Option Trading: How to Do It
When most people think of the investment markets and how to make money off them, they immediately think of the buying and selling of stocks. This is a very limited view that conflates the entire of the stock market investment field down to mere stock value. However, it is in option trading where real money can be made from the stock market.
If you're already engaged in stock market trading, and the possibilities for profit that can be had from option trading have only recently been made known to you, then it's likely you've been hesitant because of the seemingly byzantine complexity of options and markets. However, such a sentiment, though perfectly understandable, can easily be overcome by learning the basics of trading options.
Options can be lucrative because they reserve the right to buy or sell the underlying stock for the trader who holds the option. Certain variables on the option declare when the underlying stock is to be sold or bought, such as the strike price. Thus, the power of option trading is curtailed by the time limit which restricts how long an option is valid. In practice, this means that a call option reserves the trader to buy the stock when it goes up in value past the strike price set.
This means that no matter what kind of economic circumstances might emerge - recession or growth - options allow you to earn money because you are in effect, speculating on these circumstances and not on absolute stock value. Whether stock value grows or shrinks, profit opportunity exists with options.
An option's value is maximized when it is used in tandem with other options. These kinds of trading tactics are known as option strategies, and are formulated with the intent is to anticipate a number of directions the stock's value can take. The simplest example is when a call option and a put option are taken with the same underlying stock. This combination is known as the straddle.
Such option strategies can reach the apex of their profitability when their use is timed to coincide to circumstances in which the markets are most receptive to their conditions. To that end, a trader who desires to maximize the potential of such strategies must watch the market closely with various technical instruments such as the MACD indicator. By doing so, he or she can observe when trends begin to emerge in which the market may benefit a strategy handsomely.
This article attempts to repel any reluctance any current stock market dilettantes might have towards option trading. To that end, it discusses a few of the wonderful properties that make stock options so lucrative. Furthermore, it provides instructive information through the tactics used by expert traders, such as their use of well developed option strategies and technical instruments like the MACD indicator.
Published October 23rd, 2009
Filed in Finance