Listed options are financial derivatives that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a specific timeframe. They are traded on exchanges and can be used to speculate on markets’ future direction or hedge against existing positions. You can use the listed options to boost your portfolio in various ways.
Diversify your portfolio
Options can help diversify your portfolio by exposing a wide range of underlying assets, including shares, indices, commodities, currencies and even interest rates. It can help reduce the overall risk of your portfolio and allow you to profit from different market conditions.
Generate income
One way to boost your portfolio is to generate income from it. You can use listed options to construct various income strategies such as covered calls and sell or write options to gain the premium. Other income-generating strategies involve selling call options against stocks you own or writing call options outright. The premium received from these activities can help to increase your overall returns.
Enhance returns
Another way to use listed options is to enhance your portfolio’s returns. You can implement bullish or bearish strategies such as long call or put spreads, and these involve buying and selling options with different strike prices to profit from a move in the underlying asset.
Manage risk
You can also use options to manage the risk of your portfolio. For example, you can use options to hedge against a fall in the value of your shares by buying put options or selling call options.
Take advantage of leverage
Listed options can provide you with leverage, which uses borrowed capital to increase one’s potential return on investment. You only have to pay a fragment of the underlying asset’s price when you buy an option, allowing you to control a more significant position with less capital.
Protect your portfolio
You can also use options to safeguard your portfolio from sudden market moves, known as hedging. By buying put options, you can hedge against a fall in the value of your portfolio. Alternatively, by selling call options, you can hedge against a rise in the value of your portfolio.
Reduce costs
Listed options can also help you to reduce the costs of your portfolio. You only have to pay a fragment of the underlying asset’s price when you buy an option, meaning you can control a more significant position with less capital.
Take advantage of tax benefits
Another way to boost your portfolio with listed options is to take advantage of the tax benefits. You only have to pay a fragment of the underlying asset’s price when you buy an option, which can help you reduce your overall tax bill.
Get started with less capital
Listed options can also be an excellent way to start with less capital. You only have to pay a fragment of the underlying asset’s price when you buy an option, which can help you get started in the market with less capital.
Trade around the clock
You can trade listed options around the clock; therefore, you can take advantage of market movements, which can help you boost your portfolio by making the most of market conditions.
What are the risks of trading listed options?
Volatility
Listed options are volatile instruments, and options prices can move quickly, resulting in significant losses if you are not careful.
Liquidity
Listed options are often illiquid, making it difficult to find buyers or sellers when you want to trade. It can result in a sizeable bid-ask spread and eat into your profits.
Expiration
Options expire on a specific date, and if they are not exercised by that date, they become worthless. It would be best to be careful when entering and exiting trades.
Margin
You need to post the margin (the collateral you need to deposit to trade options) when you trade options. If the options price moves against you, your broker may call on you to post additional margin, resulting in significant losses. Are you looking for more information? Get it here.