Option Trading Strategy

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How to do Stock Option Trading?

When deciding to trade stocks, there are a lot of important steps to follow. The main idea is that you have to realize that you are a trader and not a gambler. You cannot leave everything to the chance. On the contrary, when considering investing in stock options, you need to conduct extensive research on the underlying stock. There are so many stocks to trade such as common stock, preferred stock and stock indexes.

Check out this video about option trading strategy

What are stock options?

Stock options represent contracts that provide the holder the right to buy or sell a specific stock, at a specific price, before the contract expires. There are two parties involved, the seller and the buyer. The main idea is that the seller is obligated to sell a certain stock at the price agreed in the contract when the option is exercised by the buyer.

Different types of stock options

If you decide to trade stock options, you should know that there are different types of stock options.

Exchange Traded Stock Options or Listed Options

These stock options can be traded with the aid of a broker during public stock options trading exchanges.

Over-The-Counter (OTC) Stock Options

As the name perfectly suggests, they are traded in Over-The-Counter (OTC) markets. Not everyone has access to these markets.

Exotic Stock Options

These complex stocks are traded only in OTC markets.

Employee Stock Options

It is extremely easy to define these stocks. Employee stock options are given to employees by their companies. The company represents the seller.

Trading stock options through different platforms allows traders all over the world, regardless of their financial skill level, to have access to stocks from different companies, regardless of their profile or location. For instance, you can trade Apple, Google, Vodafone, BMW, Microsoft, Nike and even Facebook stocks.

In case you decide to trade stock option, there are some important factors to consider.

1.Financial news influences the price of a stock

Financial news (new product releases, financial reports, market presentations, the reorganization of the company, a new partnership) has a significant impact on the price of a stock.

It is imperative for the traders to permanently analyze the way in which a certain stock reacts to some financial changes. All the current news concerning the company’s growth, profitability or, on the contrary, financial problems must be carefully analyzed. There are so many financial materials that can assist traders in making informed decisions. For instance, it will be great to carefully analyze the financial reports of the stock’s parent company.

 

2.The stock’s past history

Needless to say, the stock’s past history is also a key element. This is the main reason, most of the trading platforms provide past information about the stocks available on the site.

 

3. Take into consideration the daily fluctuations!

Keep an eye to the volume of shares traded daily. Do not forget that volatility is the main characteristic of stocks.

Stock options represent creative, flexible and innovative financial instruments. Trading them represents a real trend these days.

Call and Put Stock Options

Stock options are simple, versatile and speculative contracts that allow the owners to buy or sell a stock at a specific price before it expires. If you decide to trade stock options, you will definitely use Call or Put stock options.

What is to know about Call Options?

A call option provides you the right to buy the stock at a certain price before a certain amount of time expires. In case you buy the stock in future at the current agreed price and the stock is stronger, that call option becomes extremely valuable. On the contrary, if you consider the economic circumstances not to look too good, you can sell your option prior to expiration to avoid exercising it, to avoid a potential loss.

There are some financial terms you have to understand. For example, when you buy a call option, you put up the option premium. This signifies that you have the right to exercise the option (buy) before the call option expires. When you exercise the option, you basically buy the stock at the strike price. This price represents the predetermined price at which an option will be delivered when it is exercised.

Daily Market Advantage – a shortcut to option trading

What is to know about Put Options?

A put option represents the reverse of the call option. What does this mean? The put option offers the owner the right to sell the stocks at the strike price in a certain amount of time. In case you have a put on a Google stock, you are entitled to sell the Google stock at the strike price until the put option expires. In case the stock expires at or above the strike price, you lose your money. Put options help you maintain your profit. Using put options generally represents a more conservative comportment from the trader’s part. On the contrary, call options represent a more aggressive attitude.

Use trading simulators!

In case you find yourself for the first time on global markets and you are not familiarized with the terminology, a put option represents sort of a bet that the price of the stock will fall in a certain amount of time. Moreover, in case you are not a financial expert, it will be a smart choice to use a trading simulator. Most of the trading platforms provide this alternative. Use this technique in order to build yourself a strategy, to start feeling the market. It is true that the right prediction does not bring you real money, but you will gain financial experience. Needless to say, you will not experience any loss.

When it comes to stock option trading, you can make profit if you know yourself very well. For example, are you an aggressive or a more conservative person? An aggressive trader always opts for an aggressive strategy on stocks that go up. On the contrary, the more conservative persons do not take too many risks when it comes to investing in stocks that go down. Unfortunately, there are not too many “gray” areas when it comes to stock options trading.


Resources:

CBOE. The largest options exchange in the world
http://www.cboe.com

Daily Market Advantage – an exclusive trading and option trading club
http://www.optiontradingstrategytips.com/DailyMarketAdvantage

A useful free Trading encyclopedia
http://www.optiontradingpedia.com

Futures & stock options
http://www.optiontradingpedia.com/differences_between_futures_and_stock_options.htm

Schaeffer
http://www.schaeffer.com

An option investing guide from Morningstar
http://csinvesting.org/wp-content/uploads/2012/07/options_guide.pdf

 

Trading platforms:

Thinkorswim – many traders are using this platform
https://www.thinkorswim.com/tos/client/index.jsp

Optionsexpress
http://www.optionsxpress.com