4 things you need to know before you begin with option trading
Trading in options is vastly different than regular share trading. The stakes involved are different as are the rewards associated with this kind of trade. As any advanced trader knows, investing in options is majorly about customisation. The rewards reaped from investments can be rather high, just as the risks are. Most investors looking to trade in option start out by looking at option trading tips, but the fact is that there are a few things you should know before you begin investing in options. They are as under.
- Trading in options is all about customisation
As mentioned above, option trading involves a lot of customisation. Generally, option traders are also regarded as self-directed investors who typically, work directly with their financial advisors. The financial advisor helps you manage your options trading portfolio. While the financial advisor offers the guidance, it is you, the investor, who fully controls all trading decisions as well as transactions. However, you can always research about the different trading strategies and current market outlook, before you begin trading.
- It is better to start with stock options
One of the best option trading tips you can ever get is that you should begin with trading stock options. Options based on equities are ideal for new investors since they help you navigate the complex world of trading in options and help you understand how they stand differently as compared to stock investments. It is necessary that you understand how stock option quotes work before you advance with options investments. For instance, you need to understand things pertaining to the costs involved and the expiration of options contracts.
- There are 2 different types of options you can choose from while conducting your trades
An option is essentially a trading contract that gives the owner the right to purchase/sell underlying assets at a predetermined price or a predetermined period of time or duration. The duration could be as short as one day or as long as many years, depending upon the option contract type. The two types of options available to investors are ‘call’ and ‘put’ options. While the former option gives the owner the right to buy shares of a certain security at a predetermined price within a predetermined tenure, the later gives the owner the right to sell the shares of a certain security at a predetermined price within a predetermined tenure. Note that when it comes to option trading, owners are not obligated to exercise their right to buy or sell.
- You should be aware of the risks of option trading
Risks are inherent to all kinds of market investments and options are no exception to this rule. As an individual option trader, you should be concerned with the two main type of risks associated with trading in options – historic and implied volatility. Historical volatility signifies the past performance of the options and how the price of stock has fluctuated in the past, daily, over a period of one year. Implied volatility is about what the market place is ‘implying’ based on the NSE F&O live prices i.e. how volatile the stocks can be in future, until the contract expires.
Final word: When it comes to trading in options, you have plenty of choices. However it is not as easy to begin with these investments and the potential for making costly mistakes cannot be ignored. While it can be challenging for beginners, trading in options can be financially rewarding once you get comfortable. But, before you start investing, remember to check the F&O stock list to make informed decisions regarding your investments.