Options trading involves buying an option contract on an instrument such as stocks or ETFs where you believe there will be a gain/loss at a later date based upon whether your prediction turns out to be correct.
When you ‘buy’ an option contract, you expect the price of the underlying security (e.g. Apple stock) to increase/go up; when you ‘sell’ an option contract, you expect the price of the underlying security (e.g. Apple stock) to decrease /go down.
A call option gives the buyer the right but not obligation to purchase 100 shares of stock within a specific timeframe at a predetermined price (strike price plus premium paid). If the option is not exercised by expiration, it expires and becomes worthless.
A put option gives the buyer the right but not obligation to sell 100 shares of stock within a specific timeframe at a predetermined price (Strike Price minus premium paid). This means that if you think a market will drop in value, you buy a put. If the option is not exercised by expiration, it expires and becomes worthless.
A binary option has only two possible outcomes in terms of price movement: in or out. If you think the value of a stock will move either up or down in the coming months, then this is the type of product that you should be looking into speculating on. The pay-out can be significantly higher than other forms of options trading because if your prediction was correct, then you receive a 100% return on your trade. In addition, there are no commissions to pay. Some brokers offer free demo accounts where you can practice trading without having to risk any of your own money.
This type is very similar to buying/selling futures contracts from institutions such as CME Group Inc., Intercontinental Exchange Group, etc. The pay-out will be either positive or negative depending upon whether the investor is correct in predicting an increase in market value.
The world of options trading is an extremely risky one. People interested in owning shares in a company should do so through normal channels, while people looking to make money on the sale or purchase of stock should look elsewhere. Options trading is not for those with a faint heart or without deep pockets.
Risks associated with options trading
There are several risks associated with options trading. One significant risk is that an option’s premium may significantly decrease before it expires. If someone pays £5 for a put option giving them the right to sell their shares at £50 within three months, and the share price drops to £40, then they would have been better off selling their shares straight away. This would have been £10 less costly than the put option. As mentioned, this is a significant risk as it can happen very quickly and without warning.
As well as the outlay of capital required to invest in options, there are costs to be taken into consideration – commission is usually charged on each transaction – although exact rates depend on which financial institution someone uses.
In addition, owning shares gives investors a vote at meetings relating to company affairs. This means that they have a say over strategic decisions made by directors, and ownership of shares gives them direct influence over how a company performs. Options do not provide such opportunities for those who buy them, and also holders do not own any rights or entitlements from contracts between themselves and other parties.
Are you thinking about making investments but aren’t sure how it will work out? Are you looking for professional investment advice that might help save your time or any other valuable resource? If so, then consult with professionals before taking the plunge because it just might come back to haunt you later on down the line. You can contact Saxo Bank and find out what options trading is and how you can take advantage of their services, check here for more information.