http://www.options-trading-education.com/24227/learn-to-trade-options/
Learn to Trade Options
Option trading offers two advantages over standard stock trading. These are limited risk and leverage of trading capital. It is not hard to learn to trade options on a basic level and thereafter one can learn increasingly complex strategies. First what are the basics?
Calls and Puts
Calls and puts are contracts to buy or sell a stock. A call contract gives the buyer the option to purchase the underlying stock which he will do if the price moves in the direction anticipated. A call contract confers an obligation on the seller (writer) of the call option to sell the underlying equity if the buyer executes the contract. Similarly a put contract gives the buyer the option to sell the underlying stock which he will do if the price moves in the direction anticipated. A put contract confers an obligation on the seller (writer) of the put option to buy the underlying equity if the buyer executes the contract. Traders buy calls on a stock when they believe that it will go up in price and they buy puts when they believe that the price will fall.
Risk Management with Options
When you buy calls or puts on a stock your risk is only the price of the option contract. This is the basis of risk management in options trading. Let us say that you believe that XYZ Corporation which sells at $95 a share will go up to $100 a share in the next month or so. You could pay $9,500 plus commissions and fees for 100 shares of the stock. If the stock went up as anticipated you could sell and pocket $500 minus fees and commissions. If the stock went down in price to $9000 you would sell and have lost $500 plus fees and commissions. But, if you bought call options on the same stock for $2 a share you would pay $200 for the contract and that would be the extent of your expenses/losses for such a trade. And there is the matter of leveraging your trading capital.
Options Leverage
As much as risk management the leverage that options trading provides is a good reason to learn to trade options. With the simple investment of a premium a trader can nail down a price at which he or she will be able to buy or sell a stock, no matter high or low the price may go. The leverage of buying and selling options is that after paying the premium the trader may make a profit of the difference between the strike price, the agreed upon contract price, and the spot price, the price at which the contract will be settled, minus, of course, the cost of the premium paid to buy the options contract. The trader does not need to fork over nearly $10,000 as in the XYZ Corporation example but rather a substantially lower amount for the option contract premium. If, as in that example, the trader pays $200 for a 100 share option contract and makes $500 that is a 150% profit, as opposed to a 5% profit if he had purchased the stock.
4. http://www.options-trading-education.com/24227/learn-to-trade-options/
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