Stock Trading Tips

Adept option traders resort to implement multiple options’ position simultaneously to make profits. This technique of incorporating multiple option positions at the same time to make profits in the stock option trading arena is termed as stock option trading strategy.

There are innumerous stock option trading strategies that the option traders use to make money in this area. The basic strategies constitute bullish, bearish and neutral options’ strategies.

Going in line with the market and exploiting the trends of the market is termed as directional trading. This proves to be perfect for beginners when they enter into the area of options trading.

1. Bullish Stock Option Trading Strategy

These strategies are useful when the value of a stock goes up. But the evaluations of the extent to which the stocks will be up and the timeframe for which this tends is likely to continue play a vital role in optimizing this strategy.

Bull Call and Bull Put Spread are the couple of strategies that come under this category.

The billing stock option trading strategy that is usually taken up by a newbie is to resort to a simple call option that often proves to be profitable in bullish markets.

2. Bearish Stock Option Trading Strategy

The bearish stock option trading strategies are incorporated by traders when there is a downward movement of the stocks with the intention of getting profited in options’ trading. Beginners just opt for a simple put option in case of the bearish market trends. Brea call or put strategy can be used case of bearish markets to make profits with ease.

3. Neutral Stock Option Trading Strategy

They can internally be categorized as bullish and bearish on volatility. The very common neutral trading strategies are straddle, strangle, butterfly, time spread and condor

Straddle and Strangle are stock option trading strategies that entail equal number of call and put options with the same expiration date. The only distinguishing factor is that the strangle strategy ahs a couple of strike prices associated with it while the straddle has only one. Butterfly spread involves puts and call in bullish/bearish markets. Three strike prices are associated with this spread. The lower two are for a bull spread and the highest of the three prices is for a bear spread. Condor is analogous to butterfly. The difference is the different strike prices associated with the short put and short call.

A stock option trading course can further elaborate on the other stock option trading strategies in detail. Get to know the pros and cons of each and arrive at your own unique strategy to help you succeed in options trading in the long run.

A basic understanding of the factors that differentiate the stock trading system from the stock option trading system can emphatically help you in wading through the process of educating yourself in the arena of stock options’ trading. Once you understand the subtleties involved, it is imperative to get a thorough knowledge on the complexities of the stock option trading system before diving into trading them in reality.

The Basics of Stock Option Trading System

Options are the contract agreements that have 100 units of the share as their base. The stock option trading system constitutes two types of options namely the call option and the put option.

Call option offers the right of purchase to the buyer/holder while the put option offers the right of sale of the underlying asset to the buyer/holder. In stock option trading system, the buyer/holder is not obligated to realize the transaction within the stipulated time frame. The seller/writer owns the risk of giving away or selling the underlying asset in case of a call option while he undergoes the risk of taking back the underlying asset in case of a put option.

In the stock option trading system, there are 2 variants of options namely the American variant and the European variant. The options in the former can be exerted any time between the date of purchase and the date of expiry while the options in the latter variant can be exerted only on the date of expiry.

Strike prices of options are traded in intervals of $2.5 till $30 and at intervals of $5 there after. Options have an expiration date associated with them and this is usually 9 months from the date of listing. Options are deemed to expire on the Saturday following the third Friday of the month of expiry. LEAPS are the long term option contracts that have 36 month validity from the date of listing before expiry.

Starters who enter into the stock option trading system opt to take up directional trading when gearing up. They tend to buy call options if they expect an upward trend of a particular stock thereby wanting to get profited from the difference in prices. By this, they risk the meager value of the contract. Yet another alternative is to buy put options of the stock that is expected to have a downward trend so that they can reap the profits when the value of the stock stoops below the strike price. Here, they exploit the movement of the market to their benefits and this is popularly termed as directional trading.

In addition to directional trading, the option traders can take advantage of the erratic movement of the stock values in stock option trading system. By resorting to techniques like straddle, time-spread, strangle and butterfly spreads, they can start minting money on the fly with the aid stock option trading system by playing carefully.

Whatever might be the stock option trading strategy handled, it is very critical that you have a complete understanding on how the stock option trading system operates before you make a move to actual trading in reality. Understand the options trading completely and then barge into the day trading of options in the real sense for that would prove to be profitable.

The rudimentary knowledge of options is very essential to get into stock option trading. Go through this article and get yourself educated on the basic terminologies related to stock option trading system that can further enhance your understanding of the intricacies involved in options’ trading.

What is Stock Option Trading?

An option is just the contract representing 100 units/stocks of the underlying asset that offers the buyer the right to purchase (call option)/sell (put option) the stocks of the underlying asset.

Stock option trading is very similar to the scenario of wanting to buy a house and signing a sale agreement for the same. Suppose, you are interested in buying a house that costs $10, 00000. Though you currently don’t have the financial affordability to but that right away, you can sign a contract with the seller that gives you the right to purchase the house within a stipulated period of time, say, 2 months from the date of signing the contract. In return, you pay $3000 for this initial contract to be signed.

Irrespective of whether the construction costs are going to go up or come down, the seller has the obligation to sell the house to you at this fixed price of $10, 00000 and you possess the right to make the purchase. In this scenario, you are under no obligation to purchase the house at any cost. If you don’t make the purchase, you just loose the payment that you made towards the contract and in this case it amounts to $3000.

Here 2 different scenarios can arise. The cost of the house may go up or come down in those three months. If it goes up, say, doubles in value, you would have the tendency to make the purchase and enjoy the profit of $10, 00000 that you made in a 2-month duration. If it comes down to $8000, you might not want to buy the house and suffer a loss. In this case, you don’t exercise the purchase and just end up in loosing the initial payment of $3000 paid towards the contract and the contract here becomes void at expiry of the timeframe.

Stock Option Trading Terminologies

Options are just the derivative products that represent the underlying asset. A call option is the contract that offers the right of purchase to the buyer, commonly called as the holder in stock option trading. This type of option obligates the seller or the writer of the option to sell the underlying asset based on the request from the holder. A put option is the contract that offers the right of sale to the buyer. It obligates the seller to purchase the underlying asset based on the requisition from the holder.

Option price is often referred to as the premium and the value of the underlying asset as per the option contract is cited as the strike price. Price of the stock, strike price, timeframe till expiry and the option estimates are the factors that determine the premium of options in stock options’ trading.

Given this, you would now have an idea of the very basics involved. There are much more to be understood to completely imbibe the in and out of stock options. But, a thorough understanding of these concepts discussed above is very vital to barge into stock options’ trading. Have these in mind and get into options trading slowly and steadily with ease.

While the increased complexity of stock options has kept many investors away from stock options trading, there are others who think that stock options trading is very analogous to stock trading since both are dependent on the bullish and the bearish movement of the underlying assets. However, there are myriad differences between the two. Before diving into stock options trading, it is imperative that you understand the underlying differences which are often complex and incomprehensible.

The primary difference between stock options and stock trading lies in the fact that stock trading revolves around the stocks which in turn entail the possession of a proportional part of the company’s stake while stock options are contracts that empower the buyer/holder the right to sell (put option)/purchase(call option) the underlying asset while making the purchase(in case of a put option) and sale (in case of call option) obligatory for the seller, at the strike price before the expiration date once a contract is written. The concept of expiry prevalent in stock options trading does not appear in the arena of stocks trading.

The second difference arises out of the risk that is involved in these trading avenues.

While the stock trading implicates loss/profit proportional to the ownership of the individual, the profit and loss associated with holders and sellers in stock options trading is complex and completely different. While the buyer in case of stock options trading is bound for a loss that is limited to the value of the contract, he enjoys the advantage of unlimited profits. Nonetheless, the sellers undergo the risk of being forced to sell (call) or purchase (put) the underlying security at the strike price before the expiry date.

While trading stocks can be analogous to playing casino where all the owners who bet against a house profit inexplicably when there is an favorable market trend, the stock options trading is analogous to the participation in the horse race where the buyers’ profit is the sellers’ loss and vice versa.

Stocks move in a direction proportional to the supply and demand. In case of stock options trading, the movement of the options is internally dependent on several factors. When the price of the underlying asset or the current interest rate moves up, call options go up while put options come down in their value. Call options move along the asset value and the current interest rates while the direction of the put options is on the reverse. Call options are valuable as long as the strike price is below the current market price of the option whereas the put options are worth only when the strike price is above the current option price.

Dividends paid out on the stocks have a remarkable effect on the options. The put options increase in value with the pay out of dividends while the call options’ value drastically comes down in such scenarios. Even if the stock value is not volatile, options tend to undergo a rise/fall due to uncertainly of future price associated with the underlying asset and options estimates is another attribute that gives rise to the change in option prices in case of stable markets.