Fast Money with Options Trading Majority of People hear this to Jumpstart with Option Trading
This is the most overrated statement and leads to the wrong perception about options trading.
The option is an Insurance. It’s a Hedging Tool.
I love this definition by Investopedia on Insurance.
Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. Insurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party.
The scope of the options is to indemnity. And not anything else. Indemnity is to bring back the person to the original position after a loss.
EARNING MONEY WITH OPTION TRADING
There are three basic ways in which one can trade in options first is Hedging your Stock position with options secondly buying future position and hedging it with options third and the final one is taking a complete hedged position in options.
Option are very popular for hedging or insurance. Large corporations buy options and treat them as cheap insurance. An index option can hedge your entire portfolio of stocks. There are many ways for hedging your stock position. Buying a put can protect your downside of the stock or the index. And Buying a call option can give your unlimited returns on the upside.
HEDGING YOUR FUTURE POSITION
Options can also be used to hedge your stock or index future positions. Many investors prefer to hold future position over the stock position. Hedging your futures position is almost similar to hedging your stock position except for the fact that the futures nature is Mark to Market.
Apart from managing the positions, one has to also manage the margin money. Which is a challenging task when your portfolio is very large.
HEDGED OPTION STRATEGY
Taking a position on both the sides of the trade is an option hedged strategy. Now the strategy may involve multiple calls, multiples put or multiple calls and puts. Taking multiple sides of the options ensure that you have secured your portfolio position. The hedged option strategy possibilities are endless. Many people focus on scalping options which is the riskiest thing to do. Occasionally you can make money by scalping but to make money consistently is very difficult.
Hope this article bring your clarity with options trading.
These little changes in your styles on options trading would not create much difference in your routine trading but definitely, the impact of this in long term would be impactful. Nevertheless, you know anyone who is trading option in a very wrong way share this article with him so that it changes his perspective.
Any person who does options trading from any of the above options strategies would be eligible to earn money.
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