It's important to understand the risks associated with options trading and how to deal with them before you start trading. Some people might be nervous about starting a career in options trading, but you'll be surprised at how easy it is. You'll find that different trading strategies will work for different individuals, which means flexibility is key. So, before you learn about day trading futures let us discuss options trading and the myths associated with it.
What is Options Trading?
The option is a type of derivative security. Derivatives are securities whose price wholly depends on the price of another financial instrument in some way. In options trading, an option refers to the right – but not obligation – to buy or sell an underlying asset at a predetermined price on or before a certain date. A call option gives you the right to buy, and a put option gives you the right to sell. Options trading can appear very complex; many people believe there are popular myths surrounding options trading, and we will look at the most popular myths here today…
#1 Myth- Only Experts Can Make Money Through Options Trading
Options trading has become a very attractive method for investing. It gives you more freedom than other traditional methods while also providing a healthy dose of excitement; instead of waiting three months, you would agree with many other investment routes. The funny thing is that some people feel an overwhelming need to point this out to potential investors. No one needs to tell you why options trading is popular! Options trading isn't the be-all-end-all of investments, but it can give you valuable experience and help you branch out if you find yourself feeling overwhelmed by stocks or mutual funds.
#2 Myth- Options Are Too Risky & Complicated
A common misconception about options trading is that you can trade options without limitation to risk. Although many strategies used in stock options trading are synonymous with equity trades, stocks and options are two different things and should be treated as such. Many operatively based investment strategies can be just as risky – if not more so – than buying and selling shares outright.
#3 Myth- Only Options Sellers Make Money
Shocking, right? This is another common misconception related to options trading. In reality, both option sellers and buyers can make money from options trades. If only sellers made a profit, there would be no buyers, and there would be no market without buyers. As Mark Wolfinger wrote: “Premium buying is the less-traveled road, but it can be profitable for the well-prepared and disciplined trader who knows what he or she is doing.” It is not better or worse than premium-selling – it's just an entirely different route to making profits in the stock market, which does not come with guarantees like all things in life!
#4 Myth- Options are The Cause of Stock Market Crashes
It's true when you read about things like the stock market crashing; it sounds like it's something that happens magically. But the truth is – it's more so greed that drives investors to behave in a certain way in such situations and not the leveraged product itself – which allows for leverage in these cases! As mentioned earlier regarding derivatives, they are investment products that either offer or take away an amount of risk depending on how much leverage they allow. Any investment product can be inherently more or less risky than others. This depends on how much leverage one loses or gains concerning the underlying asset without a contract.
#5 Myth- You are Better Off Just Buying & Holding
Many traders believe a buy & hold strategy is ineffective, but there are always exceptions. Traders need to be proactive to manage their trades. This will add value to your portfolio. You can use either cash-covered PUTs or cash-covered CALLs, for example, to achieve that without having to hold the position for very long. Once you develop the expertise and knowledge of option concepts, you can discover new potential strategies that enhance a portfolio even more effectively.
So, to conclude, options trading for beginners can be difficult, but once you get enough knowledge and experience, you'll efficiently protect and enhance your portfolio. Learn day trading online.
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