Disclaimer: Trading call and put options can be a risky business. Options Pie offers educational and informative content about options trading and of course, the associated risks and benefits of trading options; however, it never offers any financial advice. In fact, OptionsPie.com focuses on helping traders learn to hedge and manage risks in order to greatly reduce the chances of overall losses and increase the chance of long-term profits. Risk management options strategies can help traders enjoy using their money to earn more money while understanding and managing risks.
For the impatient, we’ve outlined the main risks and benefits of trading options in a handy table below.
|Options Trading Risks||Options Trading Benefits|
|Without hedging, traders could suffer exposure to unlimited losses when selling options.||Options buying requires smaller cash outlays than stock buying.|
|Options trading relies on predicting price movements.||Investors have time to see what the market does before the expiration date.|
|If used, margin requirements may add to costs.||Options can be used to hedge against unanticipated price movements in underlying stocks or even other options.|
As noted on NerdWallet, trading options offers the main benefit of having the ability of controlling underlying stocks with much less money than it would take to buy the actual securities. Also, only certain risky options trades expose traders to unlimited losses. For just a few examples:
- Buying puts and buying calls gives traders the right to sell or buy if the market reaches the strike price. That means that the trader limits possible losses to the price of the actual options.
- For option sellers, covered calls and cash secured puts means that the trader has managed their risk in case their purchased options get assigned. If the stock hits its strike price, the trader already either has the stocks to sell or cash to buy an assignment. On contrast, naked calls and puts can put options traders in a rough spot in case they get assigned and either need to supply stock or cash.
- Some safe trading strategies also involve buying multiple options at the same time to hedge. As an example, the trader may use the main trade to potentially generate profits; however, they will buy another kind of option that will limit or eliminate the risks or even turn the trade profitable. That’s what people mean when they say that savvy investors can make money on the way up or the way down!
In summary, market traders always assume some risks. In fact, options were introduced in order to help stock investors manage the risks that they assumed from buying stocks. No doubt, trading options carries its own risks. That’s why it’s so important to dig deeply into various option trading strategies, overall market conditions, and of course, the fundamentals and history of the underlying stocks.
Obviously, options traders need to develop risk management skills. Attention to risk management may limit potential profits but also control risks.