Options trading is often seen as the final frontier in the world of stocks and shares – the place where gamblers and risk takers dare to dabble, but in reality, this isn’t a full or fair picture.
It’s true that there is some element of risk in options trading, but it can be a safer bet than alternatives like trading in futures. Options trading also offers good potential benefits, like flexibility, and the option to increase success through some serious research and planning.
Here we look at the major strategies everyone interested in doing well at options trading needs to get both familiar and comfortable with if they want to get the most possible from their efforts.
Strategy 1 – Be prepared to graft
Never underestimate the need to learn as much as you can about options trading, what it is and how it works etc alongside being in touch with the wider goings-on in global stock markets. Failure to do this or to make only the minimal effort is likely to lead to very risky dealings and huge losses.
Strategy 2 – Get familiar with the lingo
There are always specialized terms to learn when you venture into unfamiliar territory and the realm of options trading is no exception. Here are some brief explanations of terms you are going to come across, and each is worthy of some more detailed research before you start trading properly.
A way of placing an advance bid or hold on stocks should they become available with certain terms attached. For example, you may have a figure in mind that is a good buying point or be looking to acquire a particular number of shares. What matters is that the rate is agreed at the point you make the expression of interest.
If this sounds like a poor deal for the seller don’t be fooled. The person buying the options pays a fee (also known as a premium) which works as a type of deposit. The exact amount tends to depend on the value of the entire deal, and it can run into the thousands.
Should the share rate rise and the buyer goes ahead within the agreed time period then all is good – the deposit premium is used as part payment and all is good. However, if the buyer fails to complete before the time limit of the option is reached then all bets are off and the down payment is forfeited.
This is a strategy designed to reduce risk, or hedge your bets, as it allows the person buying the asset to sell it at any point up until an agreed date at the suitable ‘strike price’ agreed for the stock when the deal was first done.
This is a good option as the strike price must be honored until the deadline, even if the stock price devalues in the meantime, so there’s still profit in it for the investor.
As with the call option, there’s a risk, and in this case, it involves the down payment made to hold the shares this way. (The down payment is usually a 100th of the total spent on the transaction.)
Strategy 3 – Get used to the art of speculating
You don’t need to be a committed gambler to do well at risk taking, in fact, it’s probably better if you are not, but you do need to be okay with speculating, a kind of considered way of taking chances. This is best achieved through dedicated practice of watching, analyzing and predicting the way stocks and shares both lose and gain value.
If your talent is for spotting future trends and growth areas then call options are a great way to buy in and secure your place before they take off. Options trading offers the rare opportunity for those involved to hedge bets and therefore control the risk to a greater extent than regular stock market trading methods ever could. Plus the agreed down payments or deposits mean any potential loss is always clearly defined.
Strategy 4 – Learn to read an options table
Unless you are a math fiend the first glimpse of an options table is likely to be pretty scary, with lots of columns and unfamiliar, nonsensical words, but as with anything it is possible to learn enough to get by. Here’s a brief overview of the contents of an options table.
The OpSym column
This stands for option symbol and the column includes data on the stock symbol, the maturity date, the strike price agreed and if it is a C (call) or P (put) option.
The bid column
This covers the current price if you want to buy an option.
The ask column
This covers the current price if you want to sell an option.
The extrinsic ask column
This shows how much of the time premium is left before the option expires and it is lost.
The implied volatility bid/ask column
This is good to look at to get an idea of the possible future volatility of an option. It fluctuates depending on the current market value and how much time is left before the option will expire.
The volume column
A good resource for tracking the trading history of an option you are looking at, and the number which was traded recently.
The open interest column
This is the place to check out the amount of contacts in operation for an asset which are still open and active.
The strike column
Recording the figure which a buyer or seller will set before offering an asset to the market.
This is by no means an exhaustive guide to the world of options trading or the ways to become successful within it, but at the very least it’s a sound grounding, and a platform to spark more research and learning which is always essential. You can find more info here if you would like to extend your learning.
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