‘Is options trading worth it?’ You should ask this question to uncover aspects, both good and bad, before getting your blood money on this instrument. It is crucial to learn the advantages you can enjoy and the risks you should be careful of. This article walks you through such facets so that you can answer whether options trading is worth it or not.
Why Should You Consider Options Trading?
Among many trading instruments, the option stands out as the top pick. It must have some fascinating advantages that need our discoveries. This section dives into the benefits you can gain from options trading. Spoiler alert! It is not only about enriching your account but also gaining the wealth of life.
You Can Reduce Cost
Compared to stocks, options require less upfront investment. The cost of buying an option includes the price of the option, trading commission, and premium amount. It is a more economic way than owning the actual shares.
The model of leveraging investment can explain why options can cut down on upfront costs. For example, if a trader wants to have 200 shares at the price of $80 per share, then they have to pay around $16,000. Meanwhile, if buying two calls having 100 shares each at the price of $20 per contract, it only costs them $4,000. So, you can save $12,000.
You Can Use Options To Hedge Against Risk
When trading options, you undertake less risk than trading equities due to the requirement of less financial commitment and the substantial imperviousness to the effects of gap openings.
Also, taking options trading as a form of the hedge is what many traders and investors mostly do. Specifically, options allow buyers to decide on the purchase or sale of derivatives to make profits or avoid big losses. Potential risks will dwindle if you know the proper how-tos.
You Can Earn High Potential Returns
From the point above – cost reduction and the same-same earnings, the profits from options trading will increase. With the equivalent amount of shares, options can help you pay less than direct ways. In addition, it activates the backup plan to buy or sell contracts amidst tough trading situations.
You Can Apply Various Strategies
With options trading, you always ‘one way or another to earn high profits or cut down on potential losses. A wide range of strategies and tactics enables you to escape from possible dilemmas by unpredictable price actions.
While investors depend on brokers to short a stock, options allow them to trade the market with the third dimension. They do not be in handcuffs when the market moves in an unfavorable direction but become more flexible.
Stock trading might not have large moves, which creates stagnation. Instead of being the reason for your down mood, options liven up the vibe when helping you reach your financial goals, strategically.
It Does Not Occupy All Your Time
One of the overlooked facets is time management or work-life balance for traders. The image of being a trader relates to being glued to monitoring screens. So, you might question what you trade to earn money while you have no time to enjoy life!
With options trading you do not suffer from stressful pace like day traders. The predetermined factors of options, such as the strike price and expiry date, can explain why you do not have to stick your eyes to every little moment of the underlying prices.
Options trading might entail some disadvantages (that we will discuss later). Yet, it can help you enjoy personal time and bonding with your loved ones while passionately trading.
Are There Any Drawbacks of Options Trading?
After reading the benefits that options trading offers, ‘what a perfect instrument to trade!’ might be what you think of. Yet, everything has its dark sides which are crucial to see for the sight of the whole landscape! So, we share with you a brief walkthrough of some disadvantages of options trading.
Suffering High Commissions
While the cost of buying direct shares is higher than using options, commissions of weekly options can cover the difference. It is possible to have commissions exceeding 30% of your investments. So, it raises concerns about the game of mind rather than the dependence on sheer fluke or instincts.
Moreover, the sellers of put options might need to purchase stocks at a higher strike price than common levels in the fall of the market.
No Exception With Time Decay
Time decay, also known as theta – an option Greek, relates to the reduction of an option’s value as it reaches the expiration date. So, as long as you hold the position or contract, the time value of options will dwindle. It will profoundly impact your profitability.
Complex Frameworks Are the Real Challenges
Don’t take options trading as an impossible mission as we can sort it out. Yet, it is not an easy-peasy task for novice traders or the faint of hearts. Options trading has many complicated frameworks that need breakdowns or a certain amount of knowledge and experience. So, it might be quite hard for those who just started trading.
Who Should Trade Options?
Though options trading is not easy, if you are into learning and practicing, you can become a master. It all starts and ends with what you want to achieve and how much risk you are willing to undertake.
Those who know the risks and characteristics of options will be more suitable to trade options. Also, traders who trade stocks, ETFs, mutual funds, etc. might be interested in options to hedge against risks for consistent income generation. Also, you can take a look at which characteristics a successful options trader has.
When Should You Trade Options?
Let’s trade options when the market is open, specifically from 9:30 am to 10:30 am. The first hour has the most volatile price movements which provide great chances to earn high profits (if having effective strategies).
Are Options More Profitable Than Stocks?
It depends. If the stock prices witness a significant rise, the purchase of a call option generates much higher profits than owning stocks. Yet, things can always go awry in the financial markets. The ongoing stock market crash seems to equalize the risks in every instrument!
Is Options Trading Better Than Stocks?
Well, it is fair to say that there is no better trading instrument than any other. The question should be ‘stock trading vs. options trading: which is more suitable?”. Finding a suitable trading type relates to the consideration of your trading goals and risk tolerance.
Many people might consider stock trading as gambling due to its high risks. Yet, options prices can be more volatile, which makes this instrument challenging for beginners. It also explains why options need complex frameworks. On the other hand, once you master options trading, you can use it as a shield for downside protection amidst price fluctuations.
In a Nutshell
So, is options trading worth it? The part of answering this question should be under your charge. There are advantages and disadvantages to all instruments, and options are not an exception. We hope this article addresses some crucial points to help you make up your mind more easily. Stay tuned for our next articles to decode the complexity of trading and gain consistency in profitability!