Options trading refers to the exchange of contracts between a buyer and a seller. The options buyer will have the ability to buy or sell the asset in question at an agreed upon price up to or on a pre-determined date. However, the options buyer is not obligated to do so. Options trading for stocks, forex, commodities, and indices can all be done online. Options trading is typically handled by an online options broker.
Most options trading takes place in several major options exchanges including The American Stock Exchange, The Philadelphia Stock Exchange, The Chicago Board Options Exchange, Boston Options Exchange, International Securities Exchange, and the NYSE Arca.
The buyer of the option, also known as the option holder, can exercise his or her purchased rights at any time within the agreed upon time interval, but he or she is not required to do so. The option seller, also referred to as the option writer, has no choice but to agree with whatever decision the option holder makes.
There are several advantages of options trading. One benefit is that it is possible to make money without investing a large amount of capital. Options trading can give the buyer a lot of leverage. However, options strategies require a lot of planning, as well as a deep understanding of their mechanics.
Another way to use options trading to put yourself at an advantage is through hedging. Though options trading can be used in high risk transactions, it can also be used to hedge a portfolio and limit risk exposure. Options trading is a scalable tool that can benefit any investor. Options trading requires less cash upfront than does the purchase of stocks, so it is considerably safer for investors.
In addition, Fixed-Return-Options, or FRO's, including Binary Options, are an excellent choice for investors wishing to purchase a hedging product with a pre-defined reward and little risk.
In spite of the smaller amount invested, options trading can still yield a high revenue. In fact, it is possible to get very high returns on sharp price movements when you trade out-of-the-money options.
Arguably the best advantage of options trading is its flexibility. An investor can create an investment product specifically tailored to his or her needs through the use of options trading strategies.
With the many advantages of options trading, it is no mystery as to why it has become such a popular tactic among investors.