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Should I add Options trading to my portfolio?

Should I add Options trading to my portfolio?
Asked by
Jane Goodwin categorie-icon time-icon6 months ago
1 Answer Answer Question

Justin Freeman
Answered time-icon6 months ago

Given that some of the broker platforms offer literally thousands of markets, and that some traders might make a living out of trading just one market, for example USDJPY, it’s obvious that Options trading is something that a lot of people can do without. They are after all a derivative instrument and slightly different in nature to a lot of other instruments that are available to trade. They do also take a little bit of getting used to.

Not all brokers support Options trading but the larger brokers such as City Index and IG Index, do provide markets. This ties in with options trading to some extent being seen as a supplementary income source to already established portfolios. They can also be useful tools for hedging positions already on your book.

If you’re looking to mitigate general market risk then options might be for you. Holding Puts below current levels will cover you against downside risk and holding Calls above market levels means you’ll profit if markets rally. This might work for you if you’re feeling the rest of your portfolio is imbalanced to either the up-side or down-side. The cost-benefit analysis you’d need to run would involve comparing what it would cost to acquire and hold the options compared to the cost of doing the same in another instrument such as a CFD. You’d also need to factor in other costs such as any overnight financing rates that might apply.

Source: City Index

Trading options in their own right is also possible. The research notes that are available on things such as collars and straddles make interesting reading and might also give you a way to capitalize on any market moves you are anticipating might happen. (https://www.fool.com/investing/2016/09/21/how-a-straddle-option-can-make-you-money-no-matter.aspx and http://www.theoptionsguide.com/the-collar-strategy.aspx)

Given that options trading grew out of the need for improved risk management the irony is that they can of course be very risky to trade. The seller of the option does collect premium from the buyer but is the party liable for paying out at expiry date. Be careful, because that could wipe out your account.

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