For example, I often get tired after lunch so wish I could take a short afternoon siesta, to perk myself up for the rest of the day (they even say that people who do this live longer, but that's another story). So it was often during those "after lunch" hours when I was pushing myself to concentrate on numbers when I just wanted to float away into dreamland, that my heart would wish I had the freedom to do as I pleased, when I pleased.
Then I found option trading.
I went to a seminar run by a guy named Nik Halik back in July 2002. I remember it was a pretty full-on weekend and very motivating. I came away from there, feeling like I had found what I always wanted to do. With the discovery of option trading, my whole view of the sharemarket changed. I realized that, when properly understood, options provide the advantage of flexibility that ordinary share trading does not. This is because options have so many more variables than just buying and selling shares - and you can use these variables to your advantage.
When you buy shares, you simply buy at a certain price and hope to sell it for more. But options have "strike prices", "expiry dates", 'implied volatility", "in and 'out of' the money" factors.... all of which allow you far greater flexibility in adjusting your position as you see the market direction forming. When buying shares, you simply buy and hope you've got it right, but with options, if the market turns against you, you can always salvage your position. Some options can also be purchased as a form of "insurance" on shares you already own.
The other advantage with options is that you can buy different types of options, depending on your view of market direction. If you think the price of a share will rise, you can buy a call option, but if you think it will fall, you can buy a put option.
But the "wow" factor with options really comes into play when you realize that you can also "write" or "sell" an option contract, in a way that allows you to create it out of nothing. Then if you start combining the buying and selling of different option contracts on the same underlying share, simultaneously, you are talking "spreads". Spreads can be either debit (ie. they cost you money) or credit spreads (ie. you recieve a net credit to your broker account from the deal).
If a share price action is narrowing into a small range and you feel it is going to break out soon, but don't know which way, you can take an "each-way" bet. You buy an equal number of call and put options with the same expiry date and wait for the move. When the share price breaks out, the move is usually large enough so that the profit from the winning option pays for the losing one and gives you a nice net profit.
I've done very well with options. I tried trading CFDs for a while, but found them very volatile and inflexible instruments. I would often be right on my general expectation of market direction, but was "stopped out" before from intra-day fluctuations before the move took off. You can avoid this with options and go on to make your profit.
Options are beautiful things.
Two types of instability should be noticed before considering trading options. Implied volatility belongs to the first type which is closely connected to the cost of the options. And the statistical volatility, the second one, is closely associated with the value of the underlying security.
When it comes to trading options, it is important to understand instability in the market. An options trader hopes trades will go as designed and anticipated, but this may not always happen due to market instability. However, if certain factors regarding such volatility are taken into consideration prior to placing trades, losses may be avoided. We will discuss the two crucial types of volatility about which an options trader should be vigilant.
The next example is implied volatility and is usually determined using an option pricing copy. The option's price is driven by its implied instability. Traders who specialize in TRADING OPTIONS may feel that a future event may influence the option cost and therefore may try to get the buyer to pay a high-than-listed price to hedge against the possible loss.
When this occurs, it magnifies the implied volatility. Despite this, when someone selling an option sees an unpleasant future unfolding, the price of the option may depict a lesser implied volatility. In order to avoid this, a proper option strategy must be in effect.
So what does this all mean? When options traders look at implied and statistical volatility, they can draw conclusions about the value of an option. The variation between the two types of volatility can tell a trader if an option is overvalued or undervalued.
If the implied volatility is comparatively greater than the statistical volatility, then the prices of options will be more costly. If the statistical volatility is greater than the implied volatility, then it would mean that the price of the options are cheap since the daily variations are more than the projected future cost changes of the underlying security. If you get enough stock option education, then you are sure to make money from the market.
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