Home of the MODERATE TRADER |
|
Options Option trading is very risky. As in any investment vehicle, the higher the potential gains, the higher the risk. Individuals should be constantly aware of the loss of capital. The basic rule applies, do not risk the money you can't afford to lose. An individual should commit no more than 10% of total assets to trade options. Option traders should be aware. You are your own enemy! In the bottle for profits, your emotions could infringe on your decisions. Greed is your biggest enemy. If you can sell an option that you have held less than a month and realize a 100% gain, do so immediately! Remember the phrase "Bulls make money, bears make money, pigs loose their shirt." One of the biggest mistakes option buyers make is buying an option with an expiration of one month, or less. Depending on the option, the minimum time should be two to three months. Investing in options is not a gamble, as long as the options are not bought on random stocks with an expiration of less than one month. An investor, who has made money-trading stocks, could make money with options. Study the recent chart of the stock on which you plan to buy an option. Find the range of the stock. As the stock proceeds to rebound from its 52-week low, it could fluctuate in a range of five points between its high and low level within a time frame of four to six weeks. If the stock which recently reached $16 per share falls to approximately $12 per share, that is the time to buy a call option, at a strike price of 12 ½ and an expiration of at least two months. As the stock resumes its upward trend and if it were to reach approximately $16 per share, the call option could double in value. This is a very optimistic example. On the average, some of the stocks trade in a range of two to three points. Although money could be made on these stocks, the call option has to be bought at the right time (when the stock has reached its intermediate low level) and in the money. For example, if the stock fell to $15 ½ per share, a call option could be bought at a strike price of 15. If the stock were to rise to its previous high of $18 per share, the call option should be sold in the timely manner to lock-in the gains. Call option-A "call option" gives the holder the right to buy the underlying stock at a stated exercise price, prior to a stated expiration date. As the price of the stock rises above the strike price, the value of the underlying call option increases. Put-A "put" gives the holder the right to sell the underlying stock, at the stated exercise price, prior to the expiration date. As the price of the stock falls, the value of the underlying put increases. A single option contract covers 100 shares of stock. If an option were trading at $1 ¼, one contract would cost $125, plus commission. Exercise price-Exercise price, or the "strike price", is the price per share at which the holder of the call option may purchase the underlying stock. Premium-The buyer of an option pays a "premium" for the option. The greater the length of the option the higher the premium. Furthermore, some of the tech stocks command much higher premiums due to high volatility, but the wide price swings could reward the option buyer with a greater upside potential. In the money option-When the stock is trading above the strike price, a call option is "in the money." Out of the money option-When the stock is trading below the strike price, a call option is "out of the money." A holder of an option that is "in the money" does not have to buy the underlying stock. The option could be sold for profit before its expiration. Risk of capital is limited to the loss of premium paid for the option. Prior to trading in options you must receive a copy of "Characteristics and Risks of Standardized Options" from your broker. Option trading involves a high level of risk and is not suitable for all investors. Furthermore, an option trader has to meet certain criteria and each brokerage house has different rules. |