 Using Options Trading in Your Trade PlanPublished Date: 2009-09-19 17:27:46 WorkOnInternet.com
Some beginning traders are even a little wary of selling stocks short, as they have not made the effort to understand how easy it can be. The same comment can be applied to trading options, as an option trading education will open up many possibilities to you, as long as you become familiar with the terms and the use of them.
An options trading strategy can be significantly more complex than simply going long or short on a stock, but it does not have to be. Options can simply be bought or sold, with the trader anticipating whether the option is over or under priced and trading accordingly. But the interesting side of options is when you add them to your trading arsenal, and use them in combination with other types of trade. Even the most complicated trading structures established around derivatives like options are built up from the basics. Two easy examples are the covered call and selling puts.
In both of these cases you are taking the position of selling the option, thus generating immediate income. If the market moves as you anticipate, these maneuvers can result in much greater profits than simple stock trading. It can be very worthwhile to become familiar with these and other techniques that combine options with regular equity trades. You should note that when you sell options you can be exposed to a greater loss – one common traits of buying options is that you cannot lose more than the money you have spent, but when you sell them, you are committed to the trade at any cost if the buyer can gain by going through with it.
The way selling puts works is that you sell an option to buy a stock you really want at the price you want to pay. For example, it may be trading at $25 and you would like to buy it at $20. Normally, you might wait to see if the price comes down, and you gain nothing from doing this. If instead you sell a put at $20, you will get paid immediately. If the stock trades down to $20 or below, then you are committed to buy one hundred shares in it at $20, which is what you wanted to do in the first place. If the price does not come down that far, you have made money and when the option expires, you can sell another put for more income.
With a covered call, you sell the call option, which again gets you immediate income. You also buy the stock to cover the amount you need if the option is exercised, hence “covered call”. If the option expires worthless, you can sell another call for more income, and repeat the process. If the option is exercised, the shares are called away from you but you have made the cost of the call. There are many other option trading strategies that can enliven your trading and increase your potential profits. Mark Soberman of NetPicks LLC has been trading for over 20 yrs and offers free educational resources, live forex and futures signal services, as well as a free report revealing the 7 trading secrets. http://www.netpicks.com/trading- tips\">Get the 7 Secrets! |
