The great utility of options trading

A financial option is a purchase contract with which both complex and simple strategies can be carried out, as well as used as a hedge for simply bullish or bearish positions of stocks or other financial products (commodities, interest rates, etc.) both long as short term.

Purchase of a Call. Go up in value and go up in profits

If, on the other hand, we think that a security is going to go down in the future, what we do is buy a put. Buying a put gives us an assured sale price at a future date. If we are correct with the price drops of this value, the put premium will rise and we will obtain certain benefits since we have the right to sell the shares at a price higher than the current one. If we make a mistake and the underlying goes up, our losses are limited only to the money we have paid to buy the put. We cannot lose more. The value can go up without limits and our losses are limited only to what we have paid for buying the put option.

Brief description of a financial option

A financial option is a contract of sale. In general, the contract is equivalent to 100 shares for each contract, but this may vary depending on the underlying or market to which its value is derived, be it a commodity, index, future, currency, value, interest rate, etc. The price is agreed in advance and for a certain date in the future.

Some sort of digital options like binary options are versions of simplified options that can be used for very short term speculation, with average returns of 75% to over 500% for the most speculative contracts. You can see some excellent examples of binary options and an explanation of how it works here.

Option trading is very similar to buying shares of a security because we think it is going to go up, or when we sell short (sell without having the securities in the portfolio) shares of a security because we think it is going to go down, with financial options we can also bet due to rises or falls in values. But instead of buying or selling said shares, what we do is buy a contract that allows us, but does not oblige us, to carry out a series of possible actions that include:

  • Buy or sell shares of a security (or other underlying) at an agreed price (strike price) until a maximum future date (expiration or expiration date)
  • Sell ​​our options contract to another trader before the contract expires.
  • Let the contract expire without any additional financial obligation.

With financial options we can carry out both complex and simple strategies, as well as use them as hedges for simply bullish or bearish positions of stocks or other financial products (raw materials, interest rates, etc.) both long and short term.

Why Trade options?

As we have discussed above, investors and traders can trade options for different reasons, but the main advantages of trading with them are:

  • Buying options is much cheaper than buying or selling stock (stocks). We get more leverage with our money
  • With options we can ‘buy time’ to see the development of a market / value that worries us, especially in times of uncertainty and turbulence.
  • Options can protect us from market downturns, securing our initial purchase price. Excellent coverage

For example, if we think that a security is going to trend upward, we can buy a call that gives us a guaranteed purchase price at a future date. If we succeed with the price increases of this security, the premium of the call will rise and success is assured since we have the right to buy the shares at a lower price than the current one. If we make a mistake and the value falls, our losses are simply limited to the money we have spent to buy the call. Nothing more. The value can drop to zero and our losses are limited only to the price of the call.

Purchase of a Call. Go up in value and go up in profits. If, on the other hand, we think that a security is going to go down in the future, what we do is buy a put. Buying a put gives us an assured sale price at a future date. If we are correct with the price drops of this value, the put premium will rise and we will obtain certain benefits since we have the right to sell the shares at a price higher than the current one. If we make a mistake and the underlying goes up, our losses are limited only to the money we have paid to buy the put. We cannot lose more. The value can go up without limits and our losses are limited only to what we have paid for buying the put option.