Stock options basics involve a thorough comprehension of making money through market forces. It is however necessary to pick and choose the best stock options. Your basis should be the movement of prices forward and backward for the purposes of ascertaining gains or losses. The best option would be to buy at a time when the prices is very low and is moving downwards and sell at a time when the prices moving upward. This is truly how to make money trading options.
Gain an Understanding of How to Make Money Trading Options
The stock options whose basis is the movement of pixels involve an understanding of the stock exchange indices. There is one in New York, Luxemburg, and London as well as Tokyo stock exchanges. As a matter of fact, a meticulous analysis is necessary in understanding the movements and certain internal management decisions. For example, the timing of the public issue. There is also auditing financial results as well as the closure of annual accounts such as the holding of annual general meeting for the declaration of final dividend. However, there is a word of caution in this context. Avoid insider trading! This is to enable you to protect yourself from the clutches of the security exchange commission of all the countries.
Gain More Understanding!
It is important to understand certain board level decisions when learning stock options basics on coming out with global depository receipts as well as American depository receipts. Such an issue is specifically meant for the purposes of meeting funds they require for expansion as well as inviting investment in terms of foreign direct investments for emboldening the strength of the financial condition of the company to grow further. Such decisions can be known by having discussions with friends and professionals who find themselves in such companie. Also, brokers and financial wizards are great resources. Hence, it is essential that close monitoring of the stock movements are extremely essential to determine the accuracy and the need for assessment of the profit that one can make by selling or buying.
Commission and Margins in Options Trading
It is pertinent to note that a specific percentage of commission and margins are given to brokers as individuals directly are not eligible to buy and sell on the floor. In other words, you must understand how to make money trading options, but ultimately, you pay someone else a small fee to make the trade. This ‘person’ is a broker. An understanding should be made with the broker to assess the actual profit that you expect to be made and guide the broker and pursue him or her to sell or buy at a particular price. In this manner, both the ends can be met and a balance and wise judgment will enable you to make fortunes. Furthermore, a macro economic view should be taken on the sourses that consider the economic condition of the country. Consider this as well as the impact of governmental policies on the stock movements.
Hence, you should calculate your decisions by also ensuring that no loss occurs at any point of time. Blue chip stocks should be bought like InfoTech, pharmaceuticals, and top notch fast moving consumer goods companies to maintain leadership positions in terms of making profits. however, since the world economic order even in western countries is a bit delicate now in spite of good performing companies, a careful decision would go a long way in clinching these with the thumping victory in terms of windfall gains. It’s important to do your own due dilligence when learning stock options basics.
What Are Options?
Many investors fail in their ventures simply because they lack knowledge on how to trade options. Options are simply contracts that enable option buyers to buy a given share at a lower price than its actual cost. They usually buy this on or before a specific day. Options also involve option buyers selling security or securities at a given price before or on a given day.
Options come in many kinds. There are stock options that may come from your employer in the form of compensation. There are the exotic options too, usually known as FLEX. Trading options therefore, involves investors using option contracts to ensure they get high returns. You use them to purchase or sell stock.
How to Make Money Trading Options as a Speculator
Speculators in trading stock options are investors. The know how to make money in options trading with no intention of exercising their contract. They capture movement in the stock market simply by buying and selling options. Speculators who have experience in this field realize high returns because they understand when to make a move. It is risky as a speculator however, to buy in anticipation of some given events in the market.
Stocks usually have an intrinsic value. Investors with an interest in purchasing stocks usually analyze a given company’s financial statements. This ensures that investors understand the intrinsic value of the company’s stock. In most cases analysts provide the price target of a stock when they upgrade it. They might also provide investors with a time frame, and it is always vague in nature. This means stock buyers tend to opt for long term contracts. Thus, they ensure maximum returns from their stock.
Stock option buyers also choose technical stock analysis. This is another method that provides a platform of determining any specific movement of stock price. Stock analysts usually read charts and they adequately identify different areas of supply and demand. In the real sense, stocks go up when there is a high demand for them. They also fluctuate when they flood the market. The ability to identify these modifications helps determine a concise movement and time frame of stocks.
You should also know a little about extrinsic value if you need to get concrete answers on how to trade options. Extrinsic value of any stock is also known as time value. Extrinsic value revolves around volatility. This fluctuates as the demand for your options fluctuates. Other influences also affect it such as changes in stock dividends or shifts in interest rates. However, implied volatility and time value tend to be the topmost influences. Even more so than dividends and interest rates.
Time value is simply that part of premium above the intrinsic value any option buyer pays to own a contract. A time value premium decreases as your option’s expiry date draws closer. Time value hence decreases rapidly when your contract nears its expiry date. To be on the safe side, do not let any profitable trade sit idle till that time the premium will be eaten away, meaning profits will go down.
Your aim in buying stock options is to get profits. To ensure you are successful in this, there are two important options you need to consider. Determine an entry into this venture before the prices begin to move up. Secondly, act when you are likely to get profit.
Trading ETF Options
Exchange Traded Funds (ETFs) like stock, trade on regular stock exchanges. They track an index, a basket of assets or a commodity. Externally, trading in ETFs might seem straightforward but they still come with their complexities. Nevertheless, knowing how to make money trading options of ETF’s can be quite profitable.
Another similarity ETFs have with stocks is that they have options too. You can trade ETF options on your broad market whenever you feel like. They receive a specific time assignment that the market specifies. What do you need to know about stock ETF options?
How To Make Money Trading Options of ETF’s
ETF options are diverse in comparison to stock options. ETFs have fewer surprises. This gives them an edge over stocks. Plus, they also give you the ability to trade commodities as if it was stock. New ETFs are born almost daily, meaning that investing in your favorite asset class is easy.
Many ETF options trade in large volumes too. They usually represent diverse market indices in comparison to different stocks with high popularity. The fact that they trade high volumes ensures that your options trade in large volumes as well. To determine this, you simply have to look at the open interests for any specific strike in a specific month. When open interest is large, liquid is high and this in-turn means ask or bid spreads are high. It also means good fills.
Good fills simply means that whenever you set your order price between the ask and the bid, you get a fairly quick fill. In case a numerous number of options are trading at a given time, the market meet an obligation to take your offer to literally get you out of the way. They always do this with an aim of taking larger orders.
Another crucial thing in trading ETF options is wide strike increments. In most cases they trade in $1 wide increments irrespective of the underlying price.
Risks of Trading ETF Options
Trading ETF options comes with risks too and it’s important you know them and know how to manage them. One of these risks is that the market can turn without warning hence making you lose money. You can curb this by setting limits or stops just like in stock. There is also a risk in that the mechanics of valuing ETFs are difficult to know. This can largely affect the results of your option trade.
To curb or manage these risks, you should research the ETF you want to trade. It is important to understand the prospectus of every single ETF to know whether it is worth the risk. As a trader, you simply need to know the basic things on how to trade options to be successful in this field.
Use Options Trading Strategies for Being in Control of Your Trades
There is a mystery surrounding options trading and passive traders often feel shy of dabbling in derivatives as it appears too intimidating and out of reach. Moreover, most traders fail to understand how it works because there are so many options trading strategies that an average trader finds it difficult to internalize all and use them at the appropriate time.
Trading in options can yield huge profits if your strategy is sound. At the same time, it is a highly risky business for amateurs. Unless you are fully conversant with the strategies to use there is a great risk of losing your money. It is because of this that it is extremely important to learn how to trade options.
How To Make Money Trading Options of Calls vs. Puts
The first thing to internalize is the difference between call and put options. A call option is a contract that gives you the right to buy a specific amount of shares of the underlying security at a specific price (strike price) within a certain time. A put option is the opposite and gives you the right but not the obligation, to sell.
In options trading you always know the maximum loss you might have to incur on a trade. However, that does not mean that have to actually take that much of a loss if the market turns unfavorable. One of the basic options trading strategies just as in normal trading is never to initiate a trade without putting a stop loss.
It is of utmost importance that before you even try to learn options trading strategies, you should first be very clear about your financial goals, time horizon for every trade you initiate and how much time you are willing to spend. When you are trading in options, you have to resist temptations. You need to be sure of when you will exit a trade. If you have set a target after researching a trade, stick to it. There is no telling when a winning trade will turn into a losing trade.
You can use options trading strategies for any outlook on the market. You may be bullish, bearish or neutral on a particular asset and options can still make you money. This is because trading in options does not presuppose ownership of the underlying asset. You can create long or short positions or create both at the same time to reduce cost and for managing downside risk.
Options Trading Strategies: Keeping it simple
The simplest of options trading strategies for those bullish on a stock is the call options. However, traders with more experience who are moderately bullish on the stock utilize strategies like bull call spread and bull put spread to minimize cost. First, the trader assesses how high the price can go up and buys at-the-money (the same price as the spot price) call options and sells out-of-the-money (strike price above the spot price) call options for the same month. Such options trading strategies have an element of some downside protection as well.A bull put spread, on the other hand, is selling in-the-money (strike price below the spot price) put options for a higher strike price and buying in-the-money put options of a lower strike price.
Similarly, when you are bearish on a stock, you reverse the options trading strategies and create a bear call spread or a bear put spread. The options trading strategy you use manages risks of stock trading. They also allow being in control of how much you stand to lose should the market turn. You will learn options trading strategies and understand them with experience.