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is option trading worth it: yes; just like bonds, mutual funds, futures, options, etc. Option trading can actually make one rich instantly. Though it involves risk, that is to say that one can as well lose money. However most investors stick with mutual funds. Thus there is a fee, but it takes all the management worries away. Therefore some investors like to go for stocks and bonds to make it big. However some will equally invest in options. This is because, to those that can trade It perfectly. Option trading is simplemented by most good broker.
What is Option?
In defining option, there exist more than one asset to choose from. You are to make a choice in between multiple choice. However it’s popularly defined as a contracts that give you the right, but not the obligation, to buy or sell a security. That’s to say, you purchase the option to buy (or sell) the security. When making this choice, you consider time of entry and time of exit in option trading.
How does option trading work
We believe that by now we have carefully answered your question is option trading worth it. Now let’s see how it works. Investors use options for two primary reasons: to speculate and to hedge risk. Rational investors realize there is no “sure thing,” as every investment incurs at least some risk.
Hedging is like buying insurance. It is protection against unforeseen events, but you hope you never have to use it. Should a stock take an unforeseen turn, holding an option opposite of your position will help to limit your losses.
If you’d like to read more in-depth information about options, check out these definitions:
Call Option — Option to purchase the underlying asset.
Put Option — Option to sell the underlying asset.
Options Contract — The agreement between the writer and the buyer.
Expiration Date — The last day an options contract can be exercised.
Strike Price — The pre-determined price the underlying asset can be bought/sold for.
Intrinsic Value — The current value of the option’s underlying asset.
Time Value — The additional amount that traders are willing to pay for an option.
Vanilla Option — A normal option with no special features, terms or conditions.
Exotic Option — Any option with a complex structure or payoff calculation.
Example on how to trade options
For example, in option trading, Let’s assume you bought 10,000 shares of XYZ stock for $5 per share. And the contract is supposed to last for one month.
And luckily to you XYZ Company releases better than expected earnings and says that they have invented a machine that will solve world hunger. However The stock shoots from $5 per share to $50 per share. You exercise your option and you spend $500,000 to buy $5,000,000 worth of the stock. You turn around and sell it for a $4,495,000 profit ($5 million – $500,000 – $5,000).
Now let’s suppose the opposite happens. XYZ Company declares bankruptcy and goes under. The stock drops from $5 per share to $0. You can let your option expire worthless, and you are only out the $5,000.