| Options
Trading Gives you Special Advantages
Whether you decide to be a buyer
of options or an options writer (seller), they can provide a trading
edge.
Option Buyers:
Advantages for option buyers include limited Risk, buying undervalued
options (low volatility), and the ability to combine a bought option
with a written option (option spread) to further reduce risk.
When buying options your risk is limited to the amount paid for the
option (the premium) as well as brokerage. You cannot lose any more than
this. The benefit is being able to choose how much you are prepared to
risk. You can then structure a trade where the potential reward is
several times the premium paid.
Option Writers:
Like an insurance company the option writer receives a premium up front
for taking on a degree of risk. The shorter the time frame that the
option writer holds this risk the more favourable. The process of an
option price falling in value due to the passing of time is called time
decay. It is most noticeable in the last six weeks to expiry. Time decay
is favourable for option writers. Writing options when they are
overpriced can also help to give you a trading edge that’s hard to
beat.
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