What is option trading?
An option is like a contract in that it gives rights to the buyer, but not the duty, to sell or buy a primary asset at a particular value on or before a certain date. Options are sold and bought at a value called a premium which is the sum a buyer pays to the seller for the rights for an option. The premium does not remain constant but changes with the market. Which leave us to conclude that an option is similar to bonds and stocks, meaning it is a security as well. Option trading has the following advantages.
Merits of trading options
Efficient, orderly and liquid market
Consistent option contracts will enable you to have an efficient, orderly and liquid market option trading.
Options are awfully adaptable investment tools. Because of this unique reward and risk structure, they can be in a number of combinations with other options or other financial tools to pursue protection and profits.
An option allows you to set the value for a specific time period at which you can sell shares at a premium or buy them at a discount, which is merely a small percentage of what you would pay to acquire the equity completely. This allows you to leverage your investment power at the same time increasing your potential to gain from the price movements.
Limited risk for buyer
Different from other investments which have the risks that are boundless, options trading will offer you the buyer a defined risk. You will not lose more than the initial buying price of the option; the premium. Because you have the rights to sell or buy the securities at a specific date and price, the option will be worthless if the conditions proved by the contract are not met before the expiry date.