There is always some amount of risk involved in trading. But investors still go ahead with it because of the benefits they get from it.
If you are wondering why investors get involved with complicated options when they have the option to sell or buy the underlying equity, then we are here to answer your question.
Well, there is not just one, but many reasons behind it. To answer your question, we have laid down the following pointers.
- An investor has the chance to gain profit on the changing price of equity in the market. They can gain profit without actually investing the money to buy the equity. The cost of buying a premium is a fraction of the cost of investing in equity.
- When an investor decides to invest in options flow and not in equity he is making arrangements to earn more.
- Another good thing is that there is very limited risk in buying options.
Now the question is why wouldn’t all investors invest in options? This is because this can be less attractive to some investors for the following reasons.
- The problem with Options is that they are very time-sensitive. The contract for options lasts for just a few months. In this case, the buyer can lose his whole investment even with the right prediction. This can happen if the price change does not happen in the given period In other words, before the expiry of the option.
- Another reason could be is that some investors prefer a long term investment which will give them an ongoing income.
- Options are also less tangible in comparison to other investments. Stocks come with certificates, while an option is just a “book-entry”. It doesn’t have any certificate of ownership which can be a problem for many investors.
To sum it up, options don’t make the best fit for every investor. They can be fine for some, while others may prefer other types of investment. Options can indeed give you great profits, but at the same time, it is risky.