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What is Option Trading? A Beginners Guide

If you are a beginner, then trading in options can feel like a lot to handle. However, options trading gets easier if you know the basics about it. Setting the right strategies with a clear understanding of market movements, helps make options trading easier. On that note, here is a brief overview of options trading.

What exactly is options trading?

Options refer to the financial contracts that give you the right – but not the obligation – to sell or buy an underlying asset after its price goes beyond a particular point in a specific time period. These contracts must be sold or purchased before the expiry of the contract. Options trading is the term used for buying and selling options. In other words, options trading is buying or selling an underlying asset at a predetermined price by a particular date in the future.

These are powerful tools to improve any trader’s portfolio through added protection, income, and better leverage. In fact, options can also be utilized as a hedge against the stock market downturn to limit losses.

Features of options trading in a financial market

In online trading, you get to trade using the following four features of options:

#1 Call options

With call options, you get the right to purchase a security at a specific price before or on a predetermined date. Your profits increase in tandem with the market value.

#2 Put options

With put options, you get the right to sell a security at a specific price before or on a predetermined date. Your profits increase as the market value of the security goes down.

#3 Leverage

Options let you speculate on market movements of the underlying security without being the owner. Thus, they are a leveraged product that can either magnify your profits or losses.

#4 Hedging

Options hedging can let you limit your losses on other positions you may have opened. This is an aspect that makes options in demand on any online trading platform.

Why consider options trading?

As any financial consultant will tell you, trading in options comes with a host of advantages, such as:

Lower brokerage:

Though the brokerage depends on the Android trading app you use, it is typically lower for options because of immense competition. Besides, there are no hidden charges for trading in options.

Limited risks:

With options, you can create trading strategies that have limited risk of losses. But the chance of being successful is higher when you exercise absolute control over risk exposure.

No need to wait for a bullish market:

In options, if you set the right positions, then you can earn profits even when the market is not showing upward price movements. This is different from owning securities , which mainly allow traders to profit from a bullish market.

Try to study the market and learn more about options before you get into trading. As you start options trading, you will not find it too difficult to form your own strategies.

However, it is in your best interest to be aware of the key risks associated with options trading: 

Please add 2-3 risk points as well

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