Options Trading: Price

One of the factors that you need to consider is the price. The success of your strategy depends mostly on the movement of share prices in the stock market, so you need to decided where the share price headed. It can rise, fall or just remain steady. Once you have determined where the share prices will go, you can now narrow down the number of strategies that you can use.

Where is the market headed?

Determining where the market is headed is the same whether you are trading shares or options. The only thing different is your time frame. Some traders use fundamental analysis that focuses on the company and the industry it belongs to, including economic conditions in general that may have an impact in the financial world. Technical analysis on the other hand, focuses on the behaviour of price, in belief that they form repeating patterns which can be used to predict future price action. Traders are divided among the two but some are able to combine them together to devise their own method of analysing the stock market activity.

In general, significant movements in share prices may be suitable for taken strategies. This increases an option's intrinsic value and result in a profit when you sell. You will be either buying or selling the shares at a higher price than the current market price.

If you see that the stock will get stuck in a limited price range, written strategies are better. There will be little change in the option's intrinsic value but due to time decay it will fall, resulting in a profit when you close your option to buy it back. If the option runs out of money, it will become worthless and you keep the whole premium as profit.

Whatever analysis you use, always remember that market conditions changes from time to time. There is no right or wrong method, just profitable ones.