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Trading Options - An Introduction

Trading options can represent the best as well as the worst of commodities trading. Trading options can allow the investor to make great profits. It can also lead to disastrous results if he or she doesn’t stay with a proven trading plan. No matter what you know, it is always good to have an introduction to trading options.

Definition Of Trading Options
Options are legal agreements that give their buyers the right, not the obligation, to purchase the underlying assets at a future date. Whether it is the NASDAQ 100 or corn futures, trading options allows the investor to invest in these assets with a number of different investment strategies.

Hedging and Speculation
While other reasons also exist, the two main reasons for trading options are hedging and speculation. Each has a different investment philosophy as well as techniques for trading it. Before attempting either strategy, it is important to understand the differences between them and incorporate the one that you want to pursue into your trading rules.

Hedging
When you purchase commodities in an attempt to offset a potential downturn, you are hedge fund investing, or hedging. Hedging in like an insurance policy that protects the investor in the event of a negative price movement for a commodity. By trading options, you are able to reduce the potential downside of your commodity trading while still receiving the full benefits of investing. The beauty of this is that you limited your risk while preserving your profit potential.

Hedging can be done by investing in stable, commodities to offset any potential losses in more speculative endeavors. In addition, it can be done as a separate investment on an existing commodity investment; by having a second, opposing investment, it is possible to minimize any potential losses in the first position.

Speculation
When trading options, speculation is like the opposite of hedging. While hedging is a defensive investing strategy, speculation is purely an offensive one. Speculation can be looked at as a bet by the investor on the price movement. The interesting part of trading commodities in this manner is that not only can you make money when the market goes up, but you can profit when it goes down or even sideways. To be successful you must correctly analyze the direction of the movement as well as the amount it will move.

Given the fact that speculation can be very risky why would you want to do it? Two reasons come to mind. First, you have at your disposal at great deal of versatility. There are many different investment options for trading options at your disposal to employ. Second is leverage; by being able to control 1,000 barrels in one oil futures contract, you have a tremendous profit potential. These reasons combine to make trading options an excellent investment opportunity.

Help with your trading
As with any type of investing, it is important to follow the steps for successful trading, including establishing a trading system and performing technical analysis. While understanding how to trade is critical, putting your plan into action and following it is more important.  With a solid plan and the research to back it up, you substantially improve your odds for success.

Understanding options
Trading options is an excellent way to accumulate wealth. It is important to understand the approach that you wish to take and follow that method, whether you are hedging or speculating. By understanding about trading options you will be able to implement your plans and confidently follow them, giving you the opportunity to be a successful trader in the futures market.



 

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