Options Traders

As the name suggests, options traders buy and sell options in the capital market. It’s often referred to as online options trading, as most of these trades are conducted through online brokerages. Options trading is different from stock trading in several ways. Stock traders accrue a profit when a stock they own increases in value and lose money when the stock decreases. Options traders, on the other hand, must successfully predict the direction in which the stock will move AND the amount of time in which it will make that adjustment. There is also a premium built in; the implied volatility (IV) indicates how much other call and put traders expect that stock to move as well.

Options traders enjoy the benefit of committing less capital to an investment than their stock trading counterparts. They can also make profits which are as high or even higher, so the potential return is incredible.

Reasons to trade stock options

If a market is volatile, options traders can make a killing if they are able to make accurate predictions. In these situations, options traders can avoid stock market frustrations. They tend to utilize their options trading to buy stocks for a fraction of the cost of buying the stock directly. They also have the potential to make money in any type of market. They can also take advantage of highly liquid exchange-traded funds (ETFs) as a means of trading multiple option strategies. Options traders routinely capitalize on volatility swings around events like the release of quarterly earnings reports. Beyond that, they are able to generate profit in spite of interest rate fluctuations, inflation, deflation, political events, or other factors.

Options traders make use of the following:

1. Leverage: leveraging creates potential for bigger gains through the use of a smaller amount of capital.

2. Hedging: options traders can completely hedge long-term stock positions for a very low cost. They do this by establishing a position in the options market as a means of offsetting an exposure to price fluctuations in general stock shares. In this way, options on a stock are a bit like an insurance policy on that investment.

3. Lower commissions: options traders enjoy the benefits of low trading costs through many online brokerages.

4. Limited risk: options trading keeps minimal risk, and traders maintain the full control over the risk they take on.

Conclusion

Options are some of the most versatile trading instruments in existence. They offer a high-leverage approach to trading and the potential to restrict the overall risk of a trade. When used properly, options can be extremely rewarding. (For more, see the Options Basics Tutorial)