SUCCESS CONCEPTS FOR TRADING STOCK OPTIONS

Stock options are a misunderstood investment tool but once understood by both traders and investors it can be a very versatile investment tool. However, as a consequence of their versatility, options are often viewed as to complex for the beginning option trader to utilize effectively. In order to avoid common mistakes of the beginning traders or investors it's important to understand a few basic concepts like types of options offered, leverage, risk control, time, and strike prices.

First, it's important to understand that there are two types of options that are commonly offered on most publicly traded companies which are called "calls" and "puts". Call options are bought when an option trader believes that the underlying stock is going to rise in share price. Now, put stock options are bought when a particular speculator believes that the price on a stock is going to decline. So from the standpoint of directional trading understand which option to trade when considering the direction of the stock you favor.

Options offer one of highest forms of pure leverage available in the investment world and lets you control up to 100 shares of a company's stock per each stock option! If you were to invest in 100 shares of XYZ company's stock which trades at $30 per share then you would invest up to $3,000 in order to control that block of stock whereas you would only need a couple of hundred dollars to control the same stock with a single option. Lets also project that XYZ had a good earnings report and rallied to $36 a share before you sold and captured a $600 profit or 20% gain. If you instead had bought a call option it is very realistic to capture a 100% gain or greater.

By now, you are beginning to understand the profit potential that stock options offer you with this kind of leverage yet when you factor the ability to control risk with options you really begin to realize their potential. If you purchased 100 shares of a $50 stock or $5,000 on a given company and suddenly the company's CEO announced the company's bankruptcy you could see your investment go to zero. But, if you instead just bought call options on the stock the most you could lose is the few hundred dollars you purchased the option with. Having the ability to limit your risk is critical to your financial well-being especially if disaster strikes as in this example.

Stock options offer you an enormous advantage in profiting from the markets you must understand the concept of time in how it applies to option trading. Though they vary a bit, stocks offer different types of options with different time periods on them. These time periods, or what is commonly referred to as expiration periods, range from 30 days out to as long as 3 years with expiration days occurring every third Friday of calendar month. In my opinion, it is vital for you to understand the average holding days for your option trades so that you purchase the proper option so that it has enough time on it so you have time to profit from you position. If the average holding period is seven days and it is the middle of the month then purchase the next month's options so that you have 2 weeks plus another month in order to give your option position enough time to profit. Any option under 30 days till expiration is rapidly disintegrating in value due to time decay.

Strikes or strike prices are the next critical success factor you must understand when selecting options to trade or invest. Strike prices are terms assigned to the value of the underlying instrument, stocks in this case, of a company. ABC company's stock price might be trading a $80 and it's options have strike prices at a $70 strike price, $80 strike price, and a $90 strike price which you can study in any financial periodical where option price tables are offered. Each given strike price on a company's stock has certain advantages or disadvantages just depending on whatever option trading strategy you are using. However, its enough for now that you understand what strikes are and how to implement them into your trading decision so that you can make the most effective decision when trading.

By learning to implement stock options into your investment choices you can add their enormous potential for high profits and risk control to your trading arsenal. By taking some time to reread this article as well as similar material you can begin to see how they can help you profit in almost any market. Whether the market is rising, falling, is range bound, or you are just trying to protect your stock portfolio from market volatility by taking advantage of the power and risk control of stock options you can take advantage of almost every opportunity in the market.

Article Source: http://mylilpeanut.com

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