Options

Shares are the most commonly traded commodity in the stock market, but there are alternatives that you can buy which can give you less risk and bigger chances for profit. If you are confident that a company's share price will take off, consider buying call options. As the share price increases, the call's value will follow suit, providing the opportunity for unlimited profits. The most you can lose if the price falls or stays steady, is the premium you paid. Here are the advantages that you can get when riding a rising share price when trading options.

Options Provide Leverage

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?

Apart from the direction of the stock market, traders also have to consider volatility. There is a limited time to the movement of the market whether, its going to rise, fall or remain in a price range . Volatility is about the fluctuation of share prices in the market that will greatly affect your profitability whether you take or write a call. If you buy an option because you think that the stock market will take off, the chances of the expected movement before the expiry date will fall if the stock becomes less volatile.

The third factor that options trader need to consider is time. Unlike shares, they have an expiry date that traders are bound to. In options trading, the movement that you are looking for, whether its a rise or fall, must take place by the expiry date. After the expiry date, the option is worthless. So its no just about the movement and fluctuation of price, you also have to think about the time frame.

Options Time Frame

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

Exchange traded options (ETOs) are versatile short dated financial products that allow investors to;

• Protect the value of individual shares or a portfolio
• Earn income
• Undertake to buy shares for less than their current price
• Lock in a buying price
• Get exposure to shares for limited risk

Here are the basic terms and descriptions that any investor should know as they learn about equity/index options. Alternatively, you can start by listening to a short presentation and come back to this page when finished.