CFD, Options, Warrants, Forex, Shares, Products & Services, Psychology, Fundamental Analysis, Technical Analysis

Trading a variety of stocks and entering in different positions can be a tricky to manage. Unless you an experienced trader with a knack for multi tasking this can prove to be difficult. But there is a way that you can access the stock market in one transaction. The stock market offers a variety of financial commodities that you can trade other than the common shares. Trading index options is a good way to gain access to a wide range of markets.

Index options

The other black hole for traders, apart from falling share prices, is a neutral market. The price doesn't budge and settles in a limited range for a long period of time. During this time traders make little money and pay from dividends. They sell their position or hold in hopes that the share price moves up. Option offers an alternative to this scenario by buying call options over your stock. The bought call is covered by the shares.

Income

When a share falls in value, traders will either sell to cut their losses. They may incur a capital gains tax in the process, and miss the opportunity when the price recovers. Fortunately, you can use options to protect your investments. You don't need to sell, and still benefit from a rise in share price. With a put option, your shares are protected no matter how low the share price drops. Its a hedging strategy that enables you to compensate by making money in one market when you lose in another. Your put option offsets the risk of your share position.

How does it work?

Traditionally, traders make money from a rise in share price. Then when a bearish market comes around they stay out until the market recovers so they can buy back in. Trading options, on the other hand, lets you profit even when share prices fall. This can be done by buying put options. Its basically the opposite of buying call options. The more the share price falls, the higher in value the put options become. If the share market decides to take a different route and the share price increases, the put will lose its value, but the most you can lose is your premium.

Leverage

So far we have covered the advantages of buying call options, and pointers to help you decide which option to buy (or sell). Now we will cover the options that you can do when you buy the call. You don't really need to hold your position until it expires, as a matter fact most option positions close before their expiry date. You need to take one of these actions before the expiry date or your option will become worthless.

Sell your Options

Once you believe that the share price is on the rise, you will most likely buy a call option. Which one to buy will depend on two main factors that you have to choose, the exercise price and the expiry date. Deciding what expiry date you should settle for and the exercise price you want to lock in involves different factors that you have to look into.

Options: Exercise price

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