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Trading Options – A Graph Above Meets the Trade

by gbaf mag

Trading options can be extremely complicated even more so than stock trading. When you purchase a stock, all you decide is how many shares you need, and where you want to purchase them at. Essentially trading options involves an understanding of technical analysis, the key strategy for opening an options trading accounts has some more steps than simply opening a savings account. The best option for beginning traders is to open a self managed account, which is essentially a savings account that has a trading facility built in.

Most stock traders do not use their money wisely. They are traders, not investors. However, options strategies can be used as an effective money management tool. If done correctly, stock traders can make a lot of money if they know how to take advantage of options trends and how to implement options trends into their own portfolios. Of course this requires knowledge of technical analysis and how to apply it, which is the real secret.

Options trading strategies allow traders to take advantage of options trends. Traders have been trading options since the beginning of the markets. In fact, option trading strategies were the only means of hedging against fluctuations in the risk factor in the early stock markets. Of course now with the Internet and the invention of stock brokers, it is much easier to hedge against market fluctuations. Nevertheless, option trading strategies still remain highly popular with traders on the margins.

Learning to trade options can also benefit short term traders. How so? Suppose you are expecting a fundamental analysis report on Friday afternoon. If you open your spread trade options on Monday, your assets could lose tremendous value. The same thing can happen to you if you do not exercise the leverage that you are entitled to. You are better off to sell your positions before the Monday afternoon report comes out because you will at least have some exposure to the asset that you intend to trade in.

Another thing to keep in mind is the premium on each option. The premium is the amount of money that you must pay up front for the right to purchase or sell a certain number of shares of the underlying asset. This premium is calculated based on the strike price, the expiration date, the premium that you will pay, and the size of the option. For example, a call option has a strike price of one dollar, an expiration date of three months, and a premium of twenty cents per share. Clearly, there is significant risk associated with these options.

How do you work around the risk inherent in these options? One strategy is to buy more calls than you have calls; hence you will always be covered in the event of a market decline. Another strategy is to buy calls at the beginning of the trading day so that you can exercise full control over your positions within the allotted time frame. If you are concerned that an increase in the size of the market may cause too much loss for your trading position, it is best to exercise safe-ish strategies like these. Of course, it is possible for a trader to become very profitable by trading with leverage; however this is not recommended. Leverage increases the amount of risk inherent in the assets being traded, so a trader may not be able to achieve the same profits he would have been able to achieve with a different strategy.

There are two primary types of trading that have the potential to bring a trader rich: call and put trading. The strategy that you decide to use when you are trading with puts is to take advantage of a falling market. Most investors choose to do put trading in markets where the price is expected to drop as the underlying asset continues to rise. These investors also may choose to take advantage of any bonuses that a company might give its employees as a way to take advantage of the rising asset value.

Alternatively, the most profitable way to make money from options trading is to execute put orders when the market is on the incline. This graph above, notice how the premium paid to buy the call option is lower than the premium spent on the put in order? This is referred to as a long-side strategy, meaning that a trader hopes that the asset price will continue to rise. This is a risky strategy, since the effect of time-dependent volatility can magnify the losses. But if a trader has the time to watch market trends carefully, he may be able to determine which direction the underlying asset is likely to move before executing his long-side strategy.


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