What is options trading?

An option is simply giving 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 buy 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 option, he is essentially selling the market; a call essentially buys the market. Likewise, selling a put option essentially buys the market; selling a call essentially sells the market.

To receive the opportunity to purchase an option on this future, investors pay a “premium.” If the market does not reach the strike price of the option, that option will expire worthless on the expiration date. If the market reaches the strike price of the option on the expiration date, the investor will be allocated 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 just “stocks will go up” or “stocks will go down.”

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

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

Coverage. Options allow investors to hedge their positions against price fluctuations when it is undesirable to alter the underlying position.

Disadvantages of options trading

Costs. The costs of trading options (including commissions and bid/ask spread) are significantly higher in percentage terms than trading the underlying stock, and these costs can dramatically reduce any gains.

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

Complexity. The options are very complex and require a lot of observation and maintenance.

Declining time. The time sensitive nature of options leads to the result that most options expire worthless. This only applies to those traders who buy options: those who sell take the premium but with:

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

General options present a good opportunity to formulate plans that can take advantage of volatility in the underlying markets as well as price direction. However, for most traders, the downsides are significant and online futures trading is often a better option.