Posts Tagged ‘Explained’
Robert T. Kiyosaki says that Option Trading is the investment of the rich.
Indeed, option trading is the most versatile form of investment, today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.
Option Trading Explained – Simply put, it is the trading of option contracts on a particular stock.
Options Explained – A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.
There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!
Option Trading Explained – What Can Stock Options Do?
Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.
Stock Options are:
Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.
Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.
Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.
Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.
Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.
And the Negative Effects are:
No value beyond expiration. You can potentially lose all your money along with the expiration of the option.
Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.
Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.
Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.
Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.
Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.