Your investment portfolio comprises of diverse asset classes to make it well-balanced. This lets you enjoy the best of what is available. An average portfolio is likely to include stocks, mutual funds, ETFs, and bonds. But as an investor, you may be deprived of certain advantages if you depend entirely on stocks and bonds for wealth generation. This is where options trading becomes relevant.
Just like futures, options trading is also a contract that allows but doesn’t necessitate, an investor to buy securities, ETFs or index funds at a pre-determined rate after completing a set tenure. It basically involves selling and purchasing options. Few terms that you must know are ‘call option’ and ‘put option’.
A call option enables you to acquire/buy shares sometime in the future while a put option permits you to sell shares sometime in the future.
Options are derivative securities widely known to be lower risk in comparison to futures contract. This is because options give you the choice to exit from the contracts at any given time. Having said that, it also signals the fact that options do not give you the kind of ownership in a company like stocks.
Other benefits of options trading include the low initial cost required to buy one (premium and trading fee). Purchasing shares can be expensive when compared to investing in options. It can also be looked upon as a source of recurring income and adding more leverage and protection to one’s portfolio. You can also sell your options contract to another investor for a higher price before it expires.
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