The advantage of option investing is that it enables you to maximize your potential reward while at the same time minimizing your risk. An options trader is able to leverage his investment by buying and selling in different combinations, which may ultimately help him maintain the level of risk he wants. Swing Option traders are able to use such instruments to take advantage of any market condition. It is important to note nonetheless that option trading is not for everyone. Options are known as wasting assets. This means that time plays a significant impact on option prices and profitability of the trades. As the expiration date of options approaches the value of the options decreases generally. Options investors must liquidate their positions before the option expiration date if they realized profits. Unprofitable options will expire on the last trading day of that option.
Historical Facts About Option Trading
Option trading started in the Chicago Board Options Exchange (CBOE). According to CBOE, the first option contract began trading on April 26, 1973, and 911 Option contracts were traded on that day. There are two types of options instruments: call options and put options. A call option is a bet that the stock will be worth more than the price set by the option (called the strike price). A put option is a bet that the stock's price will go down below the price set by the option (and often considered much riskier, because there are no limits to how high a price may rise). Option pricing relies on Black Scholes option pricing model developed by two Nobel Peace Prize winners in Economics, Black Scholes, and Robert Merton. Option investing has been increasingly used by swing traders to profit from the markets, nevertheless, there is also the risk of losses as with all investments.
Call Options
Calls are the basic strategy used by most option traders. If an option trader concludes through her research that a stock is about to take off in price, she can buy call options which are priced in contracts. When an investor buys a contract of a call option, he is anticipating that the price of the stock will rise above its current prices within the specific targeted date. If an investor's analysis is correct, she may profit, but if the price declines, the option value will decline as well. This strategy is good for swing trading as well; the good news for the option investor is that it cost much less to purchase an option compared with outright stock trading.
Put Options
When an option investor buys a put option, she is basically betting that the underlying stock will decline in value. When this happens, the value of a put option increases, and swing traders can quickly lock in the profit by selling their puts. This process may repeat many times over during the course of a day's trading, and an active swing trader may buy the puts again when the stock price rises again. Option swing traders also use technical indicators as used by stock traders for research purposes.
Naked Call Strategy
When investors are bearish on the price of a stock, they may write a naked call on that stock thereby locking in an immediate profit if the stock remains below the strike price. Only write naked calls when and only if you think that stock will go down in price. The risk with naked calls is if the stock goes up in value, the investor loses. But the point to have in mind is that all purchased options whether puts or calls have an expiration date. Sometimes the stock may move in one direction before going the other way. When investing in options, consider buying distant expiration dates, although the value of such option may be higher because of the factoring of the time value in the price of that option.
Naked Put Strategy
Many more swing option traders write naked puts than calls. A naked put writer expects the stock price to rise. Such stock must have positive fundamentals, with good growth potentials. It is also important for a naked put writer to note that if the price of that stock goes down during the option duration, the writer may lose money if the stock fails to rally back before the option expiration period.
Option Spreads
Option spread strategies can be used in trading all kinds of investment assets. such as stocks, bonds, or futures. It is a complex form of option investing. One common form of spread is called a vertical spread. It involves buying and selling of two option instruments (one long and one short for example), which may share the same expiration dates with differences in strike prices. Spreads are generally used to limit risks, while you may gain in one position, you may lose in the other. The strategy here is for your gains to be much more than your losses. The difference represents your profit from that trade.
Option trading started in the Chicago Board Options Exchange (CBOE). According to CBOE, the first option contract began trading on April 26, 1973, and 911 Option contracts were traded on that day. There are two types of options instruments: call options and put options. A call option is a bet that the stock will be worth more than the price set by the option (called the strike price). A put option is a bet that the stock's price will go down below the price set by the option (and often considered much riskier, because there are no limits to how high a price may rise). Option pricing relies on Black Scholes option pricing model developed by two Nobel Peace Prize winners in Economics, Black Scholes, and Robert Merton. Option investing has been increasingly used by swing traders to profit from the markets, nevertheless, there is also the risk of losses as with all investments.
Call Options
Calls are the basic strategy used by most option traders. If an option trader concludes through her research that a stock is about to take off in price, she can buy call options which are priced in contracts. When an investor buys a contract of a call option, he is anticipating that the price of the stock will rise above its current prices within the specific targeted date. If an investor's analysis is correct, she may profit, but if the price declines, the option value will decline as well. This strategy is good for swing trading as well; the good news for the option investor is that it cost much less to purchase an option compared with outright stock trading.
Put Options
When an option investor buys a put option, she is basically betting that the underlying stock will decline in value. When this happens, the value of a put option increases, and swing traders can quickly lock in the profit by selling their puts. This process may repeat many times over during the course of a day's trading, and an active swing trader may buy the puts again when the stock price rises again. Option swing traders also use technical indicators as used by stock traders for research purposes.
Naked Call Strategy
When investors are bearish on the price of a stock, they may write a naked call on that stock thereby locking in an immediate profit if the stock remains below the strike price. Only write naked calls when and only if you think that stock will go down in price. The risk with naked calls is if the stock goes up in value, the investor loses. But the point to have in mind is that all purchased options whether puts or calls have an expiration date. Sometimes the stock may move in one direction before going the other way. When investing in options, consider buying distant expiration dates, although the value of such option may be higher because of the factoring of the time value in the price of that option.
Naked Put Strategy
Many more swing option traders write naked puts than calls. A naked put writer expects the stock price to rise. Such stock must have positive fundamentals, with good growth potentials. It is also important for a naked put writer to note that if the price of that stock goes down during the option duration, the writer may lose money if the stock fails to rally back before the option expiration period.
Option Spreads
Option spread strategies can be used in trading all kinds of investment assets. such as stocks, bonds, or futures. It is a complex form of option investing. One common form of spread is called a vertical spread. It involves buying and selling of two option instruments (one long and one short for example), which may share the same expiration dates with differences in strike prices. Spreads are generally used to limit risks, while you may gain in one position, you may lose in the other. The strategy here is for your gains to be much more than your losses. The difference represents your profit from that trade.
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