It’s easy to see why so many investors around the world enjoy buying or trading stocks. This business endeavor is exciting and profitable.
It’s imperative to point out that you can trade other financial instruments. However, they can be more difficult to master. This is the primary reason why some investors focus on stocks.
If you are interested in taking your investing game to the next level, you should consider options trading. Contrary to popular belief, options trading can put you in place to make consistent profits.
Can you become a successful options trader? You can become an exceptional trader if you are willing to exercise patience and hone your trading skills. Please keep in mind that you will not become wealthy overnight.
What Are Options?
In short, an option is a contract that gives you the right to buy or sell a stock at a certain price. The contract will stipulate that the transaction must take place by a certain date. You will typically buy 100 shares of the stock per contract.
An option gives you the flexibility to bet on the direction you believe the price of the stock will go. It’s important to mention that you are not obligated to buy the stock.
When you buy an option, you can do the following:
-Buy or sell stocks at an agreed price.
-Sell your contract to another investor.
-Allow your contract to expire, and walk away without further financial obligation to the stock.
What Are the Benefits of Options Trading?
Trading options offers four main benefits that you cannot afford to ignore. Let’s take a close look at them.
You face a limited downside – You are not contractually obligated to go through with the trade when you buy an option. If your projection about the stock’s direction is wrong, your losses are limited. You are only on the hook for the price of the contract and trading fees.
A smaller upfront investment helps you get a piece of the action – Buying shares of stock can be expensive. Fortunately, the price of an option is lower. If the trade goes your way, you stand to make the same amount of money as an investor who purchased the stock.
More flexibility – Before your contract expires, you can make one of three moves:
- Exercise your option and buy the shares. You can add the shares to your investment portfolio.
- Exercise your option, buy the shares, and sell them. You can sell some of them or all of them. The choice is yours.
- You can sell the “in the money” options contract to another market investor.
- If you have an “out of the money” options contract on your hands, you can sell it to another investor before it expires. This is an easy way to recoup some of your money.
You can fix a stock price – You can put a freeze on the stock price for a certain period. This means that you will be allowed to buy or sell a stock at the strike price before the contract expires.
Five Steps on Picking Options Stocks
It’s important for you to have a strategy in mind before trading options. Here are five steps on how to pick options. They can help you choose options stocks that have the potential to make money.
1. Have a Clear Objective
You must have a clear trading goal before investing your money into a trade. Would you like to put your money behind a bullish or bearish view of the financial asset?
Would you like to earn premium income on the trade? A clear objective will help you answer these important questions.
2. Calculate Your Risk and Reward
How much capital are you willing to put at risk? Choose a trading strategy that will suit your comfort level.
3. Look at the Volatility
Implied volatility can help you get a good read on the option’s price. When you compare the stock’s volatility with the historical volatility, you will be in a better position to choose your trading strategy.
Implied volatility will help you find out if other investors expect the stock to make a huge move or a small move in the market. Looking at the volatility closely can help you make better decisions.
4. Events
Pay close attention to events. There are market-wide events and stock-specific events. Market-wide events have an impact on broad markets. These types of events could be economic data press releases or announcements from the Federal Reserve Bank. Stock-specific events can be new product launches, spin offs, or earnings reports.
Market-wide events and stock-specific events can influence the stock price. You can take advantage of events when a surge in volatility takes place, or you can wait until things settle down.
5. Stick with a Suitable Strategy
You can be conservative or aggressive with your trades. However, you must choose a strategy that supports your trading style.
Trading options will give you the golden opportunity to generate passive income from the comfort of your home. If you take heed to the five tips listed above, there’s no reason why you cannot become a successful options trader.
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