When it comes to trading, there are various options to choose from. Each has its own unique set of risks and rewards, which is why traders need to understand what they’re getting themselves into before starting.
Options are a form of derivative trading, which can be used for various purposes such as hedging risk or speculating on price movements. They can be traded on exchanges just like stocks and offer investors a wide range of possibilities for trading strategies.
In addition, as options are derivatives, they are subject to margin requirements. This means that you need to have enough cash or securities in your account to cover the total notional value of the option in case it is exercised. However, options can also be complex and risky, so it is essential to understand the basics before trading them.
The two types of listed options available in Australia
There are two types of listed options available for trade; Call Options and Put Options.
Call Options
Call Options gives the buyer the right, but not the obligation, to purchase the underlying security at a set price (the strike price) on or before a specific date (the expiration date). The seller of a Call Option is obligated to sell the underlying security to the buyer at the strike price if the option is exercised.
Put Options
Put Options give the buyer the right, but not the obligation, to sell the underlying security at a set price (the strike price) on or before a specific date (the expiration date). The seller of a Put Option is obligated to buy the underlying security from the buyer at the strike price if the option is exercised.
Why beginners should consider trading listed options
For beginners, trading listed options can be a viable option. Listed options are standardised contracts that allow traders to buy or sell a specific underlying security at a predetermined price on or before a specific date. These contracts are typically easier to trade than over-the-counter options, and they offer greater transparency and liquidity.
They are traded on regulated exchanges and offer investors a more comprehensive range of investment opportunities than over-the-counter options. Listed options offer investors more liquidity and transparency and are easier to trade than over-the-counter options.
For beginners, listed options provide a simple way to trade the markets, as they only require a small initial investment and have limited risk. They can be used to speculate on the market’s direction or hedge against downside risk.
Listed options are also an excellent way for beginners to get started in the markets, as they offer a low-risk way to trade and can be used to gain exposure to a wide range of assets.
Risks associated with trading listed options
However, beginner traders should be aware that trading listed options come with their own set of risks. For example, the prices of listed options can be more volatile than the underlying security, and they may be more difficult to trade during periods of high volatility.
In addition, beginner traders should be aware of the costs associated with trading options. These costs can include commissions, bid/ask spreads, and the price of the option itself.
Despite these risks and costs, trading listed options can be a viable option for beginner traders looking to gain exposure to the markets with limited capital. By understanding the risks and costs associated with trading options, beginner traders can make more informed decisions about which type of trading is right for them.
Bottom line
It is important to remember that options can be volatile and risky, so always trade with caution and never invest more than you can afford to lose. Overall, trading listed options can be a viable option for beginner traders. However, these traders should be aware of the risks and costs involved, and they should always consult with a reputable and experienced online broker from Saxo Bank before starting.