Apr 01 2017
Financial derivatives nowadays come at a extremely developed level. We have the more commonly used stocks and bond and the mutual funds as well. But, because the financial market is much more advanced than it used to be, investors also have the opportunity to invest in options. What are options, you ask? Let us define them first and how useful they can be a bit later. So, options are a financial derivative as we mentioned first, but they offer the contract holder or buyer the right to buy or sell a financial asset at a price previously agreed upon, during a certain period of time. But what makes options special is that the contract holder only has the right, but not the obligation to do so.
This is the most important feature that make options such a versatile tool in financial trading. Traders often use options to reduce inherent and other risks that may arise from certain market instabilities. For example, traders often use options to reduce their losses from a declining stock market.
But, options are not 100% safe and are not always the right choice. They come with a disclaimer stating that options involve risks and are speculative, which means that your investment is not always safe with option trading. But, don’t let this and the word “derivative” scare you. They can be reasonably safe, if handled the right way.
On the other hand, if you know exactly how options work, since they are a complex financial derivative, you can gain a substantial advantage in the financial market. You can use their speculative nature to your gain, if this is your style. But, you can also use options, but avoid their speculative nature. This means you can use options with higher risks, but also higher profits, and you can use safer options, that come with a lower profit. Regardless of what your choice is, it is very important to know how options really work, because you may be investing in companies that rely strongly on options, so it is very important to have a clear view of your investments. Most companies use options these days anyway, whether to reduce the risks of exchange transactions or in any other way. There is no possibility to avoid them really.