increases or decreases in the future, you will get that share at the same price. We will try to understand it through an example

Suppose today you have to buy a share whose price is 1 dollar in the market but you feel that the price of this share may increase and decrease in the coming time. If you are confused about whether you should buy it or not, then you can take the help of options trading. Whether that share becomes 5 dollars or 10 dollars you will get that share for 1 dollar only.

If the price of that share goes up then you will really make a huge profit. But if the price of that share decreases then you have the option of whether you want to buy that share or not. Obviously, you will not buy that stock. You will only have to bear the premium loss. the price of which will be much less than your share.

No matter how much profit you can make in options trading but what you will lose will be small. That will be your premium amount.

 

How Does Options Trading Work?

Options trading works like an insurance company in a way. Suppose you got your car insured and in return gave some amount to your insurance company. Now the insurance company will promise you that if your vehicle gets stalled or if your vehicle becomes an accident, then you will get its full claim.

But if your vehicle is in good health, then you will only have to lose the premium. Which would be a very small value. Similarly, the options trade also works, you become the owner of that property or share for some time by paying some premium. Even if the share price goes up, you will still get it at the same price, even if its price falls, you will still get it at the same price.

Option trade gives you a contract and that contract has an expiry date. You have a right to that particular share until that contract expires.

Read: Why Blogger Fail In Blogging Journey?

 

Advantages & Risk Option Trading

1. Less Cost

The biggest advantage of option trading is that you can buy a whole lot of shares for less money. In this, you reserve the share for a particular time. No matter what the price of that share is in the future, but you will get that share at the same price at which you had registered it for a particular time. If you buy that share before that expiry date, then you will get the same share, no matter how much its price has increased.

 

2. High Returns

In this, you also get very high returns. Let’s say today a share costs $200 but you only have ten dollars. So at this time, you can use options trading. You will register that share for one month. By paying some premium amount, that premium amount is worth $10.

After some time the price of that share increased to $500. But still, you will get that share only for $ 200. Because he has signed his contract. Now you have a direct profit of 300 dollars without any risk. And you got a pretty good return too.

 

3. Less Loss

Another advantage of trading options is that you lose very little. We try to understand it through example. Suppose you have contracted a share for a month but due to some reason, the price of that share decreases instead of increasing in the year.

Now in such a situation, you will not buy that share because the price of that share has come down. So you have to face the premium loss that you paid at the time of entering into your contract. Although this amount is very small, so you have to face very little loss.

 

Risk Of Option Trading

1. Loss of full amount

In options trading, you lose the entire premium amount. That is, if you are trading options, then it is not at all that you will always make a profit. You may also have to face a lot of loss in this. You will be surprised to know that according to general trading, there is more risk in options trading, but still, people run towards it. Because in this money doubles very quickly.

 

2. Time Limit

As we have just learned above that in this you can contract that share only for a particular time. In most cases, this contract is for one month, you can extend it after one month but for that, you will have to pay a separate premium charge. This means that you have to withdraw your profit within 2 weeks and come out.

Even if there is no jump in the price of that stock in 2 or 3 weeks, you may still face a loss. If you do not think at all that if you have contracted one of your shares, then you will get it at the same price forever, it has a time. And this is the second biggest disadvantage of options trading.

 

Conclusion

Friends, in this post we have told you what is options trading. Does it have advantages and does it have disadvantages? Also, how does option trading work? Told about that too. You can earn a lot of money by trading options for less money.

If you want any more information related to this, then you can tell us by commenting. kamchalu.com thanks you for visiting the page.

Read More:

By Editorial Staffs

A team of expert writers and reporters decodes vast terms of health, crypto, stock, bio and making money matters simpler for you.

Leave a Reply

Your email address will not be published. Required fields are marked *