Option trading is not for most beginners. However, it is important that everyone understand the basics of option trading before you actually open an online trading account and start trading options. You must always be aware of the risks involved with any investment or trade. Today is more about why people might choose to venture into option trading? Most option trading is done for speculation and hedging.
Option Trading for the Purpose of Speculation
Big risk translates to big rewards; therefore, the first reason a person may delve into option trading is speculation. Speculation when done correctly could lead unimaginable wealth, but you could not imagine just how much work goes into being correct and taking the risk at the right moment time to achieve some success. If anyone could predict the exact moment when stock will stop rising or falling and timing the market with absolute precision then please point him or her out. However, no one does that and beware of anyone who tells you they can. Using options for speculation purposes, it can be quite risky; therefore, it is not for those who are not experienced. When you have to predict exactly when to get into the trade and will there be enough of a stock movement to push your option trade in the direction of your prediction and knowing precisely when to get out of it, it is asking for a bit too much. When you guess incorrectly, you may lose your pants and the shirt off your back. Hey, some people have some success with speculation, but you have been warned of the risk.
Option Trading for the Purpose of Hedging
The other reason why a person may choose to use option trading is hedging. When thinking of hedging with option trades, you should think of an insurance policy. You can protect against big losses for certain stock that you have predicted go up or down in price but does not move as you have predicted. Therefore, hedging is like an insurance policy that will help reduce losses when stock does not do as the investor has guessed.