If you are interested to invest in the stock market then you must know what are calls and puts options as many investors are making good from these two types of options. But before we proceed we must know what options are. Options are basically financial instruments that allow the owners right to buy or sell an asset. Remember options gives the right, it is not an obligation. So, the investor has a choice whether to exercise the option or not. Options that allow buying of financial instrument like stocks are called call options whereas an option that allows an investor to sell financial instrument is called put options.
Many people say that options have been a blessing because by paying an upfront cost, many investors are able to reduce the level of risk they face while investing in a stock market. However, logically it is right but if we analyze the practices of the some of the traders of stock market then we would see it is not true.
By providing leverage call options allow some investors to earn more whereas other investor suffers the losses. As in stock market gain for one is a loss of other. Therefore when an investor enjoys the profits, other investor could face serious losses.
Another disadvantage of call options is that sometimes it becomes useless to buy because many times the price of underlying security is not able to increase therefore the investment made could yield zero returns plus the money invested is also lost. Therefore an investor makes overall loss.
Some traders use options in a dangerous way and this has been a major concern for an ordinary investor as they speculate the market prices are going to decrease then they start selling huge number of calls only for the purpose that stock price would increase and this way they make profits. Similarly, put options could be used for speculative purpose as well. Therefore if you are not aware of all the ins and outs of options and stock market, it is better not to invest your money. This is the reason why an ordinary investor should go for mutual funds because they not only keeps your investment safe from all these dangerous games played by traders but also diversify your investment into different assets so that you can receive constant returns.