Thursday, February 22, 2018

Benefits and Risks Of Using Options In Trading

April 26, 2012 by  
Filed under Economics

[waw_video video=”rvFtAy0nJY4″ hoplink=””]

principles that you need to learn first, the fundamentals of becoming a trader. Just about everyone reading this can run, swim, and ride a bike. If that’s the case, that means that tomorrow we could take you out to Hawaii and enter you in the Ironman Triathlon competition and it would be no problem for you to swim 2.4miles, then bike 112 miles, and then of course follow that up with a 26 mile run, rightb You see, just because you learn how to do something does not mean that you will ultimately be successful at it. Just being able to finish the Ironman is an accomplishment; huge amounts of time, energy, training, and strategy is spent on the fundamentals to participate and finish the race. Unfortunately, this is what happens to most traders….they skip learning the basics, the fundamentals, and how to utilize them to see where they are making mistakes or breaking down. Instead, most are lined up at the starting line for the Ironman and don’t even realize it. They wonder why they don’t get the results they want and get frustrated. Are you getting resultsb! We’re living through an unprecedented time of <b>…</b>
Backtested Options Trading Systems.

Benefits and Risks Of Using Options In Trading

Author: Carter Locken

One part of your brain may think that using options in trading is no different than using any other exchange-traded contract. In some ways, that part of your brain is absolutely correct: at the end of the day, you have either bought (gone long) or sold (gone short) on one specific instrument. Either that instrument will increase in value (benefiting those who went long) or decrease in value (benefiting those who went short).

However, there are considerations about the way options in trading behave as they move from out-of-the-money, to at-the-money, to in-the-money which require extra caution to properly manage the risk in your portfolio. There are also considerations about how the premium of a given option may change regardless of the underlying asset’s value, and those considerations are often what burn novice option traders.

First, their behavior if they move in-the-money. Let’s say you sell a put at a given premium: x. Now let’s say this was done in a static world where the time value and volatility component of that premium will never change, so the put will always be worth x, or, if it’s in-the-money, now x plus the intrinsic value of the put (the difference between the value of the underlying asset and the strike price of the put). The potential for intrinsic value to be added onto something you sold is what makes using options in trading seem riskier than just trading futures themselves. With a put, the maximum intrinsic value for which you will be on the hook is the difference between the strike price and zero. So if you sold a gold futures put at $1300 per ounce, and gold suddenly became utterly worthless, you would be on the hook to purchase an asset worth $0 per ounce, but you would pay $1300 per ounce. That is your maximum risk, and it’s a mighty big risk if you were intially hoping to just sell an asset, get the money in your trading account, and let it expire worthless. Also, if you sold a call instead of a put and the market moved against you, your risk is unlimited: the potential intrinsic value between the call’s strike price and the asset’s price is infinite, because the asset’s price is infinite.

On the other hand, if you are the one who bought an option (either a call or a put), you will never be on the hook for more than the premium of that option. That is why using options in trading is considered such a safe risk-management tool … but only for those who buy the options, not for those who sell them. However, even with buying an option, there is risk: namely, that the time value of the option will decay as it approaches expiration, and that other factors in the premium’s valuation may also decrease. For instance, the inherent volatility of the underlying asset may decrease, or the interest rate may decrease. These things would cause the premium to fall, and you would lose money on the premium trade itself (assuming the option stays out-of-the-money) because you bought and owned an asset that lost value.

So you can see why using options in trading, specifically buying them, is a good tool for managing your risk, but even that method won’t prevent you from ever losing money. Sometimes selling options can lead to uninhibited risk, if the market moves against you. But at their best – and properly managed – using options in trading is a great way to either protect your position in a market, or to make money from those who need to do so.

Learn Option Trading Secrets That Most Other Option Traders Don’t Know Exist!

Article Source:

About the Author

Visit Options in Trading: You Are About To Learn Option Trading Secrets That Most Other Option Traders Don’t Know Exist!


20 Responses to “Benefits and Risks Of Using Options In Trading”
  1. admin says:

    Want to learn how to trade options but there are so many different systems out there. Can someone please let me know what system works and how to learn it? Thanks!

  2. admin says:

    Looking for a good options trading system is something I had to do when I first started but when I found this site, it really helped me a lot and it really works for me, you should check it out.

    I think it’ll help you learn how to trade options the right way and make some nice profits!

  3. admin says:

    There are many different ways to trade stock options and people use different systems, but which one is really good and will bring in reliable profits? Or is this even possible?

  4. admin says:

    Using a proven stock options trading system is important if you want reliable profits. I’ve come across plenty of different systems and the one that really stands out is here, .. you should go ahead and check it out, it’s really do a lot for me!

  5. tolstoi1 says:

    Option Vue?
    Options Xpress?
    Think or Swim?

  6. admin says:

    There really isn’t such thing as a “best broker”. Every broker has their pros and cons. Brokers that charge more commissions usually have better service and system while brokers with extremely low commissions usually have very user-unfriendly interface.

    Since it usually doesn’t take any cash to open a broker account these days, I would advise you do a complete research on all of them in order to see what works best for you.

    The site below contains a list of the top options brokers…

  7. RossenTrono says:

    Post what consistently works for you.
    What do you look for and how do you trade it?

  8. InspectorBudget says:

    I use Strangles, and occasionally Butterfly.

  9. admin says:

    I just learned about iron condors and double calendars but which one should I use since I am just starting out?

  10. TraderJoe says:

    To be successful at trading options in the stock market, you’ll need practice. The best way to get practice is through paper trading, that’s where you follow a stock and pretend you are actually putting trades in and then taking them out, hopefully for a profit.

    You can also find books on the subject, like on amazon or barnes and noble. You’ll need a good foundation on the basics. There are also different strategies when it comes to trading options so you’ll need to learn those first as well.

    For more advanced ways on how to trade options, there are sites that offer guidance. The advantage with these sites is that they will take you beyond the basics and offer you a better chance at higher returns on your trades.

    I’ve listed some sites below that you can check out, they are for information purposes only and not a recommendation. However, you will learn a little more than what you can get from reading books.

    I think if you start your learning this way, you will be able to succeed in trading options. Others have done it so there’s no reason why you can’t learn how to do it too.

    Hope that helps and good luck!

  11. CommonSense says:

    A scam for the untrained.

  12. iswaswill says:

    Let’s get real, it, having been used by Hedge Funds and large conglomerate CEOs and other inside officers has enticed too much corruption and is sucking the US Dollar value dry! If you think a stock is going down, sell it….simple as that and make the big boys do that too! No more of this cooperative bouncing the stock between option strike prices to suck the capital out of hard working American’s retirement savings! Lets get the common back in the stock market!

  13. Ted says:

    No. Actually the system works great. People who work hard to understand the system can make some extra money and retire early. Others, who want to jump in and expect to get rich without any effort get what they deserve, too.

  14. chrissmcguiree says:

    I have been paper trading my system for over a year and now want to use real money. Should I trade out of a 401k or a Roth Ira? I don’t want the IRS breathing down my neck so trying to get educated before I jump in. What is better?

  15. b2fnow says:

    As far as the irs is concerned, they don’t care whether you’re tading options or stocks or futures or eggs, they only care about profits.

    To trade options, you will need a margin acct.

  16. admin says:

    How to make good money with binary options trading? Is there any kind of strategy or system that guarantee success?

  17. xcalibus says:

    I recommend as they have an intuitive user interface and fast execution.

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!