Understanding Options Trading

Nowadays, many investors’ portfolios include investments such as mutual funds, bonds, etc. But the variety of securities you can have at your disposal does not end here. Another type of security, called an option, presents a world of opportunity to sophisticated investors.
Option trading allows its purchaser to buy and sell assets at a certain price within a specified time. The power of options lies in their versatility. With two basic types of option trading, call and put, where one can purchase and sell an asset respectively, they can be speculative or conservative as you want. In addition to known factors such as market price and expiration date, Implied Volatility IV is another important factor for options trading which is used in calculating an option’s premium. It increases when the market is bearish and decreases when the market is bullish. Options are very sensitive to changes in implied volatility, which can be measured by Vega.

Despite what anybody tells you, option trading involves careful examination of changes in investment market. As a buyer of seller of options, you should be able to make exact prediction about increase or decrease in implied volatility, examine buying strategies when volatility is low or selling strategies when IV is high. You can use the power of option trading for future benefits.

An option provides the owner the right to buy or sell an asset at a pre-determined price on a certain date. With options trading, you can leverage on your trading limit by taking buy/sell or call/put positions as per your convenience. Before participating in options trading, you need to know about implied volatility IV, which is the estimated volatility of a security’s cost, because bad transition in IV can create losses.

In times of great market uncertainty, protective options can be purchased or sold in order to cough up a fraction of the capital needed by you. By investing in options, the trader or investor can profit no matter which direction the market heads.