The Complete 2020 Guide for Beginners to Options Trading

In this case, we sell the rights to the underlying asset that we own. Selling Covered Calls can be considered an ideal strategy for those who want to create additional returns on shares that are already in their portfolio. If you are just beginning to study option trading, this strategy will be a good and, most importantly, a fairly safe option. It is also used to sell shares that we no longer need, despite a certain upside potential shortly. You are selling shares at the current price, but with a short grace period and additional commission for you.
 
Risks: The price of the shares you own may fall notably. In this case, the buyer has the right to withdraw from the deal, and you remain the owners of the cheaper shares, which you expected to sell at a higher price.

Another variant is to buy options. In this case, you acquire the right, and you may withdraw from the deal.
 
This is a popular strategy among speculators, who are good at predicting medium-term movements on the market of the selected asset. The advantage of the strategy is the fact that you do not have to guess the price at the time of the expiration of the option. Even with a slight movement in the right direction, the reward from your options increases and you can safely sell it in the market with profit.
 
Your risk here is to lose the reward paid if our analysis of the price movement of the selected asset is wrong.

Besides speculative purposes, you can buy Put options to protect existing open long positions in the stock market. For example, if you predict that stocks in your portfolio may become cheaper in the next two or three months, you can buy Put options as fall insurance.
 
If the price of your shares does indeed fall, the value of your option will increase, partially compensating for the losses. If the price of the shares does rise, you will simply reject the right to sell your shares at the agreed price on the expiration date. In doing so, you will only lose the reward, which in this case should be regarded as standard insurance.
 
Now let`s have a look at the risks associated with options trading.
Anyone who buys an option, even if he is a dummy, i.e. the right to sell or buy the underlying asset, to play on the difference in prices or values, risks are essentially limited only by the size of the reward. In case of an unfavorable combination of circumstances, the right is simply not exercised; it is closed either after the expiry of the term or by entering into an offset deal. So, it turns out that the profit is not limited by anything and losses are of a fixed size.
 
Everything is quite different for the writer (seller), that is, the second party. The profit is limited by the size of the reward and possibly by some additional value, in case the contract was covered and the assets were acquired at more favorable prices. Losses are not limited by anything. At a minimum, there will be a loss of margin in the exercise of an option exercised as a guarantee. At the maximum, this is the loss of all funds in the client's account.
 
Such imbalance, asymmetry in risks can seriously shake the confidence in this financial instrument for beginners, but it all depends on the strategy and experience of the investor. Weighted thought-out options trading can be an excellent factor for diversifying your investment portfolio, a way to gain additional profit, given the high liquidity of the instrument.

We are one of the fastest growing Forex Brokers in the Market. Trade with PaxForex to get the full Forex Trading experience which is based on...

• The Reliability on all Assets in the Market
• Trusted Worldwide for over a Decade
• Live Multi-Lingual Online Support 24/5

You might also be interested

NASDAQ 100 Index Forecast Fundamental Analysis | US / Equity Index

How to Benefit/Trade on US Elections

Columbus Day in the USA | Changes in Trading Schedule