Options Trading: Should You Go for the Directional or Non-Directional Approach

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By: SBansal
on 26th May,2016

Options trading allows the buyer to buy and sell an item in a particular time period. Check out the types of options trading.
Options Trading: Should You Go for the Directional or Non-Directional Approach

Options trading are a contract-based financial investment that allows the buyer to either sell or buy an item for a specific period of time at a specific price. With this kind of investment, the buyer has the right to not do anything about the item as well, although the money that he used to invest in the contract will not be returned to him after the contract ends. The seller, on the other hand, can't do anything once it is under contract.

The Not-So-Simple Option

The explanation above sounds simple, right? However, you should not be deceived because an investment such as this will have a lot of loopholes and parts that you need to understand. You need to learn these things before you head out and invest in items under this kind of contract.

You will have to carefully understand the different strategies used in options trading to maximise your profits. Each strategy has its own quirks, advantages, and disadvantages. It is your job to learn about each of these things.

Options Strategy

There are several strategies that you can connect with options trading. However, each options trading strategy can be categorised as either directional or non-directional. What is the difference between these two? Which of these two will work best for you? What are the things you need to know about these two strategies?

These are some of the questions commonly asked when the topic is brought up. The answers to these questions will lead you to discover the things that you need to do in order to profit from this kind of trade.

Directional vs Non Directional

The best way to understand these two types of strategies is to compare them. Here are some points that you should look into when it comes to trading options:

Basics. Directional strategies are simpler, more flexible, and easier to understand. You only need to remember to call when there is an uptrend in the market or put when there is a downtrend. Although this requires knowledge on how to read charts and understand the movements of the market, you will not be required to do a lot of in-depth thinking.

On the other hand, for non-directional strategies you will need to have an advanced knowledge about the market, manage your money carefully, and acquire technical analysis skills. These things are required in order to avoid losses.

Thus, directional strategies are often used by novices while non-directional strategies are often the strategic choice of experts.

Risks. Both strategies have risks. However, when it comes to minimising risks, it is the non-directional strategies that have the greater advantage. Both types of strategies, however, do have a set of techniques for minimising risk. The automation of non-directional strategies makes it less prone to human error.

There are many things that you should learn about when it comes to options trading. Each piece of information that you encounter should be treated carefully.

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