A class of investment apart from stocks, bonds and mutual funds is called derivatives. Derivative contract price is derived from the price of its underlying asset which can be any stock, commodity or bond. Option is one very popular type of derivative contract that investors buy and sell. It is an agreement between two parties a buyer and seller to facilitate a transaction on underlying asset at pre decided price which is known as strike price on or before the expiration date of contract. There are two types of option contract: Call & put.Option which gives right to buy is call and right to sell is put. Although risk is less here, traders can use option trading tips to perform better and earn expected returns.
Following are some of the most recognized benefits of trading in options:
1)Flexibility
One of the most appealing advantage of options is the flexibility that they offer. Most of the active stocks, indices have options which are available to trade. Different types of contracts as per needs can be designed here which have their own unique risk and reward structure. While trading in stocks benefits from a specific direction movement can be gained whereas in options benefits form other market situation can also be gained.
2)Limited risk
Risk is limited in options, it allows to create different trading strategies with limited risk but having high probability of success. A trader holding call option is benefited with good profit when price movements takes place in upward direction. Put option holders are benefited when stock price moves lower. Loss in case occur is the premium amount which is paid at the beginning of the contract.
3)Leverage
Leverage means use of various trading strategy which is helpful in maximizing profit.Option trading allows to create bigger gains using small amount of capital.
4)Beneficial under different market conditions
It is beneficial in different market conditions. You do not need to be bullish every-time. Under option trading you can establish position to earn high returns when market movements are up or down . In case of shares traders are benefited only when stock prices moves higher.
5)Liquidity
These contracts are of highly liquid nature. Traders can execute the contract quickly and easily so their capital is not tied up for long duration as it is with shares. They can invest that amount again in the same time to make more profit.
These are some of the benefits which are gained while trading in options. It is available in wide range of financial instruments like metals, currency, agricultural commodity, stocks, index, interests rate and more.Traders should understand that though option trading has potential of offering high returns, at times it can be risky as well. Therefore having a good understanding of market and how to trade with this flexible contract is must. Financial advisory services like trading tips, mcx tips are also helpful in earning profitable returns while trading in different market. Traders can use such experts views also for performing better.