Gone are the days when options trading was considered a preserve of established financial institutions and professionals. This trade has become more popular over the recent years and with more individual investors embracing it across in Hong Kong and across the world.
The options trading market recorded an average of over 20 million contracts daily in 2018. This was way above what had been witnessed in the other years. The numbers are expected to go higher in 2019 and the coming years.
What Is It About Options Trading And Why The Interest?
Many investors are finding this trade appealing because it provides both beginning and experienced investors with an opportunity to reap the many potential benefits. This trade has several strategies that can help users maximize on possibilities of making profits and to mitigate risks.
Before you get started, you will need to know your way around the trade and get accustomed to different things such as the language. You also need to get insights on how you can enhance your portfolio. Whether you are new to this trade or just want to sharpen your skills, here are several things that you need to know about options trading. These things will help up your game.
Let’s start by defining a few terms:
This is a contract that allows you to engage in the buying or selling of an investment asset. Assets, in this case, are things such as stocks or exchange trade fund commonly referred to as ETF.
A contract has a pre-determined price and a date of expiry which shows the validity of the price.
A premium is a price at which a contract can be bought or sold. The pre-determined cost is known as the strike price and the date and time on which the contract will expire is known as expiration.
Options contracts allow you to buy and sell shares to another investor directly without being compelled to first buy the security.
- Options trading
As alluded in the name, options trading is buying and selling of options contracts. Trading in options is more like buying and selling stocks. The only major difference is that buying options does not give you any ownership rights because you have not purchased the company’s shares. However, the option contract gives you the choice to buy the shares later if you so wish.
Buying and Selling Options
You will be required to pay a premium to buy or sell an options contract. Premiums are normally small amounts but they enable you to choose the number of shares to buy or sell at the pre-determined price.
As already mentioned, the system operates similarly to that of buying shares, the only difference is that paying a premium does not give you ownership rights, but rather the ability to become an owner in future.
You then make predictions on how the values are likely to change and use these to either buy, sell or put options. A call option can bring you a profit if you expect the value of the asset at hand to go up.
It’s better to purchase shares at a strike price that is lower than the expected market price. If you anticipate a decline in the value of the assets, it’s advisable to go for options that will help you make more cash from the difference.
While trading options, you can choose to stick to the buying and selling or you could exercise the other options that are available in your investment plan. Either way, never forget that the goal is to increase profits and minimize losses.
Start Using Options
To be able to make gains out of options trade you need to carefully make predictions of whether the prices of the share will rise or fall. Many times, this requires significant research and professional advice from an authorized brokerage platform.