Trading has been an attractive way to make money in financial sector. Many investors have made it a full time profession and they work in this area to make money. Trading requires a lot of time and efforts because the investor has to go through all the market trends before buying or selling currencies. Over a period of time, option trading has gained momentum and small pocket investors are getting allured to try their hands. However, it is highly recommended to understand its pros and cons beforehand so that you are able to deal with the risks in a better manner:
Advantages of option trading
Before going further, it is imperative to know why option trading has become popular. Some of the reasons are elaborated below:
- Lower upfront financial commitment
The biggest reason why it has become popular is because it does not require much money to buy the options as compared to shares. That’s why, traders with small amount of money prefer option trading. It has been observed that the cost of spending is 3 to 4% less than the other trading types.
- Fewer risks
It has been observed that the risks are limited to your trading fees and whatever you have paid for the contract. When it is compared to the stocks, the risks are much lower and bearable. That’s why, people prefer trading options to stocks.
- Flexibility for traders
The traders get so many alternatives when it comes to trading options. Some of these are bull call spread, long call, bear put spread, long put, short straddle, long straddle and others. The traders can switch the strategies at any time.
- Higher returns
One of the reasons why people choose option trading is the percentage, which it offers as returns as compared to stocks. It is much higher than what a trader gets in stock trading. In option trading, the investors enjoy higher returns against what they have invested.
It is also important to get familiar with what the drawbacks are. It has been observed that option trading offers limited time for trading. The nature of this trading is short-termed. Some investors may not like to trade for a short time. Option trading is not for everyone. You will need to get an approval from your broker who will closely look at your portfolio first. After carefully assessing all the pros and cons, you should make the right decision about trading.