STOCK OPTION CONCEPTS FOR SUCCESSFUL TRADING

Stock options are a misunderstood investment tool but once understood by both traders and investors it can be a very versatile investment tool. However, as a consequence of their versatility, options are often viewed as to complex for the beginning option trader to utilize effectively. In order to avoid common mistakes of the beginning traders or investors it's important to understand a few basic concepts like types of options offered, leverage, risk control, time, and strike prices.

First, it's important to understand that there are two types of options that are commonly offered on most publicly traded companies which are called "calls" and "puts". Call options are bought when an option trader believes that the underlying stock is going to rise in share price. Now, put stock options are bought when a particular speculator believes that the price on a stock is going to decline. So from the standpoint of directional trading understand which option to trade when considering the direction of the stock you favor.

Options offer one of highest forms of pure leverage available in the investment world and lets you control up to 100 shares of a company's stock per each stock option! If you were to invest in 100 shares of XYZ company's stock which trades at $30 per share then you would invest up to $3,000 in order to control that block of stock whereas you would only need a couple of hundred dollars to control the same stock with a single option. Lets also project that XYZ had a good earnings report and rallied to $36 a share before you sold and captured a $600 profit or 20% gain. If you instead had bought a call option it is very realistic to capture a 100% gain or greater.

Now, if you are starting to realize how powerful stock options are by offering you this kind of leverage then you will understand after reading the next few sentences that there potential for risk control is unparalleled! You see, when you purchase an option on a particular stock whatever the cost of the option is the only portion you actually risk. For example, if you buy a call option on a $60 stock that you believe is going higher and then the next day the CEO for that company announces the company's bankruptcy which results in the stock falling to zero the most you can lose in that scenario is $300. Whereas if you owned 100 shares at $60 a piece or a $6000 you could lose then entire $6000!

While you have enormous advantages with trading options you must gain a deep understanding of how time effects a given stock option and factor that into your trading. Options have a set time period before they expire worthless if they are not exercised and this time period can be set from 30 days to as long as 3 years depending on the stock. The expiration date occurs on the month of the option on the third Friday or available business day. The reason this is important is that any option less than 30 days is going to erode in value quickly because of time decay because the closer it gets to it's expiration day the less valuable it becomes. Depending on your option strategy its important to know the average holding days for your trading method so that you can make the best stock option selection.

The other critical concept you must understand when trading options is what strike prices are and how to use them. "Strikes" are the set price terms assigned to a given underlying instrument or, in this case, to the stock of a publicly traded company. As an example, XYZ company's stock is at $70 a share and its call options are listed at a $65 strike, $70 strike, and $75 strike. Each strike has its advantages depending on your option trading method but knowing what strike prices are offered and understanding them in relation to option trading will help you make the best trading decision on which stock option to select.

Incorporating stock options into your investment arsenal is an excellent way to take advantage of their enormous potential for huge profits and limited risk control. So take some time and reread this article as well as study some of the price option tables in any financial site or periodical. By taking your time and devoting yourself to building a foundation on these concepts of stock option trading you can learn to take advantage of one of the most powerful and flexible trading instruments in the markets today!

Article Source: Main Articles

Do you want to capture high flying stocks in the stock options market just like the pros? Read more stock option trading at www.StockOptionSystem.Com and signup for a free newsletter and receive a free ebook.
This article is available as a unique content article with free reprint rights.

This article may be reproduced wholly or in part without written permission provided the byline, resource area, and any hyperlinks remain in order to give proper credit to the author.

Internet search engines and directory listings are imperative to your sites existence and success. Submit Your Website to the Searchen Networks directory and search engine to achieve authoritive inbound links.

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5