Even though ASX option trading in Australia is commonly used financial product these days, it can be complex and highly risky in nature. On the other hand, good option trading strategies have the potential to make investing safer. ASX options are perhaps the most flexible trading securities out there and are also exceptional and versatile products, which investors, both novice and expert, can use to scale down risk and beef up profits.
Hazards with Options Trading
Greed – It is the biggest threat, which is entirely human in origin and is not inherently associated with options trading. Many people begin to invest in ASX options simply because they see huge profit in them and dream of “getting rich quickly.” Of course, there are huge profits and chances of getting rich quickly with options trading, but right trading strategies are essential for that. Unfortunately, sentiments of greed often tempt people to forsake trading strategies and begin gambling.
Trading on Margin – Selling ASX options entails providing a margin, just in case if a trade becomes a loser. Oftentimes, this margin condition does not equal the total cost that an investor has to bear should his or her trade gets trashed (which can happen pretty swiftly). This could without doubt, leave the investor in debt to his or her broker.
Loss of Investment Capital –For investors who have invested in shares and stocks, a slump in the market can set them back a small percentage, which usually is below 10% (unless if the market crashes seriously). During options trading, despite trading significantly smaller amounts of money, it is possible to lose 100% of the amount that the investors have put into the trade.
How to Play Safe with Options Trading
Adhere to a Trading Plan – First create a good trading plan through study and research, and hone it by practicing using a stock market simulator (paper trading). During paper trading, make sure that you have traded for a number of times so that you are able to experience several trades going against you—it is the best way that helps you discover how to read the signs of danger. Finally, adhere to your trading plan.
Proper Technical Analysis – Over analysis often results in a bad trade. The fundamentals for technical analysis for options trading in Australia can be different from those of stocks. Additionally, each options trading strategy features its own set of analysis techniques. Once you have opted for a good strategy, find out exactly which kind of analysis is called for, and stick with that.
Moderate Capital Allocation – Do not over allocate your capital. Most ASX options advisors advise that you do not commit anything in excess of 2% of your funds to any trade. Adhering to this advice makes it possible to take in a number of losses while still able to retain some trading power. If you write (sell) options, it is wise to leave about 15-20% of your funds readily available. It will allow you to “buy” yourself out of a bad trade just before it becomes a substantial margin liability.
Options trading in Australia offers a number of rewards that a wise investor can exploit. At the least, they offer investors an easy way of lowering the buying price of a share, or of hedging against loss. Options are often a source of secure, consistent revenue. Before diving into options trading, find out about various strategies, ensure to implement the proper technical analysis, and do not be inspired by greed.
If you want expert ASX options advice or want to learn about options trading in Australia, get in touch with experienced and professional advisors at Total Options.