For many new traders, options trading is overwhelming for most and confusing to the rest. However, it is a fairly straightforward process as long as you are able to understand some key aspects.

If you look at the average investor profile, you will likely see several different asset classes. Some of these asset classes may be mutual funds, ETFs or even stocks and bonds.

Options are another type of asset class, and when investors use them correctly, options can offer as many advantages that EFTs, stocks, and bonds are not able to on their own.

Understanding Options

Options are simply contracts, and these contracts give the bearer of the contract the right to buy or sell an amount of an underlying asset at a price that has been predetermined. The bearer must buy or sell the amount at or before it expires. Investors can choose to purchase options with their brokerage investment accounts just like they would any other asset.

These types of assets are very powerful because they have the ability to greatly improve an investor’s portfolio, and they are able to do this in several ways:

• Protection
• Additional income
• Leverage

There are some situations that occur when an investor would be able to utilize an option scenario to help them get closer to their goal. For example, options can often be used against a decreasing stock market in order to restrict downside losses. In this type of scenario, the options would act as a hedge.

Options can also be used for speculative trading such as betting on which direction a stock will go.

Options Are Great For Independent Investors

Many options traders are typically self-directed investors. This means that they do not work with a financial advisor directly. As an independent investor, they are in complete control of the decisions that are made during trading. However, that does not mean that they are alone when they are trading.

There are lots of online communities that independent option traders can join so they can discuss topics of interest such as strategies for option trading and the current outlook of the market.

New Investors Usually Start With Stock Options

Stock options are options that are based on equities. This is usually the first introduction to investors who are new to options trading. These options are on the NYSE and other exchanges and they are listed as quotes. Investors should make sure that they thoroughly understand the ins and outs of stock options quotes before they make their first investment. The two things that you must understand are the expiration date and the cost.

What Are The Different Options?

There are only two types of traditional options contracts. One is a put and the other is a call.

A ‘put’ option allows the investor the right to sell shares of certain security within a certain time frame and for a certain amount.

A ‘call’ option allows the investor to purchase shares of a certain security at a specific price and within a certain time frame.

It is important to keep in mind that for both of these options contracts, the investor is under no obligation to buy or sell.

Derivatives

Options are just one piece of a much bigger securities group that is known as derivatives. The price of a derivative is dependent on how much something else costs.

For example, ketchup is a derivative made from tomatoes and lemonade is a derivative of lemons. Along the same lines, stock options are a derivative of a stock.

Options are then derivatives of financial securities. This means that their value is depending on another asset’s price. Examples of other derivatives include:

– Swaps
– Futures
– Calls
– Puts
– Forwards
– Securities (backed by mortgages)

Options Trading Is About Risk

If you enjoy probability and statistics, then you will likely enjoy volatility and options trading. Investors only really need to focus on two types of volatility, and they are implied volatility and historical volatility.

Implied volatility is trading based on what the market is currently ‘implying’ how volatile the stock will be later and over the option contract’s life.

Historical volatility is representative of the past markers and how much the price of the stock fluctuated daily over a period of one year.

Just as with other investors, it is important the option traders understand their financial goals. The way you think about and handle your money will directly impact your success with options trading.

Forex is also known as FX trading or foreign exchange and is one of the most popularly traded markets in the world, with around $5 trillion traded daily. Generally, FX trading enables you to predict price fluctuations in the global currency market over time. You can trade currencies and buy and sell one against the other.

Usually, forex traders seek to gain from the changes in currency strengths, speculating on if one currency’s value, such as the US dollar, will go up or down with regards to another, like the pound sterling. As mentioned earlier, the exchange market is highly dynamic and liquid. With this high market liquidity, it implies that prices can fluctuate rapidly with short-term events and news, creating a variety of trading opportunities for retail FX traders.

How Does Forex Trading Work?

Generally, forex is quoted in pairs that are in terms of a particular currency vs another. For instance, USD/GBP (US dollar vs sterling), the change in the exchange rate between these two currencies is the profit that the trader looks to make. “The base,” which is the first currency, is the one that you speculate will go up or down against “the quote,” which is the second currency.

When trading currencies, you can predict on the market’s future direction, taking either a short (sell) or long (buy) position based on if you think the value of the currency will go up or down. Usually, the thing that triggers the forex price movements is the currencies either strengthening in value (appreciation) or weakening in value (depreciation).

Buying-Going long

If you decide to trade currencies, it would be a smart idea to buy a currency pair if you thought that the specific base currency would appreciate with respect to the counter currency, or you speculate the weakening of the quote currency in relation to the base currency.

If you believed, therefore, that the Euro will actually strengthen compared to the US dollar, then it would be smarter to opt for a buy trade or go long. Consequently, for every pip, or point that the Euro rises compared to the dollar, you’ll make some profit. Similarly, don’t forget that if the Euro’s price weakens against the USD, you will lose for every pip it falls.

Selling

You could, alternatively, sell a currency pair if you thought that the base currency’s value would weaken with respect to the counter currency. So, if you believe the Euro’s value will decrease compared to the US Dollar, you would instead place a sell trade. You will then make a profit for each pip the Euro falls with respect to the US Dollar. In case the Euro’s value rises against the dollar, you would lose for every pip it rises.

Leveraged Forex Trading

Forex is generally a margined product, which implies that you can place a small amount of money to manage a relatively larger amount. That also means that you can leverage your money even further, but losses will also be magnified. You should, therefore, control your risk accordingly. So, make sure that you’re fully aware of the dangers of leveraged trading.

Which Currency Pairs?

Traditionally, commonly traded currency pairs are divided into three main groups in terms of liquidity and popularity: majors, minors, and exotics. Read on to learn more.

Majors

They’re the most actively traded (most liquid currencies) consisting of approximately 85% of the overall trading volume in the FX markets. In general, the spreads for these are tighter than less traded minor currency pairs.

Minors

They’re not heavily traded like the major currencies; therefore, they often fluctuate. Minor currency pairs also have a wider spread because of the medium-sized liquidity in the market, in comparison to major currency pairs.

Exotics

They’re the rarely traded currency pairs. Exotic currency pairs are illiquid because of the low volumes of trade and tend to be relatively expensive to trade with wider spreads. A majority of traders tend to think that exotic currency pairs have much higher risk profiles than commonly traded currency pairs.

Who Is Forex Trading Suitable for?

FX trading is an excellent option for those investors who want the chance to trade on a market that’ always open while lowering the trading costs and potentially gaining from fluctuating markets. It contains, however, huge risks to your investment and isn’t suitable for everyone. It’s prudent to start trading on a demo account and read reviews first before trying it with your money.