How to Trade Options Successfully |
Posted: June 19, 2013 |
If you are a beginner in options trading, you would certainly want to learn as much as you can before jumping in. Doing so will help you limit the risks and increase your chances of making money. Neophytes certainly have several questions which they are looking for answers to. Flexibility Options trading has a lot of advantages compared to other investments, and this is why it has become very popular over the years. More and more people are taking a look at it and embracing it. When you trade options contracts, you have the opportunity to put bets on certain market outcomes with great flexibility. There is always the chance that, in six months’ time, a stock will be able to trade above a certain price. Leverage Another advantage of options is leverage. With a small amount of money, traders have the ability to control a very large amount of an underlying stock. In the United States, a single option contract is tantamount to 100 underlying shares. In other nations, the underlying shares can be as much as 1,000. However, the things that give options such an advantage are also the very same things which make them a risky venture for people who are not experienced. The truth remains that options trading can give investors very large returns in a short amount of time. People who are not careful, however, can lose a good amount of money if they are not careful. Strategies for trading After getting acquainted with options basics, it is time to learn the many strategies which can help you succeed. Generally, a good strategy employs the simultaneous sale and/or purchase of different contracts. This is known as an option combination. Options pricing Before investing in options, it is a must to know just how they are priced. The price of an options contract consists of two main components: the intrinsic and extrinsic value. These components are, in turn, governed by the put-call parity. What is intrinsic value? Intrinsic value is the value that is already built into the option at the moment of its purchase. What is extrinsic value? Extrinsic value is also known as the premium, or time, value. This is what you are paying the seller of the option for the risk that the seller is taking. The price you are paying the seller is determined by four factors: interest rates, dividends payable, time to expire, and volatility. Other considerations There are other variables which also account for options pricing. Pricing is also very sensitive to interest rates. If the overall economic situation is likely to move significantly in the future, there must be necessary adjustments. Successful options trading There is plenty of information on the Internet today regarding options, options pricing, options strategies, and tips for succeeding in the market. It is important that you educate yourself and get as much information as you can so that you do not end up subjecting yourself to too many risks and losing a lot of money.
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