Welcome to the wonderful world of stock options trading.
Over the next ten weeks I will be releasing and sharing
articles on how you can profit from one of the fastest
growing areas of financial investment available to
individuals. This year it is forecast that the number of
options contracts traded in America will have increased by
over 300% since 2001 (Source: The Options Industry
Council). This means that there is far greater liquidity in
the options market and many more money making opportunities
for individual traders just like you.
But before I start you may be wondering what a stock option
is. Simply, a stock option gives you the right to control
the ownership of a stock for a fraction of the price to buy
it. There are two types of options; the first is a Call
Option which is the option to buy a share of a certain
company for a predetermined price before a predetermined
date. The second is a Put Option, which is the option to
sell a share of a certain company for a predetermined price
before a predetermined date.
As an example if you wanted to buy 100 shares in ABC
Company and the shares are priced at $50 each, you would
need $5000 to buy those shares. However you could buy 100
Call Options priced at $5 each, with the right to buy ABC
Company at $50 any time up to a date in the future (say
November 16th) and you would control the same amount of
shares for only $500. If the price of ABC Company goes up
by $5 and you owned the shares you would have made $500 or
10% on your $5000 investment, however because the Call
Options give you the right to buy the shares at $50 and
they are now worth $55 the price of the options would go up
$5 as well and you would have made $500 or 100% on your
$500 investment. This example demonstrates the great
leverage stock options provide.
Call Options are used when you expect the price of a stock
to rise, if you expect the price of a stock to fall you can
buy Put Options, which as mentioned before, give you the
right to sell a stock at a predetermined price. So in the
example above if the price of ABC shares fell to $45 and we
had bought Put Options giving us the right to sell ABC at
$50, the Put Options would be worth money because you could
buy ABC shares in the market for a cheaper price than you
could sell them for. Wonderful isn't it, you can make money
if the stock market is rising or falling!
To summarize a stock option has four components to it:
1. The underlying stock
The stock that the option is traded on (ABC Company in the
example above).
2. The exercise date
The predetermined date, before which, you can use or
exercise your option. Options always expire on the third
Friday of each month (November 16th in the example above).
3. The strike price
The predetermined price you can buy the stock for ($50 in
the example above). 4. The type of option
Either a Call or a Put option.
Now that you know what an option is let me share with you
the first key to successful options trading. It is very
simple: practice, practice, practice. I cannot stress
enough how important practice will be to your success as a
stock options trader. Trading options is an inherently
risky endeavor, however by learning the keys to successful
stock options trading it is possible to mitigate this risk
and maximize your gains. Options are a zero sum game, which
means for every winner there has to be a loser. I'm sure
you want to be a winner and not a loser, right? So you must
take the time to learn the fundamental theories of options
trading and practice the strategies behind options trading
before you risk any of your hard earned capital in the
market. It is only when you are winning seven out of ten
trades on paper and you are confident in your trading plan
and money management techniques that you should trade in
the market for real. During these ten articles we will
explore just how to gain that confidence and success. Look
out for Key #2 coming soon.
US Government required disclaimer: Options involve risk and
are not suitable for all investors. Prior to buying or
selling an option, a person must receive a copy of the
Characteristics and Risks of Standardized Options. Copies
of this document may be obtained from your broker, from any
exchange on which options are traded or by contacting The
Options Clearing Corporation, One North Wacker Dr., Suite
500 Chicago, IL 60606 (1-800-678-4667).
----------------------------------------------------
Roger Cox, born in New Zealand, was President of a large
international freight company in Los Angeles before
starting his own consulting firm. Roger has been
successfully trading stock options for 4 years and teaches
others how to do the same at
http://www.prosperitywithoptions.com
