LEARNING OPTION TRADING
Learning option trading is an
important prerequisite to becoming a part of the fast-paced and
potentially highly lucrative world of options trading. While it is not
necessary to have a higher education in finance, a solid basic
understanding of what options are and how they work is vital for anyone
wanting to become involved in trading options.
WHAT ARE OPTIONS?
The first step to learning option
trading is to understand what options are. Option contracts are often
based on stocks, but are also available on other financial assets such
as futures. A stock option is a contract which entitles the holder to
buy or sell the underlying stocks on which the contract is based at a
specified price (known as the strike price), at or before a certain date
(referred to as expiration). The holder of the option contract is not
obligated to exercise this right, and may also choose to sell the
contract before expiration. Options are priced at a fraction of the
underlying stock price, allowing a trader to control certain amounts of
stock for a much smaller outlay than purchasing the stock outright.
TYPES OF OPTIONS
There are many types of options, but the most commonly used are classed as call options
and put options.
These two types of options allow a trader to go with the price
direction of the market, whether that movement is up or down. Basically,
a call option is taken with the expectation that the stock price will
rise, and the option will gain value in accordance with this. When a
trader anticipates the stock price moving downward, they can take a put
option, which increases in value along with the decreasing stock price.
An important part of learning option trading is understanding these
types of options, and knowing when to use them.
DECIDING WHICH OPTIONS TO TRADE
A vital aspect of learning option trading is determining which options
to trade. This can be done by using forms of stock market analysis. The
most commonly used types of analysis are fundamental analysis, technical
analysis, and sentiment analysis.
studies the intrinsic value of the company in which stocks are offered.
Using this type of analysis can allow a trader to identify stocks with
solid value that are being offered for a fair price. Options trading,
especially if it is swing trading or day trading does not always place a
lot of emphasis on this fundamental value, as gains are made from short
term price movements.
which is the study of price action with the aim of predicting probable
future movement, is widely used in options trading. This form of
analysis uses charts and indicators to calculate when prices are likely
to continue moving in the same direction or to experience a reversal.
Sentiment analysis studies the overall outlook of market participants
and uses this information to anticipate the likely movement of prices.
A combination of all of these forms of analysis provides the most solid
method of selecting stocks on which to trade options, and clearly this
takes some time and effort to learn and implement.
LEARNING OPTION TRADING STRATEGIES
Learning option trading strategies is a vital part of success in trading options. Part of options trading strategy includes determining the best point to enter and exit the
trade, and deciding on risk-management measures which include the use of
stop loss orders.
Another important aspect of option trading strategy is allocating an
appropriate portion of investment capital to each trade in order to
spread risk and maximize potential gain.
There are also many specific trading strategies which are utilized in the recommendations provided to the members of Weekly Options USA.
Learning option trading does not need to be difficult or daunting.
Understanding the basic principles of what options are and how to use
them, and utilizing the tools and techniques outlined in this article
can help an individual make a great start to their option trading
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