While choosing a Financial Instrument one needs to take utmost care about all the upside and downside of that instrument. There are several financial instruments available in the market today, a trader can consider investing in stocks, commodity, currency, mutual funds, exchange traded funds, futures or options. In this article we will try and draw your attention towards Options as an investment type.

Option is a contract between the buyer and seller, which gives an owner of the contract a right, but no obligation, to either buy or sell an underlying asset at a predefined price before the contract end date. Below are some of the advantage and disadvantages of Options Investing.

Advantages:

• Leverage is one of the top advantages of investing in options. While investing in options a trader is just investing in the premium which is usually not more than 10% of the value of the asset.
• Option gives a right and there is no obligation to buy or sell the asset at a future date, therefore if a trader finds the current market price not in favor of his options position then he/she can forget about the premium amount paid and choose not to exercise their rights.
• There are two types of options Calls and Puts to take advantage of bullish and bearish market trends respectively.
• A trader can use options to hedge their portfolio’s upside as well as downside risks.

Disadvantages:

• There is a learning curve involved for trading options, so if one follows their own beliefs and blindly invest in options then he/she should be ready to face the consequences of heavy losses. Hence it’s better to know the fundamentals before jumping in to options investing.
• If you are a trader who is actually interested in the underlying asset and you belong to the seller’s side of call or put option then there is a chance that the buyer of an option may choose not to exercise his/her right and you end up not getting the underlying asset and just the premium.

So trader should keep these aspects of option in mind before choosing a right instrument for their portfolio.

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