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Options Advantages and Disadvantages.


Advantages of Options:
1. Its a good hedging tool.
2. Leverage. With very small capital, trader gets advantage of underlier's stock movement. In the example mentioned above, when a stock returns 20% option returns 400%.
3. You can trade option any time when your objective is met. You do not have to wait for T+2.
4. Risk or maximum loss is limited. Refer to previous tutorials.

Disadvantages of Options:
1.Options value moves to zero value on expiration date. If there is no movement in stock price then entire capital is lost. Refer to previous tutorials.
2.If stock price goes below the strike price, entire capital is lost.
3.Corporate action like dividend, bonus etc are not applicable for option holders.
4.Options are very complicated. Understanding time value is difficult.
5.Options are generally bought in pairs. This results in lots of brokerage & taxes.

Other things to know about options.
a.They are short term trading therefore capital gain tax is applicable.
b.Its a sort of zero sum game. Means that somebody's profit is someone else loss.
However in some case, it could be win win when you are buying against somebody hedge.

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