Disadvantages Of Options Trading

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The Advantages on Hedging Using Options
There are plenty of advantages of using options trading as one of the derivatives. Investor uses option to either speculate or hedging purposes. The first significant benefits of investor using options are the ability to lock into the price of the investor desire and without the obligation to exercise the contract. The holders able to protect themselves against the possibility of fluctuation of the price towards the underlying asset which might be unfavourable to them. The investor has the option or choices whether to exercise the contract or not on or before the maturity. Correspondingly, holder would only activate the contract when the price is at a favourable position to the holder which it given the holder the flexibility which allow the trader to improvise and be used in different strategies. Besides, options are different from other derivatives such as future and forward in terms of time to execute. Options trading
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Since losses is limited, so the maximum loss is the amount trader need to pay for the premium unlike the future contract which has unlimited risk. Undoubtedly, many investors see options as a useful tool to control the risk management by hedging. Option can help to hedge from the risk associated, however it is not risk free but it enables traders to reduce the potential risk faced. According to the journal of “Call, put and bidirectional option contracts in agricultural supply chains with sales effort”, the participant of option trading is more likely to be risk adverse such as agriculture players and small commercial participants. Agricultural commodity options tend to be standardized contract and hence it end up to be a lower cost. (Lei Yang,
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