[S1015]Stock Option Trading Software

Trading stock options as an investment tool is an often misunderstood trading concept by both traders and investors yet, once understood, can be very powerful and flexible tool in your investment choices. Consequently, as a result of there potential for profit and flexibility they are often view by many in the investment community as too complex to implement effectively. However, if a few basic concepts of stock options are understood such as types of options offered, leverage, risk control, time, and strike prices then beginning traders and investors can avoid common misconceptions of this powerful investment alternative.

It is vital that you understand that there are two types of options that are commonly available on exchange traded companies are called "calls" and "puts". Calls are purchased when an option investor believes that the underlying instrument, or stock price in this case, is about to rally and go higher. Put options, however, are purchased when a particular option investor believes that the share price on the company is about to fall and go lower. Once you understand the directional bias of each option alternative you understand more effectively your available choice when speculating on the direction of the stock you are analyzing.

Stock options are one of the most highly leveraged financial instruments offered as the let you control blocks of stock in 100 shares per option. Where you would need $4500 to control 100 shares of a $45 stock you would only need a few hundred dollars if you had only bought options. If you are the owner of a 100 shares of stock mentioned in the previous sentence and that stock had a rally up to $54 share and you sold that holding then you lock in a 20% gain ($900 profit/$4500 original investment=%20 gain). However, if you bought an option on that stock for $300 and realized the same rally to $54 then you could realistically lock in a $900 gain then you would realize a 300% gain on the same stock!

By now, you are beginning to understand the profit potential that stock options offer you with this kind of leverage yet when you factor the ability to control risk with options you really begin to realize their potential. If you purchased 100 shares of a $50 stock or $5,000 on a given company and suddenly the company's CEO announced the company's bankruptcy you could see your investment go to zero. But, if you instead just bought call options on the stock the most you could lose is the few hundred dollars you purchased the option with. Having the ability to limit your risk is critical to your financial well-being especially if disaster strikes as in this example.

With options you have an enormous advantage when trading the markets but it is very important that you understand the relationship between time and stock options. Options have a limited shelf life in that they are assigned certain time periods before they expire worthless. These time periods, also called expiration periods, can vary from 30 days to several years with expiration days typically the third Friday of the month. Understading this relationship is crucial when factoring the average holding period for a trade with whatever trading method you are using and the type of stock option you are selecting. If your average holding period for a trade is 2 months then you want to select an option two months from expiration at a bare minimum. Realistically, you want to select a option that is two months out plus another month from expiration as time decay quickly erodes the value of an option that is less than 30 days from expiration.

The other success factor you must come to understand when trading options is understanding strike prices. Strikes are terms assigned on the price of an underlying stock of a publicly traded company. If, for example, ABC company's share price is at $50 its strike prices on it's available options might be a $45, $50, and $55 which you can observe in the price tables of any financial newspaper. Now, each strike price has certain pros and cons depending in large part your particular option strategy but, for now, knowing what strike prices are and understanding how to implement them in your trading decision process will you help you make the most effective selection choice.

Understanding stock options and their role in your investment choices provides you with enormous potential for high returns as well as limiting your risk. There flexibility allows you to potentially profit from rising markets, falling markets, markets that are range bound, and protecting your stock portfolio from unexpected volatility in the markets. Take some time and reread this article as well as similar articles along with studying any financial newspaper that offers price option tables. The time you invest in understanding these powerful investment tools can help you take advantage of their enormous potential and improve your bottom line.