What are Options?
Options give you the opportunity to buy or sell an asset before a certain expiry date. This means that you can speculate on the market and decide whether you want to risk it. There are two types of options called calls and puts. By buying a call you will be able to buy the asset named at a set price. If you buy a put then you will be able to sell the asset. The provider of the option is called the writer and they will sell or buy assets at a guaranteed price for which you will pay them a premium.
There are a lot of advantages to doing this. If you have a portfolio and one of your assets starts falling, you can put an option on it that it would rise and then offset the fall. It is easy to trade and the fees are low which means it can be a way to make money without such high costs as other types of trading. It also gives you time to decide what you want to do as you can buy an option and then wait until it almost expires before you decide on whether you think the trade is worth it. So you can speculate without actually having to trade it you can just buy a call or a put and then sell it for a profit if the market moves in the right direction.
Of course there are risks though. You will only have a certain time to decide on what to do with your option or else it will become worthless. If a buyer chooses to buy early there could be a risk of being forced to sell the asset at a discount to the current market price. The options value will reduce the closer it comes to the expiry time. You may have to provide extra security to prove that you can afford the option and this could mean that you could mean that you put more money in than you intended which could lead to a greater loss should the option not do as well as you had hoped.
How to Profit From Options
In order to make a profit you will need to make sure that you make the right estimate as to whether an option will increase or decrease in value. The returns on this can be much better than just trading the stock. By buying a call option you could gain limitless amounts of money depending on how much it goes up in value. With a put option the value can only fall to zero and so there is a limit on how much you can gain. However, if you buy an option and the price does not change you may decide not to buy. This means that you will lose the fee that you paid for the option. There is also a risk that there will not be options available to buy and sell. To buy you will need someone to have sold some and to sell you will need to have a willing buyer. This means that there are some circumstances where you may the fee of paying for options and then not having the opportunity to make any money from them.