If you don't necessarily want to buy any stock, but you do want to control, by outlaying a little money. Does this sound like something you could get excited about?
Well, if so, welcome to trading options for quick returns or quick losses!
The amount you outlay is only a small part of the purchase price, but you could control a large pile of stock. When the asset rises or falls your option will also rise and fall in value. Generally you can expect that options will show greater volatility and it's by trading these ups and downs that you can make superior returns, which make stock investing look foolish.
Some Key Points About Options
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Option traders use this volatility to make superior profits. You see you can make money when the value falls by purchasing a "PUT OPTION" and you can capture price rises when you buy a "CALL OPTION".
Now there are many option strategies, but I believe in keeping it simple - that way I understand what I'm doing and you should too! People who buy stocks, also protect their holdings by using options.
You see the idea of using leverage to buy is a very old one. Let's face it we may not want to spend the money, but we want to control and options give us the opportunity to do so.
Options can do 2 simple things:
*they give you "the right to buy" and
*they give you "the right to sell" at a future time and at a future price.
You are not obligated to buy or sell, but the life of your option is diminishing from the moment you enter the contract. Soon the option will expire worthless. So you must trade it!
When we are ready, we either exercise our option, we sell the option and make trading profits - or we cancel our obligation, if we are option writers.
We can also cancel our obligation if we have written a "PUT" by buying it back. Likewise if we write a "CALL" we can buy it back and cancel our obligation to sell stock.
I've discovered a home study course you should take a look at if you are interested in using the power of leverage. Just click to www.AllTradingSecrets.com and find our special link to options trading video in front page.
Okay, so if I haven't scared you so far, talking about using leverage via options - let's carry on.
When you watch the video you will see % figures, that like the following example demonstrate the difference in movement of stock prices versus option prices.
Now let's move on. If you buy the stock XYZ at $37 and the price increases 12% to $41.50 you are using lots more of your precious money to capture the move than if you purchased say a $35(strike priced) option for $3.50 per option.
Now each contract in the U.S. represents 100 shares. So your total cost is $350 per contract. In Australia one contract represents 1000 shares.
If your stock goes up it will influence the option price. Options can be extremely volatile - so you need to monitor prices very closely.
So let's say your stock goes up to $41.50 and now the $35 option series is selling for $6.50. This represents an 86% price increase.
So what has happened:
stock up 12%
option up 86%
Which trading situation do you think will make you the biggest trading profits?
Would you rather hold the option or the stock?
If you answered "the stock", I'd be very worried about you!
Drawbacks of Options:
1. Volatility - needs close monitoring.
2. You can lose your option money if you don't sell it before it expires.
3. Short life of options - usually months.
4. You need education in option trading.
Advantages of Options:
1. Leverage.
2. Volatility - can make more money per trade.
3. Less money needed than owning stocks.
4. Play the market UP or DOWN - flexibility.
If you increase your understanding you could do what every other trader is doing - making money from time to time!!
You see losses are part of the game - not all your trades will succeed.
Playing the game with this fact in mind will help you to trade better and to have a healthy respect for the market and controlling RISK. We control risk firstly by being educated! I've chosen this link because I think it will help you understand and trade options so much better.
Eri Rahman is the owner of AllTradingSecrets.com, a fine website that offer free education facilities to their visitors. He is also a practising in Stock & Options Market
Visit the site: http://www.AllTradingSecrets.com