It is easy to dismiss the benefits of a trade if the
most typical description attached to it is risk. But it
should not be so. There are great benefits that may be
taken from participating in options trading that most
people overlook. One should take into account that all
types of trades have inherent risks but they also offer
advantages in return.
Flexibility
Although it is true that options trading may not fit
everyone, it still does not change the fact that to
those traders who have made this trade work for them, it
is clear for them that options offer great flexibility
for both the option buyer and the seller.
Most types of trading do not allow profiting from the
underlying asset. However, with option trading this is
very possible. There are various strategies traders use
to maximize this advantage.
Protection
In comparison to other kinds of trades, particularly
stock trading, options trading could give better
protection to its participants. Significant losses are
typically uncommon in this trade since traders only lose
what they have invested and more often than not,
investments are just minimal because they are limited
only to the price of the option. It should be noted that
typical options are just 10% of the value of the asset.
Traders could also benefit from protective put. This is
a type of options strategy that allows for purchasing
the same number of puts and stocks such that the stocks
are protected from depreciation of value. Also, a trader
who needs to buy an option in the future at a certain
price can do so. It is, in a way, insurance for the
trader who currently has investments on long stock
positions, especially during the times when the market
is uncertain.
Leverage
Since the trader bought the “option” and not the stock,
he could profit with very little investment. By coughing
a small amount, the trader can control the full value of
the stock because he holds a contract that performs in
the same way the stock performs but for only a fraction
of the stock price. This is probably the main reason why
option trading is very appealing to traders with small
funds.
Limited Risks
The limitations of risks can be seen from two
perspectives. First, is from the duration or the period
of the option and second, is from paying a minimum
amount for the full value of the asset. During the
period of the options, the holder can either exercise
the option or not. Any unnecessary movement in the
market may be prevented, thus giving more protection to
the holder. On the other hand, if the option is not
profitable, the holder will only endure the losses for a
short and definite period of time.
Volatility Trading
Most trades only offer upwards and downwards movement.
With this kind of trading, the participant may trade
even when the market is dormant.
On a final note, by working within the principle of
option trading, the trader has the liberty to buy or not
to buy an option depending on the movement. That, in
itself, is a great benefit since the trader is not
obligated to pursue with the purchase of an asset even
when he has already lost interest on it. The only thing
one can lose is the payment for the option, which
significantly costs lesser when compared with the price
of the actual stock.