Advantages and Disadvantages
Please note - Trading or investing in options, future derivative and in stocks are individual preferences so we advice to everyone to go through all advantages and disadvantages and then take the decisions.

The Advantages of Options
Many investors and traders have avoided options, believing them to be sophisticated and, difficult to understand. Many more have had bad initial experiences with options because they have not taken proper training in how to use them. The improper use of options can lead to major problems.

Finally, words like "risky" or "dangerous" have been incorrectly attached to options by the financial media in the market. However, it is important for the individual investor to get both sides of the story before making a decision about the value of options.

In following section both advantages and disadvantages are explained.
There are four major advantages that options may give an investor/trader.

1. Big Leverage
Options provide big leverage power.
The following example will show how option provides benefit and leverage.
Suppose if you are expecting the HDFC stock which is currently trading at Rs 1700 (the current price while writing this note)     will go to 1800 or above in next week or in next 15 days and decided to buy 50 shares which will cost you Rs 85,000.

On other note if you feel that investing so much of money is not possible at this time then you can plan to buy one lot of     HDFC Call option (options are bought in lot and one HDFC lot consist of 150 shares) of strike price 1800 would cost of     around Rs 10,5 00 (approximately).

So this is how the options provide leverage.

So going forward if the HDFC stock price rises even to Rs 1750 you are making Rs 50 per stock and you have 150 shares     (one lot of call option) so you are making profit of Rs 7500 by investing Rs 10,500.
2. Limited Losses
There are situations in which buying options is riskier than owning equities, but there are also times when options can be used to reduce risk. It really depends on how you use them.
Options can be less risky for investors because they require less financial commitment than stocks.

Now let's see how options provide limited losses as compared to unlimited losses in stocks.

In case of stocks
For example, let's take above HDFC stock, say you bought it at Rs 1700.
Now say you go to bed with the stock having closed at Rs 1750 and the next morning, when you wake up and hear that there is breaking bad news on your stock and the stock opens down around Rs 300 or even down which will considerable loss to you.

In case of Future derivative
Suppose if you bought one lot of future derivative at certain price and if the price starts falling then the losses are unlimited.

In case of options
Whether you buy call option or put option the losses are limited. In case of options the maximum loss is the price you paid to buy it (it is called as premium).
It doesn’t matter how much the stock price falls, your loss is the amount you paid to buy the options.
You can even minimize these losses in options by hedging. Hegding means buy put, if you would have already bought call and vice versa. (How to do hedging is explained in our next sections)

3. Higher Potential Returns
The returns in options is higher as compared to investment done in either in stock or in future derivative.
As you can easily come to know in above example of HDFC mentioned under heading “Big leverage”.
The second way for higher returns in option is the term called Delta.
Delta is the figure in percentage which is higher for “in the money call options” and lower for “out of money options”.
Delta indicates the percentage change with respect to change in the underlying.
This will be explained in our next sections.

4. Lots of ways to trade in options
The final major advantage of options is that they offer more investment alternatives to make money as well as to reduce risk.
Options are very flexible tool. There are many ways to use options to recreate other positions.
You can buy options to make profit from either stock movement or from Nifty movement.
You can trade on options when you know the direction and even when you are not aware of the specific direction.
You can buy options to make profits from your stocks you already have in your portfolio.
You can buy stocks to minimize the losses in your future derivative position.
And many more which are explained in other sections.
The Disadvantages of Options
As options are having great advantages and provides various ways to make money and minimize losses there are also few disavantages which are mentioned below,
1. Costs
The costs of trading options taking into consideration the brokerges rates are significantly higher on a percentage basis than trading the underlying stock or future derivative, and these costs can drastically eat into profits.
So choosing low brokerage rates is very imporant.

2. Liquidity
With the vast array of different strike prices available, some will suffer from very low liquidity making trading difficult.
So choosing right options strike price is very imporant.

3. Complexity
Options are very complex to understand and require a great deal of observation and understanding to make profits. Trading or investing in options is not as easy as we do in stocks or in future derivative.
So study the basics and all teminoology, stratetgies and techniques about options.

4. Time factor
The time-sensitive nature of options leads to the result that most options expire worthless. This only applies to those traders who buying options while on the other side short sellers of options collect the premium (make profit) so due to time factor in options, most of the time, short sellers make prodit in options.

5. Unlimited Risk
The short selling of options contains unlimited risk. (which you will come to know as you proceed reading our other option articles).
On the other hand buying options contains limited risk as you tend to loose only the amount you paid in buying the option irrespective of how much the stock price falls.
Welcome to Indian Share Market
buy stock,buy back shares,buy and sell,best buy stocks,buy or sell sugar stocks,buy sell,online stock,buying selling,shares to buy,purchase,sell share,buy back,in India,prices,back,trading,buying,how to online prices,sharemarket sugar companies industries,news sugar industries shares tips,trading,how to invest in,investment in,learn share market price rates
investment,financial investment,companies,finance,funds,market,investment online services,return on investment,best,bond,bonds,corporate,bse India,bse live,market,bse trading,high return,high yield,advice,growth,information,opportunities,securities,strategy,long term trading,shares,stocks,stock market,bse sensex,value,delivery based trade,delivery based trading,delivery trade,delivery trading,short term,mid term,how to invest,investing,how to make money,internet business,financial planning,online business,nifty,nse India,nse live,online money making profit,investing online,make money on internet,quick,margin trading,opportunity,fund,program,nse trading,sensex,nifty,nse market
Your Desire to Earn
Custom Search
Following are terms to search more information
Disclaimer: Information presented on this site is a guide only. It may not necessarily be correct and is not intended to be taken as financial advice nor has it been prepared with regard to the individual investment needs and objectives or financial situation of any particular person. Stock quotes are believed to be accurate and correctly dated, but does not warrant or guarantee their accuracy or date. takes no responsibility for any investment decisions based on recommendations provided on website.
Financial contents like Technical charts, historical charts and quotes are taken from NSE and Yahoo sites.
Note - All quotes are delayed by 15 minutes and unless specified.

Google Adsense Ads are posted on every page of the website so visitors clicking on Ads and going to those links and carrying any financial deal is not at all related to and any financial deal should be done on their own sole responsibility.
Please read at before using any material or advice given at
Copyright © 2012 All Rights Reserved
option trading
options trading
options trade
option trading stock
online option trading
option trade
stock options trading
futures options trading
how to trade options
online options trading
option trading software
options trading software
options trading strategies
currency options trading
day trading options
forex options trading
option trading strategies
option trading system
futures and options trading
options trading software
options trading system
commodity option trading
options paper trading
options trading strategy
commodity options trading
learn options trading
options trading course
nifty option trading
options trading education
option trading education
options trading systems
options trading training
call option trading
day trade options
future and option trading
options trading strategies
options and futures
options information
options market
options on futures
options pricing
options quotes
options strategies
options strategy
options trade
options trader
options trading
put options
Stocks for InvestmentReadersOur TargetDemat Account OpeningFree Subscription|
HomeFree Technical ChartsFree Advice Contact usSuggestions/Complaints|