Why I Never Trade Stock Options

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Options give active investors the flexibility and ability to protect, grow or diversify their position. With a stock option trades of strategies and stock option trades, options can appear complex however all options strategies work on the same principle. You can write options against shares you already own to earn additional income.

As options are classed as either call or put options, you can generate wealth from rising and falling markets. Options can be used to offset potential falls in share prices by taking put options. This gives you the right to sell your shares at a pre-set price for the life of the option, no stock option trades how low the share price may stock option trades.

Ever wondered how you can buy stock cheaper than the current share price? In this article I will explain how you can increase returns than would have been achieved with a simple Options strategy while taking small profits along the way. This is when an investor buys stock and sells Call Options. The Buy and Write is quite an unassuming strategy that has been used by institutional and retail investors over many years.

The stock is purchased and the Options are sold Callsthereby this is an approach that suits a market that is steady or trending higher slightly. Writing a Put may mean an investor buys the stock at a predetermined price and time.

Each option covers shares. These percentage advantages accumulate over time so that from the smallest investments, a bigger profit can grow. So we can proceed to write another call. We no longer have a stock position in XYZ. Without the sale — all profits are unrealised. However, the option strategy has both enabled us to take small profits along the way and our profit is realised stock option trades the end of the strategy giving us capital to reinvest.

The delta on an option is a member of a Greek family that determines the price of an option. The Delta is represented in mathematical terms between Options that are in the money have stock option trades delta of 1, options that are well out of the money have stock option trades lesser rating of say 0.

As the options moves closer to being in the money the delta will increase. So what does this mean? If the stock moves 1 cent, then so does the option. If the option has a delta of 0. One important point needs to be made. As calls and puts are polar opposites this is reflected in the delta as well.

Calls have positive deltas and puts have negative deltas. For example if the underlying rises the value of the call will increase, the put will decrease. So as you can see from the above examples can create more certainty around you fills for further details contact your broker or the ASX. In stock option trades times the market has fallen 8 - 8. What if an investor could take advantage of a great dividend yield and the upward movements of a stock and remove any downside risk? Enter the Married Put strategy.

It is used when the investor is bullish on the stock long term but is worried about short term uncertainty. We buy 1, XYZ Bank shares For every cent lost on the physical below the entry price, the equal and opposite gain would stock option trades made on the Put. If the investor is still happy to keep the stock i.

At this point the downside protection of the Put is removed. Or the put could be rolled e. There would be an additional cost here. At this point stock option trades investor may feel that the Put is no longer needed and it would lapse worthless. Remember that if the investor is not comfortable with this strategy they can sell the stock and Put stock option trades any time to exit the position.

Also there is a great variation to the Married Put which is the Leveraged Married Put where some Margin Lenders will lend the full value of the stock if the Put is in place. The Married Put is a simple and effective strategy that gives investors the ability to stay in the market through times of short-term uncertainty.

If anything, it gives the investor some time to make a measured decision at a cost that is far outweighed by the profit potential. In the event that an incorrect decision is made, the cost of that is limited to the cost of the option. Historically the market spends more time moving in an upward direction bull marketthan in a downward trend bear market.

That's good news for investors, as over time the bull market will win out in duration and the longer you hold your Blue-chip portfolio the greater the chance of positive returns. On the flip side, the longer you hold your Blue-chip portfolio, the greater the chances are that you will encounter a correction. In my opinion the below are representative:. We insure our house.

We insure our car. Some people even insure their pets Like all other options, they have Calls and Puts, they can be bought and sold prior expiry, they have an expiry date and a strike. They are stock option trades settled stock option trades expiry, which is when profit or loss is actually realised. The settlement Stock option trades expiry is the opening price of the index on the day of expiry. Like with most options, if the investor believed the underlying asset was to fall they would look buy a Put to cover it.

The XJO protection directly mirrors the fall in the stock option trades in this example because we have purchased the option at the strike that is exactly the same as the index level.

The same calculation can be used for any percentage stock option trades in this example. Not many investors would have all stocks in their physical portfolio, or even ONLY blue-chip stocks.

In the event of a correction your physical portfolio could fall more or less than the cover provided by the options you hold. In the event that no correction occurs during the life of the Put cover, then the premium stock option trades would be lost as the option expires worthless if the index is above at expiry.

In order to continue cover, another Put position would need to be purchased which would involve recurring outlays to afford protection. Over time this could become costly. Investors could use the dividends received on an annual basis to help fund the use of protections strategies like this.

In summation, options give you options. You may not have to liquidate stock option trades portfolio with the rest of the herd at a great loss. Options trading What is an mFund? Learn forex trading What is forex? Benefits of trading forex? Trading guides What is options trading? Is there any support on the platform?

How do I fund my account? How can I reset my password? Where can I find my account number? How do I do a one-off sale? How do I pay for my shares?

What is your brokerage? Can I trade my margin loan with you? Contact us Premium Services. What is options trading? Options trading Options give active investors the flexibility and ability to protect, grow or diversify their position.

Options can be used to: Earn stock option trades from your share portfolio You can write options against shares you already own to earn additional income. Generate wealth in rising and falling markets As options are classed as either call or stock option trades options, you can generate wealth from rising and falling markets. Hedge against share price falls Options can be stock option trades to offset potential falls in share prices by taking put options.

Working examples and case studies Case study 1: From little stock option trades, big things grow Ever wondered how you can buy stock cheaper than the current share price? Open a Stockbroking account.

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When most people think of investment, they think of buying stocks on the stock market, and many are probably completely unaware of terms like options trading. Buying stocks and holding on to them with a view to making long term gains is after all, one of the more common investment strategies. It's also a perfectly sensible to way invest, providing you have some idea about which stocks you should be buying or use a broker that can offer you advice and guidance on such matters.

These days, many investors are choosing to use a more active investment style in order to try and make more immediate returns. Thanks to the range of online brokers that enable investors to make transactions on the stock exchanges with just a few clicks of their mouse, it's relatively straightforward for investors to be more active if they wish to. There are many people that trade online on either a part time or a full time basis; buying and selling regularly to try and take advantage of shorter term price fluctuations and often holding on to their purchases for just a few weeks or days, or even just a couple of hours.

There are plenty of financial instruments that can be actively traded. Options, in particular have proved to be very popular among traders and options trading is becoming more and more common. On this page we have provided some useful information on what is involved in options trading and how it works. In very simple terms options trading involves buying and selling options contracts on the public exchanges and, broadly speaking, it's very similar to stock trading. Whereas stock traders aim to make profits through buying stocks and selling them at a higher price, options traders can make profits through buying options contracts and selling them at a higher price.

Also, in the same way that stock traders can take a short position on stock that they believe will go down in value, options traders can do the same with options contracts. In practice however, this form of trading is far more versatile than stock trading. For one thing, the fact that options contracts can be based on wide variety of underlying securities means that there is plenty of scope when it comes to deciding how and where to invest.

Traders can use options to speculate on the price movement of individual stocks, indices, foreign currencies, and commodities among other things and this obviously presents far more opportunities for potential profits. The real versatility, though, is in the various options types that can be traded and the range of different orders that can be placed.

When trading stocks you basically have two main ways of making money, through taking either a long position or a short position on a specific stock. If you expected a particular stock to go up in value, then you would take a long position by buying that stock with a view to selling it later at a higher price. If you expected a particular stock to go down in value, then you would take a short position by short selling that stock with a hope to buying it back later at a lower price.

In options trading, there's more choice in the way trades can be executed and many more ways to make money. It should be made clear that options trading is a much more complicated subject than stock trading and the whole concept of what is involved can seem very daunting to beginners.

There is certainly a lot you should learn before you actually get started and invest your money. With that being said, however, most of the fundamentals aren't actually that difficult to comprehend.

Once you have grasped the basics, it becomes much easier to understand exactly what options trading is all about. Buying an options contract is in practice no different to buying stock.

You are basically taking a long position on that option, expecting it to go up in value. You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker. This order was named as such because you are opening a position through buying options. If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best.

We provide more information on selling and exercising options later. One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to go down. If you were expecting an underlying asset to go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price.

If you were expecting an underlying asset to go down in value, then you would buy put options, which gives you the right to sell the underlying asset at a fixed price. This is just one example of the flexibility on these contracts; there are several more. If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close that position. To close a position by buying contracts you would place a buy to close order with your broker.

There are basically two ways in which you can sell options contracts. First, if you have previously bought contracts and wish to realize your profits, or cut your losses, then you would sell them by placing a sell to close order. The order is named as such because you are closing your position by selling options contracts. You would usually use that order if the options you owned had gone up in value and you wanted to take your profits at that point, or if the options you owned had fallen in value and you wanted to exit your position before incurring any other losses.

The other way you can sell options is by opening a short position and short selling them. This is also known as writing options, because the process actually involves you writing new contracts to be sold in the market. When you do this you are taking on the obligation in the contract i.

Writing options is done by using the sell to open order, and you would receive a payment at the time of placing such an order. This is generally riskier than trading through buying and then selling, but there are profits to be made if you know what you are doing. You would usually place such an order if you believed the relevant underlying security would not move in such a way that the holder would be able to exercise their option for a profit. For example, if you believed that a particular stock was going to either remain static or fall in value, then you could choose to write and sell call options based on that stock.

You would be liable to potential losses if the stock did go up in value, but if it failed to do so by the time the options expired you would keep the payment you received for writing them. Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them.

However, depending on the strategies you are using and the reasons you have bought certain contracts, there may be occasions when you choose to exercise your options to buy or sell the underlying security.

The simple fact that you can potentially make money out of exercising as well as buying and selling them further serves to illustrate just how much flexibility and versatility this form of trading offers. What really makes trading options such an interesting way to invest is the ability to create options spreads.

You can certainly make money trading by buying options and then selling them if you make a profit, but it's the spreads that are the seriously powerful tools in trading.

A spread is quite simply when you enter a position on two or more options contracts based on the same underlying security; for example, buying options on a specific stock and also writing contracts on the same stock. There are many different types of spreads that you can create, and they can be used for many different reasons. Most commonly, they are used to either limit the risk involved with taking a position or reducing the financial outlay required with taking a position.

Most options trading strategies involve the use of spreads. Some strategies can be very complicated, but there are also a number of fairly basic strategies that are easy to understand. You can read more about all the different types of spreads here.

There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. It's continuing to grow in popularity, not just with professional traders but also with more casual traders as well. To find out just what it is that makes it so appealing, please read the next page in this section — Why Trade Options? What is Options Trading? Section Contents Quick Links. What Does Options Trading Involve? Below we explain in more detail all the various processes involved.

Buying Options Buying an options contract is in practice no different to buying stock. Exercising Options Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them.

Options Spreads What really makes trading options such an interesting way to invest is the ability to create options spreads. Benefits of Trading Options There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. Read Review Visit Broker.