Stock Options Trading – A Guide
You see an average return in an option trade is most often over 30% with possibilities of returns well in excess of 200%. These returns can be realized in days and not months or years like stocks take. Very few stocks in the past 20 years have returned more than 200%, it is an anomaly and not the norm.
But there is so much more that
So where did
This is not the case anymore. There is now enough information and knowledge available to the “small investor” such that they have become a force to be reckoned with.
Why did people want to trade options? People wanted a way to help secure the investments that they were already making in the stock market. They wanted a way to help insure the trades that they were making. Thus the market began and along with it
Put- An option granting the owner the right to sell the security at a set price for a specific period of time
Call- An option granting the owner the right to BUY a security at a set price for a specific period of time
Market Maker- An exchange member whose job it is to
Intrinsic value- he value of an option if it were to expire immediately with the underlying security at its current price; the amount which an option is in the money. If the option is out of the money it has no value and therefore no intrinsic value either
Time Value- The amount by which an option’s total value exceeds its intrinsic value
Exercise- To invoke the right granted under the terms of a listed option contract. Call holders exercise to buy the underlying securities, while put holders exercise to sell the underlying securities
With a brief overview of the verbiage we can now discuss how to apply
There are options trading strategies to trade every kind of market that exits. From bull markets to bear markets and markets that are boring and flat, not going anywhere.
One of the most basic of option trading strategies, buying a call option is perhaps the easiest option trade. If you believe that a
For example, if you thought that XYZ was going to be trading higher in a month from now you would buy a call. If XYZ was trading at $44.67 and you saw by looking at the charts that XYZ was just breaking out of a bull flag pennant and looked like it was going to $55 by the end of the month.
You could buy the at the money call at $45 for $1.20. Each
You see if you bought 10 contracts at $1.20 that would cost you $1200. In order to buy 1000 shares of the actual XYZ stock it would cost you a whopping $45,000! This is why a regular person can get involved in
Surprisingly, only a small percentage of options are actually exercised. More expire worthless! That is right, most expire worthless!! The large majority of people sell the option contracts when they are up and have a profit before expiration. This is what majority of the professional traders do, as should you. Exercising your option is a more difficult process that includes a few more steps that I will cover in the next article.