What are the best future option strategies
Trade options or prefer to trade CFDs?
In this article, we're going to walk you through how to start options trading as a beginner. We'll also teach you the basics of options trading and give you several examples of how to trade options. We'll show the pros and cons of options trading and discuss what other trading instruments there are that might be suitable for your trading strategy, such as CFDs.
What are options
Options are used to speculate on the development of an underlying (base value). Such underlyings can be stocks, government bonds, commodities or others. Options are classed as derivatives because their price depends on the price of the underlying asset (from the Latin: derivare = to derive). Options trading goes back to ancient Greece, where speculations were already being made on the yield of the olive harvest. You can trade options in most markets today, such as the forex, stocks, commodities, bonds, or index markets.
One of the most popular forms of options trading is stock options trading. When trading options, you acquire the right, but not the obligation, to buy or sell the underlying asset, in this case the share, at a set price before or on a date in the future. Buying options is thus similar to other forms of speculation, in which you bet on how the price of an underlying asset will develop. However, because an options trade has an expiration date, the options trader must consider both how long a price will move in the desired direction and how high the associated volatility is.
But first we want to address the two options in options trading, the put option and the call option
Trading options - this is how it works
The first thing you need to know when trading options as a beginner is what your options are. These are called put options and call options. It is important to understand that there are two sides to any option trade, the buyer of the option and the seller of the option. Although you can buy options in most financial markets, let's limit ourselves to stock options for now.
Basic knowledge of options: what is a put option?
With a put option, the buyer acquires the right, but not the obligation, to sell a share at a previously agreed strike price and expiration date. The trader bets on a falling share price, so he is going short, so to speak
Let's look at an example of this. In it, the Tesla share is quoted at a price of 360 US dollars, which is also the strike price for this share. The price of a put option at this strike price is $ 6 per option. The expiration date is in three months. The put option has 100 shares, so it costs 100 shares x 1 put x $ 6 = $ 600. This price is also known as the option price or option premium. The trader's breakeven price is the strike price minus the price of the put option. In this example: $ 360 - $ 6 = $ 354.
If Tesla's stock price is between $ 354 and $ 360 on the option's expiration date, the option has some value but will not generate any profit. If the share price were above the strike price of $ 360, the option would be worthless and the trader would lose what he paid for the put option: $ 600. Any stock price below $ 354 would make the options trader profitable.
Basic knowledge of options: what is a call option?
Acquiring a call option gives the buyer the right, but not the obligation, to buy a company's stock at a predetermined price (also known as a strike price) and date. The seller of the call option is obliged to do so. If the buyer exercises his subscription right, the seller is obliged to sell him the share at the previously determined price.
As an example, suppose a trader bought a call option for Apple on a strike price of $ 180 that is due in six weeks. This means that the buyer of the call option has the right to exercise the option at a price of $ 180. If the value of the stock should rise to $ 200 in the agreed period, the trader will get a good deal if he exercises the option: he buys the stock for $ 180 even though it is already worth $ 200, and the seller of the call option will be in the obligation to sell the stock for $ 180, regardless of how much it is really worth. However, should Apple shares fall to $ 150 in the agreed period, the buyer has no obligation to execute the option deal. In that case, the buyer would let the option expire and the seller would keep his stock.
Options trading strategies
Options are negotiable securities, which means that very few will reach their expiration date and result in an exchange of securities. This is because most traders view options as a vehicle to speculate on the price movement of the underlying asset. However, not all options relate to the price movement of their underlying asset because the value of an option decreases over time, which gives it characteristics that fundamentally differentiate options trading from buying stocks.
This is one of the many reasons why beginners in the options business tend to lose money. It is therefore essential for them to first know about the so-called "Greeks" ("Greeks"): Delta, Vega, Gamma and Theta. Behind it are statistical values that measure the risk when trading options.
- delta: This value measures the sensitivity of an option to changes in the price of the underlying asset. Basically, the number of points is shown here by which the option price moves as expected for each point of change in the underlying. A change in the underlying value by one point will not always result in a change in the value of the option by one point. The delta values range between 0 and 1 for call options and between 0 and -1 for put options.
- Vega: This value measures the sensitivity of an option to the volatility of the underlying asset. It shows the amount of change in the price of the option in the event of a 1% change in the volatility of the underlying.
- gamma: This value measures the sensitivity of the delta value to changes in the price of the underlying.
- Theta: This value measures the time value of an option. The closer the option gets to its expiration date, the more it can lose value. Theta measures the theoretical dollar value an option loses each day
As is easy to see, there are many factors that need to be considered when trading options - besides the analysis you need to find a profitable trade, the analysis of potential future price movements and potential entry and exit spots. The complexity of trading options is one of the reasons many traders turn to other instruments to speculate in the financial markets, such as CFDs (Contracts for Difference).
Why options traders should consider trading CFDs
Like an option, a CFD is a financial derivative that allows the trader to bet on rising and falling prices. A CFD is essentially a contract between a buyer and a seller. It states that the seller pays the buyer the difference between the current rate and the rate at the end of the contract.
A broker usually acts as the seller. With a CFD, the trader simply pays the difference between the opening and closing price of the underlying asset. In contrast to options trading, where a movement in the underlying asset by one point does not always result in a corresponding movement in the option, the CFD remains much closer to the movement in the underlying asset. The following table shows other important differences between option and CFD trading:
Expiration Dates: The course could develop to your advantage after your option expires, which you would then no longer benefit from
No expiration dates
Options are not available for all stocks and instruments
Traders can trade in over 3,000 markets
Option sellers can suffer unlimited losses
Traders can use a stop loss and other measures to protect against volatility
The value of options decreases over time
No loss of time
Options traders must have at least $ 2,000 in their account and day traders must have $ 25,000
CFD traders can start trading at Admiral Markets for as little as $ 200
CFD trading is also characterized by individual features:
- Use a Lever: Thanks to the leverage, retail clients can trade up to 30 times more than is in their account, depending on the instrument. For professional clients, the maximum leverage is 1: 500.
- Trading in all directions: You can go short or long on any market and make an opposite bet to hedge.
- Hold trades for as long as you want: With CFDs you can get in or out of the market in seconds. You can also hold your positions for days, weeks and months.
- Advanced risk management tools: Use Stop Loss and Take Profit to minimize your risk.
- Access to global markets such as Forex, Stock CFDs, Index CFDs, Commodity CFDs, Bond CFDs, and Crypto CFDs.
How to start CFD trading today
Step 1: the trading platform
If you want to start trading CFDs, you should first look for the right trading platform. In addition to access to global markets, factors such as stability, user-friendliness and accessibility are particularly important. For CFD trading you can use the following trading platforms, which are among the most popular worldwide:
In contrast to niche platforms that are used for options trading, the MetaTrader platforms are precisely tailored to the needs of a CFD trader. This includes broader support offers and diverse features that are available to the trader.
Step 2: your trading methodology
CFD trading is a simple form of speculation in financial markets. However, the huge number of potential trades in so many markets, some of which are open 24/7, can make it difficult to identify the best risk-reward ratios. So your strategy should include the following:
- routine: At what time do you look at the markets every day?
- style: What kind of trader are you? Day traders, scalpers, swing traders or a long-term investor?
- Markets: Which markets do you want to focus on? Forex, stocks, commodities, indices or others?
- methodology: How do you intend to make your trading decisions? When do you want to buy and sell?
You may not yet know the answer to one or more of these questions. The best way to learn to trade is to do it practically. For this purpose, you should first open a free demo account in which you can test your strategies completely risk-free.
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This material does not contain and should not be construed as investment advice, investment recommendation, offer or solicitation of any type of transaction in financial instruments. Please be aware that articles like this are not reliable predictions of current or future developments, as circumstances can change at any time. Before making any type of investment, you should seek the advice of an independent financial advisor to ensure that you have a proper understanding and assessment of the risks involved.
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