Options are vehicles to take you where you want to go. As a new trader, do not look to them to tell you where the market is going. You are the driver. Options are simply a tool you can use to exploit your analysis of the market in unique ways.
Most would-be option traders get started with futures, and it can help to view options relative to futures. There are many trade-offs between futures and options. When you understand how options work and know the right strategy for the given time frame, they can help you avoid some of the pitfalls of futures trading. Some of those include implementing a trade with an improper risk/reward outlook, getting stopped out, emotional decisions, poor money management and letting a bad trade become worse.
What are options? Call options are contracts that give the buyer the right, but not the obligation, to buy the underlying market at a stated price (the “strike price”) before or on some date in the future (the “expiration date”). Put options are contracts that give the buyer the right, but not the obligation, to sell the underlying market at a stated price before or on some date in the future. The option seller takes the opposite side of the position. That is, he assumes the obligation to sell or buy the underlying if the strike price is met. The option buyer pays the option seller the option premium for assuming
this
liability.
With active and liquid markets in hundreds of options available today, it is possible for individual investors to buy and sell these contracts in seconds — just as easy and fast as you can with stocks or futures.
However, despite their benefits, unless you know how to use options properly, they will not help you. Indeed, an improperly applied option-based strategy can create greater losses than a futures-based position. With options, you can be “right” the market and still lose money if your position is constructed wrong. However a properly constructed position can allow you to profit even when you are “wrong” the market. The proper strategy and the discipline to apply it are a big part of being successful.
WHO SHOULD USE OPTIONS?
Small or large accounts can benefit from option trading, but an account under $25,000 has more reason to use them. Many markets can move $4,000 in a week per one futures contract, which would be too big a percentage of risk for a small account. Options give an advantage to controlling risk that futures alone do not have.