Stock Option Trading (Basic Information)

May 31, 2010 · Posted in options trading · Comment 

It is no secret that 2008 was a terrible year for most stock investors, and most probably things are going to get worst in the future. The US and the World economy are in a recession that will probably last at least for the rest of 2009. The recession translates into less demand for products sold by companies, which means less profits from companies and then lower stock prices. In very simple terms this is the summary of why the stock market is going lower.

If you are an investor that is loosing money on your stock portfolio, maybe you should take a look at another market that can help, the Option Market. Most investors don’t know anything about stock option trading, or stock option strategies, or what is a Call or a Put option. The truth is the Option Market is a sophisticated market mostly used by professional investors. But this does not mean individual investors should stay away from it. There are many firms that will offer you advise on this market (for example www.teofutures.com), others will offer you newsletters and education so you can familiarize with this market.

It is not my intention to explain in full detail about the option market, but these are some of the most important characteristics about stock option trading:

1.- You don’t need a lot of money to trade this market. In general terms you should open an account with minimum $10,000 in order to be able to diversify that money into different stock option strategies. Some firms allow you to open with less than that, but based on experience accounts that start with small amounts of money generally loose 100% of their investments.

2.- When trading stock options you can bet that the price of a stock will go higher or lower in the future. This means you still can make money even though the markets are down.

3.- Stock option investing is a fast investment. You don’t buy and hold when trading options. You buy and sell, sometimes even in the same day. When purchasing options, usually the more time you keep a position the higher your chances of loosing money.

4.- Trading options is considered risky because you can loose 100% of your investment capital and with some stock option strategies you can even loose more money than your original investment.

5.- Be very careful whom you open an account with. Preferably follow strategies where you only buy Options (Calls or Puts) or spreads. Stay away from firms that will offer you guarantee returns or spectacular profits. As a rule of thumb anything between 0% and 120% return a year is an actual real return to obtain from Option trading. Returns of 500% a year, or turning $15,000 into $200,000 in 18 months, or 100% returns in the first 6 months, it is better to stay away from those offers. Maybe you can obtain those returns but the risks are very high so chances are you most probably loose all your money trying to obtain that type of results.

As mentioned before, stock option trading could be a very good alternative to help investors during these difficult times. Don’t invest all your capital in this market and be very careful whom you work with. Specially stay away from guarantee returns.

Mr. Jorge Malo is President of TeoFutures, an investment firm in Florida, which specializes in small retail investors interested in trading the option markets. More information can be found at http://www.teofutures.com.

Option Trading Tip – Are You A Jack Of All Trades & A Master Of None?

May 30, 2010 · Posted in options trading · Comment 

I make a living out of trading options…and a pretty good one at that!

For a long time I couldn’t say those words as I struggled just to hold on to my capital, let alone make it grow.

Though there were several reasons why I struggled (including being grossly undercapitalized and at the same time placing too much of my trading bank on individual trades) the main reason for my struggle I believe was a lack of focus.

By ‘lack of focus’ I mean that I was constantly jumping around trying to implement too many different option trading strategies from basic call and put buying, to putting on multi leg spread tades, believing that the more complex the strategy, the greater my chance of success.

I had become a ‘Jack Of All Trades & A Master Of None’ and the only people that were making money from my option trading were my brokers.

One day a friend of mine (a very successful futures trader) said to me, “You don’t need to know everything about trading the markets to make money and be a success. You just need to ‘focus’ and become an expert in one or at most a few different trading strategies and know exactly when and how to use them. The rest is just practice!”

Those words rang loudly in my ears and from that point onwards I narrowed my focus.

I decided that I would go back to the very basics of option trading and only buy calls and puts with the intention of becoming very good at picking the short-term direction of stocks.

Today, almost 2 years later and after going through a steep and often expensive learning curve, buying calls and/or puts is what brings in the largest portion of my current monthly income.

I also use a couple different spread trading strategies when the market moves sideways, but my main ‘focus’ is on picking the short-term direction of a small number of stocks that I have gotten to know VERY well (through backtesting), and then buying the appropriate option based on risk vs reward and my short-term outlook.

The success I’m enjoying today (19 profitable months out of the last 24) is due to becoming proficient at reading stock charts and developing an option trading system that I am comfortable with and performs well and by applying my trading rules consistently.

Ultimately you only need to know a few different strategies to be able to trade any stock up, down, or sideways.

The options themselves are simply the ‘tools’ to make money from your ‘opinions’ and in my experience the tools that are the easiest to use, have also been the most profitable.

James Thomas is a successful private option trader and trading mentor. Get your free course, “What The Wall Street Hot Shots Won’t Tell You!” for a limited time at: http://www.option-trading-tips.com

Option Trading – How to Comprehend Option Trading As a Beginner Into the Trading Market

May 28, 2010 · Posted in options trading · Comment 

Option trading, as the name suggests, gives an option to the trader to buy or sell a particular asset at a later date at a predetermined price. Basically it is a contract between two parties, i.e. buyer and seller for the business transaction regarding an asset, the either party is given an option to buy or sell some specified asset in coming time period at a price which has already been agreed upon. Though, both parties are under no obligation to transact the business deal. As it already has been stated the option can be granted to either party; A call option gives the buyer the right to buy the underlying asset; a put option gives the seller (in that case buyer of the option) the right to sell the concerned asset. In return for granting the option, the seller of the option collects a payment (the premium) from the buyer. In case the buyer opts to exercise his right, the seller of the option, as per force of contract law, has to sell the agreed upon option to the buyer of the option at the predetermined price. The buyer of the option also has the right to let the option expire without availing it. Option trading can involve any sort of asset like property, shares of stock or bonds or some other securities and currency.

This article mainly focuses on the main conceptual highlights if the option trading and the various propositions regarding the option trading, which are more or less common in the all sorts of option trading, be it of stock or securities or some future contracts or property or currency.

Every financial option is a contract between the two parties with the terms of the option specified in term sheet. Mostly Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:

o Who has the bought the option, namely does the option holder has the right to buy (call option) or the right to sell (put option).

o The nature, class, quantity, and amount of the pledged asset: or some other specifications which might be deemed necessary to be disclosed for the proper and right full execution of contract.

o The price which is supposed to be paid for the underlying asset as per the terms of the contract. This price is called strike price or also known as the exercise price, because at this price the opted transaction is supposed to be paid either just before the date of expiry or at the expiration date, which is the last date the option, can be exercised.

o any other settlement term regarding the delivery or handing over or receipt of underlying asset, such as whether the writer r must deliver the actual asset on exercise, or may simply put up the corresponding cash amount or some other asset specified in the term Sheet.

o The term sheet must mentions the conditions and terms, which have been set to quote the option in the market so as to convert the quoted price into the actual premium-the actual amount, which is supposed to be paid by the holder to the writer of the option.
Basic Modes of Options

The basic Modes of financial options are:

o Exchange traded options or “listed options”) are a class of exchange traded derivatives .Exchange traded options have their own standard of laying down the contracts and its further specifications. These contracts are often negotiated and settled through clearing houses. Its fulfillment is guaranteed through the credit of the exchange.

Because the contracts are standardized, precise pricing models are often available. Exchange traded options include:

1. stock options,
2. commodity options
3. bond options and other interest rate options
4. index options and stock market index options
5. options on future contracts
6. Foreign Currency Exchange Options

o Over the counter options (OTC options, also called “dealer options”) are the trade agreement between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and free; therefore, they can be altered and molded to fulfill any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:

1. interest rate options
2. currency cross rate options, and
3. options on swaps or swaption
4. Employee stock options which are issued by a company to its employees as compensation.

This particular article aims at clarifying the elemental characteristics of the option trading for the beginner. Once the fundamental aspects of the option trading have been grasped, the operation in this field can open up a long vista of opportunities.

Author: James D. McAdams
Article Source: EzineArticles.com
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Options Trading Software – What You Need To Know About Software For Trading Options

May 28, 2010 · Posted in options trading · Comment 

These days, with most options being traded online, it is vital that you have a powerful software system that will allow you to trade at the most effective level possible and make more profit. A good trading software package does more than simply allow you to trade easily. Options trading software should also help you trade smarter and more profitably. There are a wide number of trading software packages available out there but you will be looking for the same basic features in all packages to help you become the most effective and most profitable trader possible.

One thing to look for in any options trading software are the credentials of the company selling the software. Because there are literally dozens of systems out there, you will probably want to make sure that you are using a system that has been tried and tested by a lot of other traders, both professional and individual, and that the company has a good track record for delivering quality product.

You will also want to have a close look at the options analysis software that the system provides. This type of software will allow you to look into potential trades before you make them, and will advise you on every aspect of the trade from a technical point of view. This is vital not only to avoid blatant mistakes that you may have overlooked, but also to help you decide between a number of similar trades when you need to identify the best one quickly.

You will also require to be able to quantify trades, graphically present the trade to help you visualise what is happening, and allow you to make advanced calculations and simulations on a trade. All of this is to allow you to make disciplined and intelligent decisions with the information you need, before you trade.

As well as the power and features of the software itself, what is vital for most traders starting out is that the company provides you with all of the support and information that you require. There will be many situations in which you will need assistance, sometimes at the last minute, and you need a company that provides you with this level of support.

Also keep an eye out for good value added packages that software companies may provide you with, such as options trading advice and methodology or techniques that you may find useful.

Check out http://www.trading-futures.org/ for articles about futures trading and managed futures.

How Option Trading Profit In Any Market Conditions

May 26, 2010 · Posted in options trading · Comment 

All stock market multi millionaires must be able to profit under any kind of market conditions. If you are able to profit only when stock markets go up, then you will find it a gargantuan task to ever have any sustainable success, much less become a stock market millionaire.

Yes! It is possible and easy to profit whether stocks are up, down or sideways using option trading. If the ability to trade all kinds of market conditions is the doorway to becoming a stock market millionaire, then option trading would be the very key.

In this article, I will outline some common ways by which you can profit from all kinds of markets by option trading.

Simple Option Strategies for Up Markets

Buy Call Option – You could buy the same number of equivalent stocks for a fraction of the price using call options and profit when the stock goes up. If the stock should crash, you will lose only the small amount you put towards buying the option instead of the whole amount that you would have put towards buying the stock itself.

Sell Naked Put Option – Instead of buying call options, you could sell short put options thereby pocketing the entire amount you made on selling the put options if the stock should go up.

Bull Call Spread – A bull call spread consists of buying call options at the money and selling short out of the money call options of the same month. The benefit of this strategy is that you profit when the stock goes up and profit also when the stock stays sideways!

Simple Option Strategies for Down Markets

Buy Put Option – Instead of shorting stocks and risking a margin call, you could simply buy a put option. Buying a put option is exactly the same as buying call options except that you profit when the stock goes down instead of up.

Sell Naked Call Option – Instead of buying put options, you could sell short call options thereby pocketing the entire amount you made on selling the put options if the stock should go down.

Bear Put Spread – A bear put spread consists of buying put options at the money and selling short out of the money put options of the same month. The benefit of this strategy is that you profit when the stock goes down and profit also when the stock stays sideways!

Simple Option Strategies for UP or DOWN Markets

Straddle – A straddle consist of buying a call option and a put option at the same strike price on the same stock. This strategy allows you to profit whether the stock moves up or down and is excellent when you are certain that a stock will move greatly soon but isn’t sure which direction that may be.

Strangle – Similar concept to a straddle but buys out of the money call option and put option instead of at the money ones in order to reduce the cost of the position.

Simple Option Strategies for Sideways Markets.

Covered Call – If you are holding on to a stock that is moving sideways, you could collect “rental” out of it by selling the call option of that stock month after month and pocket the whole amount of the sale should the stock remain sideways.

Short Straddle – Instead of buying call options and put options as described above in a Straddle, you would sell short them instead. In this way, you create an option position which profits when the stock remains sideways.

Are you amazed now at how easy it is to profit in any kind of market conditions by option trading? These are only very few of the many more option trading strategies that you can use to your specific portfolio needs. To learn more about what option trading and stock options are for free, please visit http://www.OptionTradingPedia.com .

Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management (http://www.MastersoEquity.com ). For free Option Trading Education, please visit http://www.OptionTradingPedia.com.

Options Trading – Calls and Puts

May 24, 2010 · Posted in options trading · Comment 

Options are contracts on an underlying trading instrument such as shares of stock, bonds, a commodity, a mortgage loan and many others. However, there are common features among all options. It does not matter if it is a share of stock or a mortgage loan; they all have certain things in common. One such commonality is the contract feature that specifies what the option owner has actually contracted.


Options traders have two situations that may influence their buying and selling: calls and puts. There terms are used to indicate specific behaviors of options at various points of the option’s life.


CALLs


A call bestows on the contract holder the right to purchase an asset at a particular price on or before the option’s expiration date. This is only a right to buy, it is not an obligation. The call owner always has the choice to allow the option to expire. This does mean that all the initial money that was invested in purchasing the contract is lost, but the choice still stands.


Call buyers are gambling on the underlying asset’s behavior; that it will increase in price before it reaches its expiration date. Also that it will not only rise, but will rise significantly enough to show a profit.


In order to show a profit, the price must rise enough to cover the difference between the market price and the strike price. The strike price is that price at which the stock must be bought. But, because the option has a cost attached to it, the price must exceed that amount enough to cover the additional amount. This cost is referred to as the premium.


The premium of an option, whether call or put, is determined by a variety of elements. These include, but are not limited to, the price of the underlying asset, the strike price and the time remaining on the option.


The time remaining on an option is vital. The shorter the time remaining, the greater the risk and vice versa. For example, if there are 90 days left to exercise an option, the risk is somewhat lower than if there was only 1 day left. This is because within that 90 day period the price could rise enough to show a profit. With just 1 day remaining, however, the odds are considerably lower.


For example, on April 1, MSFT (Microsoft) has a market price of $27. Call options for June 30 are selling for $3 with a strike price of $30. One contract for 100 shares is purchased.


If the contract is held until the expiration date, the trader either loses $300 ($3 X 100, the initial price of the contract not including commission) or the trader can purchase the underlying stock at $30. If the current market price was $35, then the trader has profited by $200 ($35 – ($30 + $3) = $2 per share X 100 shares, sans commission).


When the market price of a share rises above the strike price, the option holder is “in the money.” If the market price drops, then the holder is “out of the money.”


PUTs


A put gives the option buyer the right to sell an asset at a particular price by a specified date. Again, like a call, this is a right, not an obligation.


Put buyers are anticipating the stock prices to fall before the option’s expiration date. Therefore, in such cases, the market price must drop below the strike price in order to show a profit from exercising the option. For simplicity purposes, the cost of the put is ignored. Under those circumstances the option holder is in the money.


Still using the previous example, maintain the same situation, but this time the option is a put. If the market price falls to $25, the profit would be as follows:


First, $3 x 100 = $300 = Cost of put, excluding commissions.


Purchase 100 shares at $25 per share = $2,500 this is to repay the broker ‘loan’ (this broker loan is a part of shorting stock which is borrowing shares you don’t own, then repaying later).


Sell 100 shares at Strike price = $30, 100 x $30 = $3,000


Profit = ($3000 – $2500) – ($300) = $200.


It is the broker who handles the underlying mechanics. All the investor has to do is order the trades at a given time and date.


Wise investors do their homework and research their strategies, no matter if they are investing in calls or puts. Options trading does present risks and is rather complicated when compared to simple stock trading, although all trading contains an element of complication and risk. But investors in this line should study the history, volatility and other vital factors of both the option contract and the underlying asset.


A trader should never enter the market blindly and trade without doing the proper research first. The failure to do adequate research and go into the trade informed puts the trader at a must greater risk of losing money and not showing a profit.

Visit 123OnlineTrading.com – Options, Stocks, Forex to find books, tips and advice about online options trading. Besides a large selection of free educational articles you can also find powerful books about online trading in general.

Other Resources:
123OnlineStockTrading.com – Stock Trading Links

The Basics of Forex Option Trading – The Tricks to Bigger Profits

May 22, 2010 · Posted in options trading · Comment 

If you know how the stock market works, then you will have a general idea of what a Forex option trading is. However, stocks and Forex have big dissimilarities so you should not confuse one for the other.

You can only apply Forex option trading at the international currency market. This is an alternative trading method that is low risk but with high profit potential.

How It Works

Basically, trading Forex option also involves buying and selling currencies. However, instead of being tied to the fluctuations of the market, an option has a fixed purchase or selling amount with fixed expiration date.

For example, if you buy an option, you will only pay a fixed price for the transaction. If the market moves in your favor and the final strike price is higher than the purchase amount, then you get instant profits from the trade.

On the other hand, if the market moves against your position and the final strike price is lower than the original purchase price, then your Forex option will become worthless.

The important thing is you will not lose more money because you already opted for a fixed price for the transaction. Essentially, you can only lose the amount that you invested in the option thus effectively shielding your entire Forex account from bankruptcy.

This is basically how Forex option trading works. This is a very good trading method if you do not want to make bigger risk at the Forex market. The potential for taking profits with this type of trading is also greater because you can wisely choose which would be profitable.

How Can You Guarantee Winning Trades?

The key to win big utilizing Forex option is to use Forex software that can provide accurate analysis of the market. Most brokers will provide you with analysis tools such as charts and graphs to study market trends and developments.

But if you are a novice trader, all the figures and charts could be very difficult to comprehend. If you want to completely eliminate your headache in analyzing the charts, you need to use automated Forex software that can accurately predict market movements.

An automated Forex system can also be used for regular trading. The system can work on auto pilot thus ensuring that you will always be trading 24 hours a day. But if you want to trade, the software can instantly spot good offers and take the option.

The capability to accurately predict market movement is critical to the success of your option trading. If you can utilize automated Forex software with specific functionalities for market analysis, data mining, and Forex networking, then you can ensure that your Forex option trading will become very successful.

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The 1 Biggest Options Trading Mistake Ever

May 21, 2010 · Posted in options trading · Comment 

Recently, I have been answering options trading questions posted by options trading beginners at my website and it amazes me to find that MANY of these questions surround a single theme. Some of these questions are like:

“I just bought a call option, how do I take profit?”

“I bought a put option at XXX strike price, so what does it mean for me to hold this put option?”

“I think I made some money on my call options but how is profits calculated?”

Options trading beginners asking questions like that are making the biggest options trading mistake ever made by beginners and that is… Buying options without knowing completely what options is in the first place!

It never fails to amaze me how many people are buying options without first knowing what options are and what they do in the first place! Incredible but true! This is the reason why so many beginners lose their shirts. Stock options, as a leverage instrument, is merciless when it comes to losses especially when you don’t know what you are doing and that has resulted directly in many horror stories surrounding options trading.

Would you drive a car without knowing what a brake pedal does? Would you operate a new machine without knowing what all the buttons does? Why then would you buy options when you don’t know what everything in options trading mean?

After pondering hard on this question of why beginners are buying options when they don’t even understand what options does in the first place, I arrived at the conclusion that too many beginners think buying options is as simple as buying stocks. In stock trading, all you have to do is to choose your favorite stock and then buy it. That’s all you need to do. However, in options trading, there are options of various strike prices as well as expiration months, so, how are you to know which single option to buy in order to fulfill your trading objective if you don’t understand the difference between strike prices and the effects of different expiration months?

Amazingly, a lot of beginners today continue to make this single most deadly mistake and then when they get stuck in a trade, they try to find “quick fixes” on the internet, which of course, doesn’t exist. Perhaps we are now living in a world of quick information and a spirit of adventure and trial and error such that many people think that they can learn options trading the same trial and error way. Of course you can but it will eventually lead you back on the road to learning about what options is completely and the difference is that you would have paid thousands of dollars in school fees to the market. Most deadly of all is that the losses would have affected your trading confidence and cast a shadow of fear in your heart, leading to emotional decisions in your future trading. Yes, it can break your options trading for life!

In conclusion, there is a lot to learn about options and small changes like buying a different strike price can lead to very big end effects and if you don’t know what all these does in the first place, how are you to optimize your profits and minimize your losses? In the end, all options traders who took the easy way out (of course I would regard that as the hard way out) of simply taking the plunge and learning from the experience would still come back to getting a proper understanding of options. I recommend all of you who are contemplating options trading as part of your investment arsenal to learn completely what options is and what it does BEFORE getting into your first trade.

Author: Jason Ng
Article Source: EzineArticles.com
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Option Trading Tip – so Why Trade Options?

May 20, 2010 · Posted in options trading · Comment 

Beyond all the ‘hype’ what is it that makes option trading so good?

This is a question that I wish more people would ask, but the thing is not too many people know they even exist!

The main reason that I love option trading is that options provide the opportunity to turn a small or modest amount of money into a large amount of money quickly!

How is this possible you might ask?

Well before I get into the ‘how’ that let me show you exactly ‘what’ options are.

Options are simply ‘contracts’ that give the buyer the right or choice (but not the obligation) to buy or sell shares in a particular company, at an agreed price, on or before a set date.

Now the thing is, as an option trader I am not interested in buying or selling stocks, I am only interested in buying and selling the options on stocks.

I want to buy an option for one price and then onsell it to someone else for a higher price and make a profit before the option expires.

Now whether or not I am able to do this depends on two main things:

1) Whether the underlying stock (the stock that the option is concerned with) goes UP or DOWN in price.

and

2) The type of option that I have bought.

Now, there are 2 types of options, CALLS and PUTS.

Call options give us the right to BUY shares in the underlying stock.

PUT options give us the right to SELL shares in the underlying stock.

As I said before, we are not interested in buying or selling the underlying stock, only in making a profit by buying the options (on a stock) and then onselling those options to someone else for a profit.

However, the only way we can make a profit is if the option itself increases in value.

So What makes options go up or down in price?

CALL options increase in value when the underlying stock goes UP.

PUT options increase in value when the underlying stock goes DOWN.

This may sound confusing if you are new to option trading, but basically what we want to do is to buy CALL options on a stock when we think it is about to go UP in price or buy PUT options if we think the stock is about to go DOWN in price.

If we are right and the stock moves in our desired direction, UP for CALLS or DOWN for PUTS, we will make money.

The concept is really quite simple once you accept that it is possible to make money whether the underlying stock moves UP or DOWN.

Now here’s the thing that makes option trading so appealing.

Options only cost a fraction of what it would cost to buy the underlying stock itself and a small move in the price of the underlying stock, creates a much larger move in the price of the option by 10 times to sometimes 100 times!

Let me give you an example, let’s say that GE is trading at $31.00 per share. If we wanted to buy 1000 shares in GE today it would cost us $31,000.

However, the option to BUY GE (CALL options) for $30 at any time during the next 60 days is only $2.00 per share. If we bought enough options to give us control over 1000 shares in GE it would only cost us $1,500.

Now let’s say that GE goes up by $1.00 to $32.00 during the next 3 weeks.

If we had bought the shares in GE we would have have made a $1,000 profit (1000 shares x $1.00 per share) or 3%+ return and if we bought the options on GE we still would have only made $1,000 (1000 shares x $1 per share) however as we would have only invested $2,000 into the trade, this would be a return of 50%!

By trading the options instead of the stock it is possible to make far greater returns and at the same time risk only a fraction of the capital.

This is called LEVERAGE and this is the main advantage to option trading over other wealth creation strategies.

However, just as leverage can work for you it can just easily work against you.

This is why you need a solid trading system that stacks the odds of success in your favor on every trade and at the same time reduces your risk.

James Thomas is a successful private option trader and creator of http://www.option-trading-tips.com – an informative resource full of useful option trading tips.

Option Trading Explained – In Layman Terms

May 18, 2010 · Posted in options trading · Comment 

Robert Kiyosaki says that Option Trading is the investment of the rich.

Indeed, option trading is the most versatile form of investment in the world today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.

Option Trading Explained – Simply put, it is the trading of option contracts on a particular stock.

Options Explained – A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.

There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!

Option Trading Explained – What Can Stock Options Do?

Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.

Stock Options are:

Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.

Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.

Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.

Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.

Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.

And the Negative Effects are:

No value beyond expiration. You can potentially lose all your money along with the expiration of the option.

Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.

Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.

Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.

Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.

Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.

Using options creatively even allows us to structure investment positions to reap a fixed monthly return that beats the market regardless of which way the market goes! Just like in the Ride the Flow System offered at http://www.mastersoequity.com/MOE_ridetheflow.htm . Where your capital can be fully protected no even if the market enters a severe drop. Sounds amazing?

Option Trading Explained – Conclusion

I hope this “Option Trading Explained” has given you a good overview of the effects of options.

For a full and complete education in option trading, please visit http://www.mastersoequity.com/OptionUni.htm

Jason Ng is the Founder of Masters ‘O’ Equity international. He is a fund manager specialising in options trading and his Star Trading System has helped thousands of traders worldwide. Please visit www.MastersoEquity.com .

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