Making Money with Options! Pros and Cons for Both Sides!
"Option" calls some associations for those who are familiar with exchanges. As a rule, most traders speculate at options, i.e. buy them and sell to gain direct income. But some forget that so called "risks hedging", i.e. reducing the risks is more traditional for option contracts. Majority of speculators buy options to buy or sell a good with the previous price. Though, this section is dedicated to option exchange and traders, in this very article we'll talk about traditional way of using option co tracts and how to make money with options.
Firstly, if you don't know anything about options, read the intro-article about them on this website.
1.Fields of Using Options
2.Advantages for Buyers!
3.Making Money with Options for Sellers!
4.Losses and Risks
Fields of Using Options!
- Option contracts are often used in import and export, when entrepreneurs face with foreign currency. That would not be a secret that most currencies' rates change abruptly and fast. And though there are many forecasts, they are often wrong and leading to risks. A crisis in the issuing state can happen in any moment, and the businessman will suffer losses. Surely, they may earn with it, but most importers are not interested in speculation, as they work in another field. They don't have an opportunity to track charts and predict world currencies rates. So, sometimes an entrepreneur buys an option from supplier, by which the latter is obliged to change currency for the former at the rate that was in the day the contract was signed. So, you partner takes all risks, gaining more as option reward.
- The second profitable field is raw materials market. As with currency, goods as oil, gas, non-ferrous and ferrous metals, etc. always change in price. Oil prices are unstable and regular people, along with businessmen, realize that this can lead to losses. And the one case is when you arrange the deal a month or two before, another case is when you plan expenditures of your company for the year and permanently need fuel. In the latter one, you can insure yourself from a jump of the price and buy an option from the producer. You will pay the fixed reward, but if oil or gas price jumps, you'll keep the right to buy with planned price.
- Precious metals market also suits options. For instance, a jewelry factory regularly buys 200 lbs gold. The expenditures plan is made annually, and it's not reasonable to spend more just because the price can jump. Thus, the factory buys an options from a producer, giving the right to buy a certain amount of gold with the current market price. It's more profitable - you don't need to allocate money with the reserve for the case this metal will rise in price.
- Options can be used at other markets as well, but not so much as at mentioned. Other ones can be of real estate, services, etc. In fact, nowadays prices of material and immaterial goods change, so we can use option contracts everywhere, from corporatization and production to selling thoroughbred kittens.
Advantages for Buyers!
- Firstly, you insure your risks, buying options. You don't have to worry the rate will rise and you'll violate your plan of expenditures. All risks are insured by an option seller, and you get the opportunity to do your business without analyzing currency or goods market. Besides, an option is the right, but not an obligation to buy or to sell. In other words, if you have an option contract, you are able to demand its selling at the previous price; but if the current rate suits you better, you can make an urgent deal and buy goods at new and more profitable price.
- Along with risks insuring, you are able to calculate costs. It's useful for any business, because you will know for sure, how much is to be paid for the certain option and will be able to plan other costs. If you can't say anything about costs for goods, you have to allocate more money, which doesn't let you manage 100% money. You must always keep the reserve can be used in emergency. But, this reserved money could have been used for marketing, extra goods or just for you. Surely, there must be some reserve, but the more accurate is your realization of costs, the less is that reserve and the more efficient is work.
- One can make money with options, because the rate can rise as much as the spread will cover profits. And it's not the most significant point for entrepreneurs, though, it's quite pleasant. That's good to know that the rate jumps, your competitors suffer losses, and you gain.
Making Money with Options for Sellers!
- If you are an option seller, then you get additional income as the reward. And usually rates don't move that abruptly to cover such reward, and if you are a good analyst, you'll be able to increase your profits. Surely, you take all your partner's risks, but for fee.
- As a rule, those entrepreneurs who sell options, have more clients than those who don't. Actually, the majority of businessmen don't want to take risks and are used to estimate all costs and profits accurately. They agree to pay for an option just to minimize risks. They are likely to work with a company providing option contracts instead of one which doesn't have such service.
Losses and Risks!
The only buyer's loss is the reward paid for an option contract. They won't be ever able to lose more. And if currency or goods price rises, and you use your right to buy them by more profitable price, you make money with options.
A seller doesn't suffer any losses but takes risks. They may not make money with the change of the rate, because buyers have the right to sell options with the previous price, but a seller is not obliged to do so and can make an urgent deal on the new price good for them and not for you. You'll gain most if the rate stays still.
Buyers take another risk - the danger to face frauds. A buyer can pay and make a contract, but then it will turn that the partner has not ever made any business and is a cheater. To insure yourself, make deals attentively, and look whether they meet world standards and have legal effect. Having done everything right, you'll be able to protect interests in court.
So, only the one side can make money with options (depending on circumstances), but those contracts are profitable for either sides. Actually, profits are not the point there, but risks insuring is and costs calculating as well. For this, most make paid option contracts without any purpose to gain from them. Options are mutually useful and profitable becoming more and more popular among entrepreneurs all over the world.