Buying and selling assets, whether they’re stocks, shares, or any other asset class, can be a great way of earning money as an investor. Many people know this, but not everyone realizes that there are a plethora of financial instruments that can be used to do so. Of these, options trading is one of the most important for any new trader to know about.
But before you try your hand at options, make sure that the following applies.
You Know What An Option Is
Let’s start with the most basic of basics shall we, what is an option? Put simply, an option is a contract that entitles, but does not obligate, an investor to make a trade at a later date. The terms of that trade are specified in the options contract. Because of this, an investor can use an option to commit to buying or selling an asset at a later date but with a guarantee of it being at today’s rates.
It is important to note that an option does not obligate a trade to make the trade set out within. It merely gives them the option to do so.
You Know The Difference Between A Put And A Call
Before you get involved in any kind of financial activity or speculation, it is essential that you understand what is involved. If there is ever even a small chance that you could lose the money that you invest in a financial transaction, you shouldn’t proceed until you are 100% certain that you understand what your obligations are and why.
Netpix has an FAQ, which is a good starting place for learning about options more generally, but in this guide, we are going to focus on one important aspect of trading options specifically. If you know this particular bit of information, everything else you need to understand will flow easily from it.
There are two types of options that you can buy, a put and a call. A put is an option to sell an asset at a later date. A call, on the other hand, is the option to buy an asset on the specified date. Both puts and calls are useful for investors in a number of different scenarios.
For example, if an investor is concerned about a business’s ability to navigate a difficult short-term challenge and thinks that the stock price might plummet; as a result, they can buy a put option, giving them the option to sell their stock at the current value. After a year, or whenever the put expires, the investor can decide whether to sell their shares as per the option, or whether the business has proven more resilient than they anticipated, in which case they can simply walk away.
You Know When To Choose An Option And Why
Like any trading instrument, options have their own ideal use cases. There will be some situations where an option is an ideal choice for a trader, but there will also be times where it makes more sense to make a different move. No trade should be dependent upon just one type of trade or asset for their financial security. It is much better to diversify your portfolio and protect it against potential market shocks. Options are just one tool for doing this.
You Know What Your Financial Health Is Like And You Can Afford To Trade
Before you commit to any trades or consider buying an option, you need to know what your current financial situation is. Specifically, you need to have a good grasp of how much money you have and how much you can afford to lose.
As long as you know all of these things and you are confident that you understand when to buy options and what to use them for, options can be a very powerful investment instrument. Experienced investors who have a good grasp of the long-term can benefit enormously from using options.