As information becomes more accessible and technology in the trading industry becomes more user-friendly, more and more people are gaining access to assets such as options trading. For instance, a report released by Alphacution Research Conservatory showed that a staggering 39 million options contracts were traded daily in 2021, representing a 35% increase from the previous year. A number that we are confident will only improve in this year’s analysis.
And as you probably already know, options are financial instruments investors use to hedge the future value of financial assets. However, there is an indication that many traders might be selling themselves short by only implementing simple call and put options instead of advanced strategies that bring higher yields. So join us as we try to deduce why options trading has become such a trend.
What are Options?
Options are monetary derivatives that allow you, but do not obligate you, to buy or sell underlying securities on a pre-agreed date and price. Furthermore, hedging and speculation play significant roles while trading options. The first exchange-traded options were in 1973, of which we’ve also put together a list of the best options brokers in the UK to help you get started. But first, let’s look at what the basic options are:
- Call options- when buying these options, you’re purchasing the right to accept certain assets at a set price within a given period. They also tend to have bullish buyers and bearish sellers.
- Put options- allow you to sell given financial assets at a set price and within a specified period. They also tend to have bearish buyers and bullish sellers.
Options allow you to hold on large asset transactions as you monitor how their price reacts to certain market stimuli without losing the benefit of buying or selling them at particular prices. As such, you should always be aware of the side the seller is leaning on before trading on them.
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Why are Options Becoming Popular?
1. They are Cost Effective
Options are a great way to revenge on your current position for future benefits cost-effectively. For instance, let’s say you’re expecting the price of XYZ shares to rise in the next few months, but you don’t have enough to cover the total cost. Or you’re interested in the same shares but are uncertain how the price will move in a few months.
In both instances, you can buy options equivalent to the shares you would like to purchase in XYZ and hold your option or opportunity to buy the shares at the same price in a few months. If the shares rise in a few months, you will have raised enough to cover the rest or see the indicators you were looking for.
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2. Mitigates Risks
This is true, but it will mainly depend on how you use your options. In some instances, it would be much preferable to hold shares than to hold options, while in others, the contrary is true.
Nonetheless, options are the best way to hedge in your trading. To begin with, they allow you to enter market positions with a high likelihood of paying off in the future without bearing the total cost, leaving you liquid enough to invest in other ways. Secondly, if by chance your gamble does not pay off, the option amount at risk is significantly lower than the total cost of holding the same position.
3. Strategic Advantage
Your trading strategy will play a significant role in determining whether you achieve your investment goals and objectives. And options are a flexible investment tool by design. For instance, synthetic options positions can help you reach your financial goals. If that sounds a bit complicated for you, then the fraction of percentage options cost to hold positions will give you leeway to look for other opportunities.
Investing in the stock markets comes with its fair share of risks and opportunities, but this can largely depend on how well prepared you are. As we’ve seen, options can present an excellent way to hedge on big investment moves whether you’re sure of the outcome or not. And if utilised correctly, they can significantly reduce the effects of a blow while optimising your gains if positions play out in your favour.