http://www.options-trading-education.com/6596/stock-option-trading/
Stock Option Trading
By www.Options-Trading-Education.com
Both long term investors and day traders engage in stock option trading.
In each case stock option trading allows one to hedge investment risk and provides leverage of investment/trading capital.
A long term investor will buy calls to lock in opportunity on a promising investment.
Or he may buy puts in order to protect gains in a rapidly rising stock.
The long term investor hopes to get in and out of a stock with handsome profits but will typically hold for the long term.
On the other hand a day trader in stock option trading is looking for short term profits that stem from market fluctuation.
Day Trading Stock Options
There are a number of profitable options strategies for the day trader.
As stocks rise and fall in price so do options contracts based on those stocks.
Day traders use both fundamental and technical analysis to follow stocks and their option prices.
Time value in stock option trading is larger the longer the option has to run and becomes quite small when the contract is close to expiration.
So long as an options contract has a fair amount of time to run until expiration traders can scalp profits from upward or downward trends,
trade within upper and lower limits of a trading channel,
and use other approaches that take advantage of market fluctuation in stock option trading.
Using a Long Options Strategy
One can profit from selling calls on a stock and still retain the stock.
This is a form of eating your cake and having it too.
A stock investor who understands that the stock he owns has in all likelihood risen to the top of its trading range can
sell calls on the his stock with little fear that the stock will rise and that the buyer will execute the option contract.
This is a common means of using stock option trading to profit from owning a stock.
This strategy works well for those who understand the fundamentals of the stocks that they own
and keep an eye on market sentiment using technical analysis tools.
The advantage of this sort of long options trading is that the investor will never lose money.
If, however, he does not pay attention to what he is doing there is always the possibility that he will miss out on an upswing in stock price
and sell at the strike price just after a nice rally.
Leveraging Investment Capital
Investors and day traders both take advantage of options trading leverage.
Instead of having to purchase a stock, stock option trading allows the investor or trader to use a substantially smaller amount of capital
in order to hold a position in a promising market.
If the options trade goes as expected the trader can simply exit the options contract with a profit
that is often a multiple of the amount invested.
