Options often seem like something too complicated and incomprehensible. We understand! But let’s be honest: it is indeed a complicated topic, especially if you are just starting to learn about financial markets. However, with the right approach, everyone can understand the options.
At JustMarkets, we believe that even the most complex financial instruments can be explained in simple words. Options give traders flexibility: They allow them to make money in different market periods and manage risks effectively. This is a useful tool for both beginners and experienced investors.
If you are just starting out in trading, we recommend that you familiarize yourself with the basic concepts in our JustMarkets blog. This will help you understand the basics faster and feel more confident.
In this article, we will calmly and step-by-step understand:
- What are options, and how do they work?
- What are their features and advantages?
- What strategies are most often used by traders?
- How to minimize risks and use options wisely?
Make yourself comfortable and let’s understand complex things in simple language together with JustMarkets.
What Is Options Trading?
Even the most complex financial instruments can be explained in simple terms. Options are just from this category. At first glance, everything seems confusing, but if you break it down, it becomes much clearer.
So, options are special contracts that give you the right (exactly the right, not the obligation) to buy or sell a certain asset at a pre-agreed price and within a certain period of time. Why is this convenient? Because you can lock in a favorable price in advance and not worry about market fluctuations.
Let’s start from the beginning.
To avoid confusion, let’s remember the two main varieties of options:
- A call option (or simply “call”) gives you the right to buy an asset.
- A Put option (or “put”) gives you the right to sell an asset.
The key idea is that you don’t have to exercise an option if market conditions don’t suit you. By paying a small commission (premium) for the contract, you gain flexibility in your decision-making.
What is a call option?
A call option gives you the opportunity to buy an asset at a predetermined price (called the strike price). If the market price of the asset rises above the strike price, great! You can buy at a lower price and make a profit. And if the price doesn’t rise, no big deal. You simply don’t exercise the option, losing only the premium you paid.
By the way, you can not only buy but also sell call options. Then you commit to sell the asset at the strike price if the buyer decides to exercise his right. Remember that the seller bears certain risks.
What is a put option?
A put option works in reverse. It gives you the right to sell the asset at the strike price. If the price of the asset falls below the strike price, you can sell at a higher price and make a profit.
As with call options, you can be both the buyer and the seller of the option. By selling a put option, you commit to buying the asset at the agreed price if the buyer decides to exercise the contract.
What is leverage in options trading?
Now for the important point of leverage. Options, like CFDs, allow you to use leverage: you control a large trade by investing a relatively small amount of money. This gives you a chance to increase your profits, but the risks also increase. Therefore, you should be careful with leverage, especially at the start.
By trading options via CFDs, as you can do on the JustMarkets platform, you speculate on the change in the value of the option premium without buying the asset itself. This lowers your entry threshold and allows you the flexibility to manage your trades.
How can I hedge with options?
Options are a great tool for hedging, i.e. protecting your investment from unwanted market movements.
Need an example? Let’s say you own stock in a company, but you’re worried that the price of the stock might fall. Then you buy a put option on that stock. If the price does go down, you can sell them at a higher strike price and recoup your losses.
Conversely, if the price goes up, you simply don’t use the option and lose only its value. But your main investment will remain on the plus side.
Options are a way to make money on price movements or to insure your risks. It is important to remember that they are a right, not an obligation. And most importantly, always study all the details of the contract and do not rush to make decisions.
How to Trade Options?
So, we have already understood what options are and how they work. Now it’s time to move on to the most interesting part – how to trade them in practice. Don’t worry if things still seem complicated right now. We’ll figure it out together, step by step, and you’ll understand exactly how everything works.
Let’s understand the terms
Before you open a trade, let’s familiarize ourselves with the basic words that you’re sure to encounter during the trading process:
- Premium: The price you pay for an option.
- Strike price: The price at which you can buy or sell the asset in the option.
- Expiration date: The expiration date of the option.
- Call option: gives the right to buy an asset.
- A Put option: gives the right to sell an asset.
- In the money: An option that makes a profit.
- Out of the money: an option that is not yet profitable.
Now that we have the terms out of the way, let’s move on.
What determines the price of an option?
The option price, or premium, depends on many factors. Firstly, it depends on how far the price of the underlying asset is from the strike price. Volatility is also important: the more the market fluctuates, the higher the premium. The longer the option expiration time, the higher the value because the price of the asset has more chances to approach the desired levels.
Choosing an options trading strategy
It all depends on your goals. If you want to insure your investment, buying a put option is a good choice. If you count on the growth of the asset, a call option is suitable. And if you want to earn income from price fluctuations, you can explore combined strategies. We at JustMarkets always advise you to first understand the basic scenarios and then move on to more complex combinations.
Choosing a market for trading
Options are available in many markets, from currencies and commodities to stocks and cryptocurrencies. If you are just starting out, choose instruments that you are already familiar with. This will make it easier for you to analyze the market and make informed decisions. And when you feel confident, you can gradually expand the list of assets.
Determining the term of the trade
Here is a simple rule: the shorter the term of the option, the higher the risks and the faster you need to make decisions. If you want to follow the market leisurely, choose a longer term. This will give you time to analyze and take more informed action.
Buy or Sell?
For beginners, we advise starting by buying options so that you limit your risk to the premium only. Selling options requires a deeper understanding of the market because potential losses can be much higher.
Monitor your open positionEven if you have opened a trade and everything seems to be going according to plan, don’t forget to monitor the situation. The market is changing, news is constantly coming out, and it is important to react to these changes in a timely manner. Use the analysis tools in MetaTrader to keep the situation under control.
By the way, if you haven’t installed a trading terminal yet, it’s time to do it:
MetaTrader 4 for PC
MetaTrader 5 for PC
And remember: the better you understand the market, the more effective you will be in using even the simplest trading signals and strategies.
Basic Options Trading Strategies
When you are just starting to understand options, all these strategies may seem confusing, to say the least. But believe me, if you break them down calmly on your fingers, it becomes much easier. In options trading, there are both basic approaches that are suitable even for beginners and advanced combinations for more experienced traders. At JustMarkets, we advise you to always start with the simple ones and then make them more complicated when you feel confident.
Basic strategies
So, let’s start with the basics.
One of the most understandable is the covered call. Imagine: you already own shares in a company, and you additionally sell a call option on those shares. If the stock price doesn’t rise above a certain level, you simply receive a premium on the sale of the option. And if the price does rise, you can sell the stock at a more favorable price and still make a profit. A great way to generate additional income from your existing portfolio.
Another basic strategy is the protective put. This is like insurance for your investment. You buy a put option on a stock you own. If the market goes down, you offset the loss with the profit on the option. If the market rises perfectly, you just lose a small amount of premium for the option, but the stock rises in value.
Another interesting tactic is the straddle or, to put it simply, the overlapping position. The idea is to buy both a call and a put option at the same time with the same conditions. If the market goes sharply in either direction, you earn. If it stays where it is, your losses are limited only by the premiums paid.
Advanced Strategies
Now it’s a little more complicated.
There is a strategy called “condor”. Sounds impressive, right? In fact, it is a combination of several options with different strike prices. It allows you to profit in a calm market when the price of the underlying asset remains within a certain range.
Another advanced tactic is the butterfly. Here you work with three levels of strike prices. The goal is to catch the moment when the price of the underlying asset is closer to the average strike price. This strategy is suitable for those who like a conservative approach and do not want to sit at the terminal all day long.
And, of course, spread strategies. The idea is to buy and sell options of the same class at the same time but with different conditions: strike prices or expiration dates. This allows you to control risks and understand in advance what the maximum profit and loss will be.
Strategies for generating income
If your goal is regular income, there are several tactics for this purpose as well.
One of the popular ones is writing a covered call. You are selling a call option on a stock that you already own. Even if the stock price stays where it is, you will make money on the premium you receive.
Another strategy is selling cash-secured put options. The point is to be prepared to buy the stock at the strike price if the option is exercised. If the stock price does not fall to that level, you simply collect the premium.
Profit and risk
Of course, options are not magic but a tool with an understandable logic.
Potential profit depends directly on market volatility and the term of the option. The higher the volatility and the longer the time to expiration, the higher the option premium. But you should not forget about the risks. If you buy an option, your maximum loss is limited by the premium. If you sell an option, the potential losses can be greater, especially if the strategy is complex and requires precise execution.
One more thing. Time works against the option holder. The closer the expiration date, the faster its value “melts away” if the market does not move in the right direction.
Pros and Cons of Trading Options
When you are just starting to learn about options trading, it may seem that there is nothing but complexity. But in fact, options offer a lot of interesting opportunities. The main thing is to understand how to use them correctly and where the risks are hidden. Let’s find out together.
Advantages of trading options
Let’s start, of course, with the pleasant things.
Flexibility
Options allow you to trade in almost any market conditions. Does the market grow? There is a strategy. Going down? There’s a strategy. Even if the market is standing still, options give you the tools to make money even in a sideways movement. This, by the way, is one of the main differences from classical trading, where you earn mainly on the growth of the asset price.
Risk management
Options can be used as insurance for your investments. For example, if you hold a stock but are afraid that the price might fall, you simply buy a put option. Even if the stock does go down in price, the option will make up for your losses. It’s like insurance for a car: it’s better if you don’t need it, but you have peace of mind.
Leverage
Thanks to options, you can control a large position by investing a relatively small amount of money. Roughly speaking, instead of buying a large amount of stock at once, you pay only the premium for the option. If the market goes in your direction, the returns are impressive. But let’s add right away: the opportunity to earn more money always comes with more risk.
By the way, with options, you get access to a variety of instruments, from stocks and indices to currency pairs and even hedge funds. And another important point: when you buy an option, you don’t have to buy the underlying asset itself. If the trade goes wrong, the most you lose is the premium you paid.
Disadvantages of trading options
Now let’s take an honest look at the other side of the coin as well.
Complexity
Yes, options are not an easy instrument. It will take time to understand the terminology, strategies, and pricing nuances. This is not spot trading, where everything looks simpler.
Risk of losing your investment
The option premium you pay when buying a contract can be completely burned if the market does not go in the right direction. Therefore, it is important to assess the risks in advance and not invest more than you are willing to lose.
Need an experience
Options require a certain level of experience. Without a basic understanding of what a strike price is, how time decay works, and how volatility is affected, trading can end in disappointment. This is why we at JustMarkets always advise beginners to first read our blog, learn the basic principles of trading, and then move on to more complex instruments like options.
Pros and Cons of Options Trading:
| Advantages | Disadvantages |
| Flexibility in various market conditions | Requires knowledge and experience |
| Risk management through hedging | Risk of losing the premium paid |
| Leverage opportunities for higher potential returns | Complex strategies and terminology |
| Wide range of assets to trade | Market volatility increases risk |
| No obligation to buy the underlying asset | Time decay can erode option value |
How to Trade Options in the UAE and Saudi Arabia
If you live in the UAE or Saudi Arabia and are thinking about trading options, the great news is that there are more and more opportunities. Even though options are considered a complex instrument, access to them in these regions is very real. Now let’s calmly break it down.
Let’s start with the most important markets. With us in the UAE, you can trade options on a wide range of assets. Here are some of them:
- Forex, for example, the popular pairs EUR/USD, GBP/USD, USD/CHF or EUR/GBP.
- Stocks including leading US companies and indices like the FTSE 100.
- Equity indices like FTSE 100 and Wall Street Index.
- Commodities metals and energy like gold or oil.
This is convenient because you can choose an asset to suit your interests and strategy. If you suddenly want to try something new, for example, commodity market options give you this flexibility.
Ways to trade options in the UAE
Now about how exactly you can trade. There are two main ways here:
- Options trading via CFDs
In short, a CFD (Contract for Difference) is such a contract for price difference. You do not buy the option itself but speculate on the change in its value. To do this, you will need an account with a broker that offers leverage. The good news is that you can work with the same options through CFDs as on the real exchange, only easier. With us, you can learn more about CFDs and start small. - Trading options through a broker
This is the classic way. Options, like stocks, are traded on registered exchanges. However, accessing the exchange directly for a private investor can be difficult, but you need to fulfill a number of conditions. Therefore, most traders open an account with a broker, and the broker goes to the exchange on your behalf.
So you trade through a convenient platform, paying a commission for transactions. The main advantage is all orders are executed on real exchanges and you get access to official quotes and instruments.
How to Trade Options with JustMarkets
You have already familiarized yourself with the base; now, let’s see how to put it into practice with JustMarkets.
JustMarkets offers convenient access to global markets and MetaTrader 4 and 5 platforms. We offer transparent conditions and help traders of all levels, from beginners to experienced market participants.
If you don’t have an account yet, you can open one here: Register at JustMarkets.
You will have access to a wide range of markets, including currency pairs (both popular and exotic), indices, stocks, commodities, and cryptocurrencies. You can also choose the right account type depending on your goals and experience.
How to start trading options? Step by step.
- Register an account: Open an account
- Choose an account type for trading options.
- Install MetaTrader 4 or 5.
- Deposit funds in a convenient way.
- Explore the available markets and strategies.
- Start trading and develop your skills.
Trading options with JustMarkets are a combination of convenience, reliability, and a wide range of tools for growth.
Wrapping Up
Options give traders flexibility and the ability to manage risk and seek profits in different market scenarios. The key is to start with the basics, take your time, and be sure to test strategies in practice.
When you are ready to take the next step, open an account at JustMarkets and start trading options on the convenient platform. Registration will only take a couple of minutes: go to registration.
