Advantages and Disadvantages of Options

The Advantages of Trading Options are:

1) Options trading offers flexibility to the buyers as well as to the sellers. It can be used in a wide variety of strategies in order to make a profit from the ever changing market.

2) Financial leverage is another advantage of trading options. Investors can employ considerable leverage without committing to a trade.

3) They are less risky as compared to other types of trading instruments. Huge losses can be avoided as risk is limited to the option premium, so the maximum loss is the price you paid to purchase it (known as premium).

4) Hedging using options enables investors to manage risk and reduce potential risk.

The Disadvantages of Options Trading:

1) The cost of trading options can be higher on a percentage basis than trading the underlying stocks.

2) Options are so complex that it requires a close observation and maintenance.

3) The short selling of options is accompanied by unlimited risk.

4) Options will expire at a fixed point in time and lead to most trading expire worthless. This is applied to the traders that purchase options.

* Next: Advantages and Disadvantages of Stock Trading