Spread Trading: Advantages and Disadvantages

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Flexibility - With options you can trade any type of potential move in the underlying security. Think the shares might double within a week - perhaps you believe the shares will hardly move over the next month - you can even use them to protect your downside. This leverage can be used intelligently. For example, options can be used to take advantages and disadvantages of trading in futures and options position in a stock using a small down payment Directional choice - Obviously related to flexibility.

Options are good tools for trading upward and downward and even sideways price movements Reduce risk - Futures and CFDs also offer leverage but the potential losses are often open-ended. Many option strategies allow similar leveraged profit potential but with limited risk Sell options against shares that you already own - This is called a advantages and disadvantages of trading in futures and options call strategy and it's a way to earn extra income from shares you already hold Can be low risk - Many option strategies involve low risk or are designed to limit risk.

Can be high risk - A common misconception with options is that they are high risk. Sure, they can be as high risk as you want but many option strategies are designed to reduce risk. Leverage is great when making money but horrible when losing as it means all losses are multiplied. Most traders who suffer losses in options do so because they use too much leverage Complex - It's theoretically possible to teach anyone how to buy and sell shares and conduct general business in the stockmarket within a few hours.

But this cannot be done with options. A proper, solid but basic option education will take advantages and disadvantages of trading in futures and options months at a minimum.

To be a real pro will take at least 1 year. Do not forget this Volume - Some options don't trade that much which in turn means there's little liquidity. With spreads like that it's almost impossible to make money. As a good rule of thumb, first check out the average daily volume and if it's low don't get involved with those options Computers normally have to be used - Not always but it's hard to discount their usefulness when using options.

If you're not that competent with computers and struggle with Spreadsheet programs like Excel that's going to be a disadvantage Wasting assets - Normally a disadvantage to most people new to options because they'll often start off buying them. But options lose value over time so not only do you have to be right on direction but also with your timing.

Direction is often not that hard to predict, but timing is a different story altogether Unlimited risk - If you sell an option short your risk is often unlimited. Short calls have unlimited risks attached theoretically there's no limit to how high a share can rise.

The risk on a short put is limited as the underlying cannot fall below zero. But if the underlying were to fall sharply the losses on short puts can be horrendous. Read more in the Options section: How options are priced. Option volatility - It's critical. Using Options to hedge. The importance of timing. How to Learn Spread betting and Prosper. Options - Home page. For my personal trading I like to use Core Spread Got to love their ultra low bid-offer spreads.

All recommendations and comments are provided for general interest only and should not be construed as advice. Professional advice should always be sought before buying or investing in any financial product. The price of securities and any income from them can go down as well as up. Past performance of a security or market is not necessarily indicative of future trends.

Any advantages and disadvantages of trading in futures and options and recommendations on LearnMoney.

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The advantages and disadvantages of options Options are a very unique investment vehicle so it is important to learn the unique characteristics of options before you decide to trade them. Options allow you to employ considerable leverage. This is an advantage to disciplined traders who know how to use leverage.

Some strategies, like buying options, allows you to have unlimited upside with limited downside. Options allow you to create unique strategies to take advantage of different characteristics of the market - like volatility and time decay. Options allow you to take a position with very low capital requirements. Many individual stock options don't have much volume at all.

The fact that each optionable stock will have options trading at different strike prices and expirations means that the particular option you are trading will be very low volume unless it is one of the most popular stocks or stock indexes. This lower liquidity won't matter much to a small trader that is trading just 10 contracts though. Options tend to have higher spreads because of the lack of liquidity. This means it will cost you more in indirect costs when doing an option trade because you will be giving up the spread when you trade.

Options trades will cost you more in commission per dollar invested. These commissions may be even higher for spreads where you have to pay commissions for both sides of the spread. Options are very complicated to beginners. Most beginners, and even some advanced investors, think they understand them when they don't. When buying options you lose the time value of the options as you hold them. There are no exceptions to this rule. Options can be a pain when it is harder to get quotes or other standard analytical information like the implied volatility.

Options not available for all stocks. Although options are available on a good number of stocks, this still limits the number of possibilities available to you. Trade options at OptionsHouse.