Good Reasons to Trade Vanilla Options
If you are wondering if you can just simply buy and sell options to make money, the answer is yes you can! These easyMarkets lessons start by teaching you the most simple ‘buy’ strategies in which to trade market movements. Entering the financial markets could only be achieved a few decades ago through the stock market by talking over the phone with two or three individuals simultaneously, and only if your bank account’s balance was large enough to sustain that type of investing. But modern day trading doesn’t have to be like this and can be made from the comfort of your sofa.
Many people think of the stock market when they think of options. However, the foreign exchange or currency market also offers the opportunity to trade vanilla (or forex) options and our lessons will focus mostly on these unique derivatives. Since vanilla options are traded over-the-counter (OTC), traders can choose the specific market rate and date on which an option is to be valid, then receive a quote stating the premium they must pay to obtain the option.
Why trade options?
You may be wondering, “Why trade an option and not the underlying asset?” Good question, because…
- When buying an option, your downside risk is limited to the option premium (the amount you paid to purchase the option).
- When buying an option, you have unlimited profit potential.
- You can pay less money up front than for a forex spot position.
- You can build strategies to trade many different market outlooks, such as a strategy profiting from a move in either direction.
- Options can be used to insure an already open spot deal (or a portfolio of deals), to trap profit, and/or limit risk.
Good news, if you didn’t understand any of these terms, they will be explained in the next articles on Put and Call options!