Options Trading 101

Submitted by Stock Market News on 27 May, 2011 - 17:14

How to trade options.

Options provides traders more opportunities in comparison to share trading. Unlike in a futures contract, traders don't have an obligation to buy and sell, and can let the expiry date pass by without doing anything. An options trader can take or write calls, take or write puts, trade a combination of the previous two, do any of the previous steps with the purchase or sale of the underlying shares. With all of this how do you choose the right strategy to make profits out of options trading.

Takers and writers

The main goal of course is to profit and cut your losses. The option taker buys options at a low price as much as possible and sell high when its value rises, then pocket the difference. On the other hand with option writers, they sell options at a a high price as much as possible, then sell low when its value falls. In both situations the trader wants to pay at a low cost and profit from a high sale.

Factors to Consider in Options Trading

To be able to make the best out of options trading, traders need to think about the factors that make increase or decrease the value of an option so that they know what to do to yield the highest outcome. A rise in share price benefits call options but a fall in time and volatility can result into a loss.

  • Price - direction of the share price
  • Volatility - extent of price fluctuations
  • Time - when will the price fluctuate and your expiry date

These are the basic elements that you need to consider when choosing your strategy. In the next articles, we will look into each factor to see how you use them to your advantage.

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