In this article, you’ll find 6 reasons that make options trading so beneficial. Many experienced traders and institutions primarily trade options because they know the salient features of this financial instrument.
#1 Time is money
There are two ways to trade options. One is to buy options and this is also called “long”, while the other way is to sell options, which is known as “short”. If you sell options and is thus a so-called writer, then you can enjoy the premium income. This premium income is composed of the intrinsic value and the time value. The intrinsic value is easily determined, as it represents the difference between the current value and the selected strike. How the exact calculation made should not be the focus here. Let’s focus on the word “time value”.
As a seller of an option, you get money when time goes by, or in other words, time is money.
The buyer of an option pays that time value and does not get it back, so for the buyer – time costs money, he will lose more and more money if the underlying does not move in the right direction.
For this and other reasons, it is very advantageous to be on the seller side in options trading.
#2 Simple decisions
In options trading, many decisions are very simple and many of these decisions can be made in an objective way by using mathematics and statistics or probability theory. So if you love numbers, you will sooner or later end up in options trading.
You can make decisions based on various key figures that are always available to you. One of the commonly used key figures by options traders are the “Greeks”.The Greeks are being used to evaluate option positions and to determine option sensitivity. The name actually comes from the Greek alphabet and in options trading have a very specific significance.
Of course, you do not have to be a math genius to succeed in options trading because there are plenty of easy strategies.
#3 High hit rate
The hit rate in options trading, especially in sell option, is exceptionally high. Those who follow a trend following strategy in ordinary trading will in most cases have a hit rate around 30%, i. 70% of trades end in a loss, which can often lead to mental difficulties.
- You sell an option
- You are going to buy it back cheaper
If options expire worthlessly you have a big chance to buy it back very cheap or worthless. If you pay attention to the right selection in the right spots and a good management of the positions, then even 80% is not rocket science.
#4 Win when the market is against you
In options trading, you can even make money if the market goes against you. This is possible because parameters such as time value and implied volatility work for one when one sells options. So it may be that you e.g. bet on rising prices in the Apple stock and still earn money when the stock falls slightly, i. There are 3 ways to make money:
- the stock of Apple is rising
- Apple is running sideways
- Apple falls slightly
In traditional trading, on the other hand, you only make money when Apple goes up.
#5 Minimal time and effort
The time required in options trading is relatively low due to the slightly longer holding period. Of course, it depends on the chosen strategy, but a holding period between 10 and 30 days often occurs. This means that the daily effort is kept within limits and options trading is therefore ideal for people with jobs.
#6 Option strategy constructions for every market condition
Last but not least, options allow us an almost unimaginable array of strategies to be used for trading every imaginable scenario.
Simple example: Assuming you think that Apple will either rise sharply or fall sharply and most likely will not stagnate, then you can implement this scenario with options relatively easily.
But it is also much more complex: Let’s say Apple could rise slightly, but will not rise much and will not fall, then you can also map this.
Or one thinks that Apple falls slightly, but not below a certain price, the options can also be very useful.
All this and much more, you can implement ONLY with options.
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