What Is Options Trading?

Options are a type of financial derivatives that are used for trading in the financial markets. These derivatives offer the options to buy or sell the underlying asset in the market. They are not like futures contracts where the buyer or seller is obligated to complete the action.

There are two types of options that are:

• Call Options
• Put Options

In a call option, the owner of the options has the right to buy whereas, a put option gives the trader the right to sell. The timeframe and price of a contract are predetermined by both parties. They are needed to be exercised within the required time frame.

How Options Trading Works?

Options give traders the right to buy or sell a particular asset and not the obligation. These contracts are exercised online between two parties. The buyer or seller of options also has to pay a premium for the rights of the contract.

A call option has a bearish seller and a bullish buyer. On the other hand, a put option has a bullish seller and a bearish buyer. Options trading means speculating on the prices of the trading assets. Investors or traders also use options to hedge the risk associated with any trade.

Options trading can be done with a variety of trading assets such as stocks, currencies, commodities, cryptocurrencies, and many more. Let us understand the working of call and put options.

How to Use Call Options?

Traders who expect a rise in the prices of securities buy call options because these options give them the right to buy at a lower price. The price of buying is predetermined and traders can easily buy trading assets at that price.

On the other hand, a seller of the call option expects the prices to fall. Traders make profits if the prediction goes according to them in the market. Traders need to execute the contract before the expiration date of the contract.

How to Use Put Options?

A put option gives the right to a trader to sell a particular quantity of securities at a predetermined price. A buyer of a put option expects a fall in the prices of securities. However, a seller of a put option expects a rise in the price of trading assets.

Traders need to sell their securities before the expiry of the contract. A premium might need to be paid during the purchase of the contract.

Benefits of Options Trading

Options trading has various advantages due to which traders are attracted towards it. These are the benefits of this trading style:

• It requires a lesser initial investment as compared to directly investing in trading instruments.
• The price of a contract is also low if we compare it from the price of assets: that is the premium and the trading fee.
• Options trading provides diversification to the portfolio of the trader by adding extra income and leverage.
• Traders can buy or sell assets at a frozen price which is fixed at the starting of the contract.
• This type of trading is flexible as traders can exercise various strategies before the expiry of the contract.
• These contracts can be bought and sold from one holder to another in the middle at a higher price.

Top Brokers for Options Trading

There are several brokers but how do you find the best broker for yourself? Traders need to do a little research to find the best broker that fits their needs. Some of the qualities of brokers are:

• It should be regulated by leading authorities.
• It should offer a demo account for all the traders.
• The trading leverage should be high to earn more profits.
• High-quality educational material should be provided by the broker.
• Good analytical and market research tools should be provided.
• The platform must be safe and secure to ensure traders’ data security.
• It should render dedicated customer support to all the traders.
• It should not charge much on the transactions made by a trader.
• The trading platform should be customizable and friendly.
• The number of trading assets offered by the broker should be higher.

If we keep in mind these qualities of a broker, here are a couple of brokers that fit these requirements. They work on the MT4 trading platform that is highly customizable and offers easy access to the traders. The brokers are:

• Brokereo
• TradedWell

Traders can compare a different broker and consider these brokers also. Then choose the best one that fits your requirements.

The Bottom Line

Options trading is a type of financial derivatives, traders can diversify their portfolio using these contracts. There are two different types of options that are call and put options according to the situation of the market. Traders need to find the best brokers for themselves because there are various benefits of options trading.