Options Trading - Advantages and Disadvantages

What is Options Trading?

An option is simply granting someone the right to buy or sell something in the future. In the case of Dow index futures options, when someone buys a Dow call option they are buying the right to purchase that underlying Dow future at a specific price, known as the "strike price," at a future point in time, known as the "expiration date." When an investor buys a put, they are essentially selling the market; a call essentially buys the market. Likewise, selling a put essentially buys the market; selling a call essentially sells the market.

In order to receive the opportunity to buy an option on this future, investors pay a "premium." If the market does not reach the strike price of the option, then that option will expire worthless on the expiration date. If the market does reach the strike price of the option on the expiration date, then the investor will be assigned the underlying future at that strike price.

Advantages of Options Trading

Flexibility. Options can be used in a wide variety of strategies, from conservative to high-risk, and can be tailored to more expectations than simply "the stock will go up" or "the stock will go down."

Leverage. An investor can gain leverage in a stock without committing to a trade.

Limited Risk. Risk is limited to the option premium (except when writing options for a security that is not already owned).

Hedging. Options allow investors to protect their positions against price fluctuations when it is not desirable to alter the underlying positon.

Disadvantages of Options Trading

Costs. The costs of trading options (including both commissions and the bid/ask spread) is significantly higher on a percentage basis than trading the underlying stock, and these costs can drastically eat into any profits.

Liquidity. With the vast array of different strike prices available, some will suffer from very low liquidity making trading difficult.

Complexity. Options are very complex and require a great deal of observation and maintenance.

Time decay. The time-sensitive nature of options leads to the result that most options expire worthless. This only applies to those traders that purchase options - those selling collect the premium but with:

Unlimited Risk. Some option positions, such as writing uncovered options, are accompanied by unlimited risk.

Overall Options present a good opportunity to formulate plans which can take advantage of volatility in underlying markets as well as price direction. However for most traders the disadvantages are significant and online futures trading is usually a better option.

Tim Wreford runs Online Futures Trading, a website that provides information and resources for traders. Tim also provides a free day trading system, the results of which are updated daily on the site.

---

Intrenet Marketing VS Forex Currency Trading

Have you noticed that when someone's trying to sell you something - such as a system for making money - they always make it look far easier... Read More

Forex Made Easy for Everyone

Forex made easy is as simple as you would want it to be. The foreign exchange market is a worldwide market and according to some estimates is... Read More

Momentum Trading: A Practical Day Trading Strategy to Get Profits from Hot Stocks

Momentum day trading can be extremely profitable when done correctly...Day trading momentum stocks can be a very risky adventure. You can lose a lot of money when... Read More

Forex Trading Can Be Like Day-trading

Forex trading, or foreign currency trading, has become a bit of a craze of late, especially since it is something available to anyone who owns a computer.... Read More

Day Trading Training ... You need more than just going to a free stock market workshop to learn

Day trading is all about making buy and sell decisions. When you make a trade either your going to lose money or your going to make money,... Read More

Risk and Stock Trading Fees: The Two Barriers To Overcome If You Want A Successful Trading Career.

You know the old joke:"How do you make a million in the stock market? Start with two million?"There is no way around it, risk and stock market... Read More

Forex Scams: How to Spot Them A Mile Away

In recent years, investors have witnessed increased number of investment opportunities and offerings. While the complexity and success of these investment products vary, technological innovation has made... Read More

Money Management, Part 2

FEARING LOSSESThere is a huge difference between being risk averse and fearing losses. You must hate to lose. In fact, you can program your brain to find... Read More

What are Your Options Regarding Forex Options Brokers?

Forex option brokers can generally be divided into two separate categories: forex brokers who offer online forex option trading platforms and forex brokers who only broker forex... Read More

Day Trading - Moving Averages vs Support and Resistance

When day trading the SP and Nasdaq futures, do you rely on your moving averages more than your support & resistant areas?During the first hour of trading,... Read More

Forex Broker

A broker is any person or firm that charges a fee in exchange for executing trades for a trader. A Forex broker does not charge a commission... Read More

Crisis of Confidence in the EU

The European Union (EU) constitution was dealt a double blow, first by a French "no" vote on 29-May and then by a follow on "no" from the... Read More

Why Forex Traders Plan To Fail Before They Even Place Their First Trade & How You Can Know It & ...

Have you heard the wise saying that a trader who fails to plan, plans to fail? I have, and I was once that trader! However, did you... Read More

Two Timeless Rules in FOREX Investing

RULE #1) ~ Cut your losers; let your winners ride.One important thing that every new trader must know before entering this highly profitable business is that life... Read More

ISO 4217 in Forex Trading

ISO 4217 is an international standard describing three letter codes to define the names of currencies established by the International Organization for Standardization (ISO).The first two letters... Read More

Stopping Yourself

I read on a bulletin board a traders comment that on his first outing trading the E-Mini S&P 500 he lost on each of his trades. He... Read More

Assessing the Opportunities Presented by the New Iraqi Currency

Could it be possible that you are staring right into the most spectacular financial opportunity of the century? Operation: Iraqi Freedom will undoubtedly be a war marked... Read More

New Opportunities with Forex Trading

The simplest definition of currency trading is the practice of exchanging one country's currency for another country's currency. Basically, currency trading involves four main variables: currencies, exchange... Read More

Forex Profits

The Forex Market-What, When and Why?Forex, FX and the Forex market are some common abbreviations for the Foreign Exchange market. Actually it is the largest financial market... Read More

A Look at Forex Market Makers

The investor in the currency market takes for granted that a pair of currencies can be bought or sold at a moment's notice. Once an order is... Read More

How To Handle A String Of Losses

Everybody hates to lose and unfortunately no one is blessed with the ability of foresight, therefore losses are an unavoidable part of trading. When we enter a... Read More

Types of Foreign Currency Hedging Vehicles

The following are some of the most common types of foreign currency hedging vehicles used in today's markets as a foreign currency hedge. While retail forex traders... Read More

Why Demo Account Performance Is Often Better Than Real Account Performance

Over the past several years, the popularity of online currency trading has grown substantially. Each day, online FX brokerage firms attract new investors - each of them... Read More

How to Trade Currency

We all know when you go on a trip to another country; you need to take some travelers checks and some cash in the currency of that... Read More

The Nature of the Trading Business

Consider the following: As a trader you are in a business. Your strongest opponent has plenty of capital. He follows a program and he does it without... Read More

What I Learnt Losing £60,000 My First Year as a Full-time Trader

During my first year as a local (independent trader) on the floor of LIFFE, I bought and sold 8804 FTSE futures contracts, about 40 contracts per day... Read More