The optons writer uses tactics that let him limit the risk potential. This is known as hedging. However, this is complicated and involves some steps that could get difficult for a beginner in the options market.
To understand the optionsmarket and to tradeon it with real money you need to be aware of theprofitability. When you buy a call option then if the price rises and is above yourstrike price then you are in-the-money. When you buya call option and the price is lower than your strike price then you are out-of-the-money.
When you buy aput option then if the price is aboveyour strike price then you are out-of-the-money. The intrinsic value is the degree to which your trade is either in-the-money or out-of-the-money.
Theoptions market is dual in its nature. If you think that you are bullish on an asset and have apositive stance on it then you want to buya call option. If you have anegative outlook and you believe that the asset prices will fall in the future then you need to buy aput option. Thus most of your attention is devoted to understandingwhether you want to buy a call or a put option in an asset.
Trading with leverage
There is an additional risk taken when the trader takes a position with leverage. Leverage lets the trader take large positions with a small account size. This increases the profit potential but it also equally increases the loss potential. This is why it is highly advised that a trader should trade cautiously with leverage.
Yourbroker lets you take alarge trade but that does not mean you should take the maximum position with it. It is important that you use leverage with care so that it can be used to make profits but not eat into your trading account with losses. When leverage gets overused then the trader gets vulnerable.
As anoptions trader, you need to understand the dangersof leverage. If traded cautiously then the options trades are actually safer than most other investment forms. Forthose who want to know before entering the trade, how much money will they be risking on a trade for them options trading is highly recommended. The options traders who are selling options have to deal with higher risk but using the hedging strategies even these risks can be controlled.
The risk should be analyzedbefore opening any new position andwithoutthis, the losses can get escalated which could wipe away your trade account. Readthis page to manage risks when trading options.