Is Option Trading Safe?

Usually, most of the expert-level investors doubt is option trading safe or not? Or should they invest their amount in the options trading or not? Or Is option trading safer than stock trading? 

Surely, the list of such questions is unstoppable but the relevant answer to them lies in the article.

 

Let’s gather some valuable information to know how safe is option trading. However, before coming to the main topic it is important for you to understand option trading basics. 

Options are a part of Derivatives trading and are basically financial contracts undertaken by two parties- buyer and seller.

Usually, options give the right to purchase or sell a security or an underlying asset at a specific value, known to be Strike Price, in the coming future at a specified time. 

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Let’s undertake it with the help of an example given below-

You wish to buy 10,000 shares at Rs. 28 per share of a company named ABC. For mutual interest, both parties – you and ABC company went into an Options contract. 

By paying a certain premium amount (token money) the contract or the agreement begins with the end date or options expiration date of after two months of the date of the agreement.

Since you were worried that the price may drop, you purchased the option to buy the 10,000 shares at the given amount. 

Now, no matter if the price increases or decreases, you can buy the shares within the given duration (2 months) at Rs. 28 per share. 

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There are different types of options trading which means during the investment process you can take two positions namely Call Option and Put Option.

How Safe is Option Trading?

Now that we know what options are and how options trading works, now we must go ahead with How safe is option trading.

Although no trading is 100% safe and to believe differently is completely silly. Options are safe if you accurately understand how and when to use them. 

As it is said by one of the pioneers of Day Trading-Jesse Livermore “Only The Game, Can Teach You The Game.”

This clarifies that no profits are made in a day but with practice, you can learn how to successfully trade. 

By knowing the Pros and Cons of Option Trading you can make a decision whether it is safe to invest in or not. And to explain why we have given some of the reasons below that perfectly answer How safe is option trading:

• Option Trading Safer than Stocks
• Option Trading Cost Comparison
• Option Trading Returns
• Choice of Option Strategy
• Option Trading Volatility

With benefits like these, you can comprehend why most of the investors opt for options in this sophisticated stock market. 

Let’s understand each of these reasons one-by-one in a detailed way.

1. Option Trading Safer than Stocks

Options trading is known to be less risky than equities if traded well and strategically. It all depends on how and when you use them while investing. 

This makes total sense that you learn and understand the differences between Option Trading Vs Stock Trading in generic terms to start with.

Options are safer than equities since they require a low amount of financial capital or money than equities and definitely safer since they are unaffected by the fatal effects of the market fluctuations.

While goal based investing in equity, one can only opt for Stop-Loss order to protect the position. However, the problem with Stop Loss is that the defined order is executed at or below the limit used in the order.

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Let’s understand with the help of an example-

A Day Trader named Sharan purchased 600 shares of a company named XYZ at Rs. 78 per share. To sell the same and to minimize the investment loss, he puts a Stop-Loss at Rs. 75.

The order becomes a Market order and carries out when the share price reaches Rs. 75 or below. 

Now, say Sharan goes to bed viewing the closing amount of shares as Rs. 79.

The very next morning when he wakes up and switches on his Television, breaking news is displaying that the company has done fraud with respect to its earnings. 

Suddenly, Sharan checks his order status and finds out that the current value per share has dropped to only Rs. 34. So, the first order will be placed at Rs. 34, in a considerable loss.

The stop-order was not able to protect you from this tragic situation. 

If he had opted for Put Option, he would have been saved from this dramatic loss. Unlike Stop-Loss, options give you insurance of 24 hours or seven days a week; something that stop-loss orders cannot do! 

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2. Option Trading Cost Comparison

Options are the kings when it comes to levering power. Through options, an investor can obtain a position at peak cost savings as compared to a stock position.

Let us understand how options help in rising the cost-efficiency of stock, share, or other securities-

Sharan paid Rs. 2,80,000 to purchase 200 shares of a company named XYZ Ltd. costing each share Rs. 140. However, Sharan has to buy two contracts with each having 100 shares at Rs. 65 calls, then the total cost will be around Rs. 13000 (2 contracts x 100 shares x Rs. 65 market price).

However, achieving the same is not easy and is not possible without the right strategy of when and how to pick the right call while positioning. 

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3. Option Trading Returns

Undoubtedly, potential returns through options are relatively higher than stock trading because you will be able to reduce option trading risk through a cautious selection of investment possibilities. 

Secondly, if you are selling an option contract then getting Premiums against a stock or share will also add to your returns. 

Option trading can be made easy and wise by choosing the best indicator for option trading, like the cumulative tick, stochastic oscillators, and many more.

Let us quickly look at the same with the help of an options trading example:

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Priyank wants to sell 200 shares of QAZ company at Rs. 255 each. To achieve the same, he came in an option contract with Mayank.

The contract between these two parties has been fixed at Rs. 248 (strike price) for a month by paying a certain amount known as Premium. 

By the end of the contract, the company experienced a downfall or the stock market expects to face a Bearish condition.

Priyank thought that this is the right time to sell the stock at the given price since it can fall to Rs. 240 per share and can lead to higher losses. 

As Mayank has already paid the Premium, he agreed to purchase the shares at the strike price. The very next day, the stock collapsed to Rs. 240 and Priyank got happy that he opted for Options to protect his funds. 

Finally, Priyank got higher returns in the form of the Premium amount and investment order.

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4. Choice of Option Strategy

Options are quite flexible as they can be changed anytime during the contract validity. Hence, protect you from the losses and dangers.

Options are safer since they are a highly reliable form of hedging. A plethora of risk-management strategies using options contracts can be employed to save oneself from the potential losses of owning a stock or share.

Instead of one investment strategy, an investor can opt for a plethora of strategies that can save him from downfall and can lead him to have stress free trading. Opting for multiple ways while trading to attain the same investment goal can be highly useful. 

You can analyze stock movement, market volatility, and time movement against the underlying asset, using the best indicator for option trading. 

But to grab the best knowledge of these features it is important to choose the app for option trading that makes it easy for you to apply the right strategy.

Choose the stockbroker offering the best trading app and open a demat account to make the maximum profit out of your trade.

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5. Option Trading Volatility

No doubt that options are the best way to protect the order deal from getting loss or profit. When the market and stock prices experience volatility, it can be easily saved with the help of using options. 

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For example- 

A few months ago, Seema had bought 300 shares of a company at Rs. 150 per share. Now, she wants to make profit by selling them in the stock market.

At the same, Ajay wishes to purchase the same at Rs. 180 per share. Both these parties come into an option contract at Rs. 175 per share with an expiry date of a month. 

Later, Seema finds out that the price is going to fall as the market has collapsed. Seema suddenly asks Ajay to purchase the shares at the fixed price within the agreement validity and to which he agrees.  

Just a moment after she had sold the shares of that company, news from a friend came about the shares dropping to Rs. 130 per share. 

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So, just like the above instance, you can save yourself from the market and stock prices ups and downs by choosing Options trading. 

Now, we believe that you can easily answer the question- Is option trading safe or not?

From the aforementioned points, we can clearly examine that they are 100% safe if used wisely during trading and investing. 

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Closing Thoughts

No trading or investment is completely safe and reliable unless and until it is done professionally in a strategic way. 

Before opting for options trading, you must know what exactly is option trading and where to use them while trading. 

Once you have an understanding of the concept you can determine is option trading safe or not and to answer the same in a clear way, we have given five important parameters that answer option trading is safer.

No doubt, options are better and safer than equities especially if you are a Delivery Trader.

Using options while trading in the stock market can also increase your cost-efficiency, however, for the same, you must have a successful strategy.

To save you from the market and stock price fluctuations, nothing is better than Options and also they give you the flexibility of when and how to buy or sell a stock, share, or other securities in the market.

Finally, in our last words we would like to ensure that options are the top risk management strategies and is option trading safe or not totally depends on your knowledge, skills, and techniques used in the stock market.

Thinking to start with Option reading? For that Open a Demat Account, refer to the form below

 

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