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Stock Options Trading – A Guide

Vladimir's LST System

There are many ways to invest your money in 2011, one of the best is  stock   options  trading. If only for the fact that  stock   options  trading offers leverage that cannot be found in  stock  investing.

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  stock   options  trading offers to the people who invest. I am going to outline what  stock   options  are and the strategies that you can learn to make enormous returns on your money. This article will help introduce you to the world of  stock   options  trading. I will show you that anybody can learn  stock   option  trading.

So where did  stock   options  originate and why do some investors chose to use options to invest their hard earned money? One reason that I will share with you before a brief history that answers why, the reason, in the past only professionals were able to access and trade the options market.

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.

Where did  stock   options  trading originate? Back in 1973 the Chicago Board of Exchange opened the Chicago Board of Options. This little outfit has grown to become the largest single options trading floor in the US.

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  stock   options  trading. I will discuss more in the next article about why people saw options as a god way to insure their investment. But first, I feel that I need to discuss options trading terminology first.

What about a little terminology on  stock   options  trading? There are so many different terms that some are not familiar to those who do not trade. A few of the most common terms are below

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

Bid- The price at which an  options  buyer is willing to buy an  option  or a  stock 

Ask- The price at which a seller is offering to sell an  option  or a  stock .

At The Money- (ATM) A term that describes an  option  with an exercise price that is equal or close to the current market price of the underlying  stock 

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

Delta- The amount by which an  options  price will change for a one-point change in the price of the underlying  stock . Call options have a positive value and put options have a negative value

With a brief overview of the verbiage we can now discuss how to apply  stock   options  in your trading arsenal.

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  stock  looks bullish or is going up you would want to use a call  option  to participate in the  stocks  run higher.

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  option  contract consists of 100 shares of  stock . Therefore, if you buy 10 contracts you will be in control of 1000 shares of stock. This is why the leverage in  options  allows a person to control a large amount of  stock  for a fraction of the price.

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  stock   options  trading easier than actually buying the company’s  stock .

A put  option  would allow the buyer of the  option  to sell the underlying  stock  at a specified price. So if you thought that ABC was going to come crashing down because they are going to be sued by the SEC then you would buy the put option. The same underlying principles apply to a put option the same as a call option contract. Just reverse the upside to a downside projection.

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.  Stock   options  trading techniques for the informed options trader.

Just like anything the more time you spend studying  stock   options  trading the better you will become.

Vladimir's LST System

Source by Doug Prince

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