Investing your money into money market trading is one of the best things you can do. Despite being tricky, it has some pros and cons, depending on the investors’ knowledge. If you are a smart player, the cons don’t hinder your move. Below are the pros that can make you consider the move.
Minimal Initial Capital Outlay
When it comes to the money market, you need to be discerning where you invest your fund. Knowing the initial capital outlay is a significant factor in this matter. If the cost is relatively high, it may discourage the investor. If the investor requires a minimal capital outlay, the options are ideal as compared to stock. They are more suitable for newbies in the market.
Minimal Risks
An investor gets into the money market to make good margins over the investment made. With this one hand, the investor will look for options that will increase the earnings with minimal risks. When the investor understands leverage, they can hold the same investment position while spending less.
Flexibility
Options are a better form of investment since the investor has a time frame between the purchase date and the expiry date. The investor within this period can opt to sell an option and buy shares to boost their portfolio, excise, and option buy shares sell all or part of them or sell an option to other investors before expiry. This investment’s flexibility makes it more suitable for investors who wouldn’t want to hold an asset for long periods.
Hedging
The money market could be a bit volatile. As a wise investor, hedging is a good strategy that will reduce exposure to risk if an asset in the portfolio may be subjected to uncertain price reduction.use of a hedge reduces an uncertain loss without reducing the expected earnings on your investment. This security measure should be inversely correlated, in the event of an adverse price change, the security moves in the opposite direction, acting as a hedge against the loss.
When an investor settles for options, they have a variety to choose thus suitable for different market structures. Based on the risk involved the below are choices to choose from:
Covered Call:this option generates income and reduces risk, it’s flexible in that you can trade off at a set price-short strike price. Suitable for investors who have a neutral view on the asset but hold the asset to generate income from the option premium.
Married put: the trader purchases an asset and puts an option for equivalent investment, the holder has a right to sell the asset at the strike price. It prevents downslide when holding the asset.
The bull call spread: the investor buys a call at a specific strike price and sells at a higher price. This form of CallCall is suitable for traders who are optimistic about the price rise on their investment.
The bear call spread: The trader buys an option at a specific strike price and sells the same at a lower price. It gives limited losses and gains.
Long straddle: The trader buys a call and a put option at the same strike price, with the same expiry. Call benefit upward moves while puts benefit downwards. With the application of the two calls, the risk cancels out. Suitable for investments that have a high level of uncertainty.
Earning trade is a smart idea since investors can use background information from the previous stock before investment. They also give you an opportunity to trade-off options that are highly volatile after the earnings announcement. The below can aid in evaluating an investment.
Open interest: the total number of options contracts that have been traded but not liquidated through exercise. They give information on the liquidity of an option. The higher the number, the better the option.
Volume: The number of share security traded over a given period, the higher the volume, the better the option.
Risk metrics: they are derivatives that measure the risk of an option to another underlying variable. Delta measures the rate of change of an option against one dollar; if the price goes up with other price variables that are constant, the call price hikes. Theta, indicated the rate of reduction in the value of an option as it draws closer to maturity. Selling before maturity is a better deal.
Earning trade is a good move, as outlined in this article. The only caution to exercise should be on evaluating the risk and return with the above measures.this would be a move that you would highly considered.