In money markets and finance, option is used to refer to a contract which confers to the owner (the purchaser) the right, not necessarily the obligation, to buy and sell an underlying asset or instrument at a price indicated before a specified date. The contract also binds the seller to incur a corresponding obligation to do their part in fulfilling the transaction. This refers to either buying or selling in a situation where the owner decides to exercise the “option” before it expires. In the stock option trading transaction, the buyer has to pay a premium to the seller for this right. If the owner has an option to buy stock at a certain price, this is referred to as a call option, if the owner has an option to sell stock at a specified price this is known as a put options. These are the most common stock option trading terminologies but the call option is the most popular.
For many traders, stock option trading begins when there is need to purchase a call or a put in what is known as directional trading. Directional trading takes places when traders are confident of a particular direction of certain stock price and they have positioned themselves to benefit from the expected movement. Stock option trading presents limited risk when compared to stock trading. Once traders are confident that certain stock price will move in a certain direction they may prefer to invest in options to investing in the actual stock. Stock option trading also holds high profit prospects and the upside of stock option trading in comparison to other common forms of trade is that in option trading traders can earn big with significantly low risk capital.
If the stock market atmosphere is positive, in other words, bullish, stock options traders can buy call options in order to tap the opportunity of sharing in the huge prospect of stock gain without risking much of the stocks market value. If the stock market outlook is negative, bearish, and there are indications that the stock price is on a downward trend, a trader can buy a put so as to seize the opportunity of a decrease in stock price with no huge margin required to short a stock.
Stock option trading strategies are not limited to market direction. There are numerous strategies that stock option traders can formulate but the foundation of all fruitful stock option trading is understanding the ins and outs of the two foundational principles of stock option trading, call and put. Tractability is key to successful long term stock options trading.
Interesting to note is that marketers do not only move vertically ( downwards and upwards). Markets can move sideways as well. Stock option traders with strategies limited to vertical directional market swings stand to lose on a plethora of opportunities created by numerous stock market dynamics. Stocks can trend modestly lower or higher for extended periods of time. Price movement can also be erratic and volatile and in most cases its only shrewd and versatile traders who can still rake-in profits even if the stocks are not moving anywhere.
There are calander spreads, strangles and straddles as well as butterflies, all these are strategies developed to help traders achieve their objectives in various kinds of stock market climate. If you want to learn more about stock option trading Nasdaq offers a comprehensive resource here.
We have covered advantages of stock options trading as well various strategies of trading options in the resource, Trading Stock Options, Is It Rocket Science? Please visit this resource and learn about the different well documented strategies of trading stock options.
Stock Option Trading Information: Where to start
Beginning a meaningful career in the stock options trading business can be a nightmare if you do not know where to get stock option trading information. The cyber sphere is flooded with the good, the bad and the ugly. As a beginner in the game of stock options trading you need to identify the good places to learn the ropes and take off with sound guidance that will help you achieve your goals and earn meaningful income like every well-established trader.
The reason why you should access all stock option trading information at your disposal is so that you can learn what options are. As a starting point you need to familiarize yourself with what stock options are. In the learning stage you will understand how stock options differ from mutual funds, securities, bonds and stocks etc. Having understood these differences you can then learn how the concept of stock options came about and why this kind of trade can be favorable over other forms of trade. Investors go into options trading either to speculate or as a form of hedge. Speculation is all about betting on the movement of certain securities. This is one of the areas that come with huge risks and huge profit prospects as well.
On the other end, you can think of hedging as an insurance policy. Large institutions use hedging to protect their investments. A stock option trading guide will also familiarize you with the different types of options.
If you have explored different stock option trading information blogs, guides and eBooks you call also consider taking up a stock options trading course. The course will teach you basics of stock option investing as well as how to make money as a trader when the stock market is on upwards and downwards trends. The course will also teach you techniques to safeguard your profits. Stock options trading education will also familiarize your with ways of avoiding common obstacles in this kind of trade. The course will equip you with more resources and more hands-on insights and expertise that will help you reinforce your level of expertise and make well informed trade decisions.
Options can be placed in various categories. Basic knowledge on different types of options, terminology, fundamentals and the basic categories in which options can be classified will do you just well for start.
These can be exercised any time from the date of purchase and the expiration date. Most exchange-traded options fall into this category.
European options differ from American options in the sense that they can only be executed at the end of their lifespans. Take note that the difference between American and European options does not have anything to do with geographic location as seemingly implied by the terms.
Options can also be classified as either long term or short term options.
We have explained the difference between long term and short term options on this post, Advantages of Stock Options Trading Long term options are known as Long-term Equity Anticipation Securities (LEAPS). Short term options are commonly referred to as plain vanilla.
Options trading is a very versatile and robust paradigm and as such there are many variations to the standard options type. These are called exotic options.
One of the best resources to get stock option trading information is the Learn Stock Options Trading website http://www.learn-stock-options-trading.com/. The website is dedicated to providing stock option trading information for beginners. The stock options course has various learning modules that zero in on various concepts of the trade. The learning package comes with free chart analyses as well as a guide on automated stock options trading. The six module course will give you a head start as you begin your journey towards meaningful online stock options trading business.
If you want to know how options trading works look at this simple and clear practical stock options trading example here.
Trading Stock Options As a Business: Learn How Gurus Do It
Every trader coming in the fray of stock options trading wants to master the game and get to a solid trading strategy that generates meaningful profit. The best way to trade meaningfully is to approach stock options trading as a business. In this post we share with you the steps of trading stock options as a business. Stock options hold many benefits as we have explored in this post, Benefits of Stock Options Trading Leverage. You will note that trading stock options can give the trader control of up to 100 shares of stock per option. The good part with this is that risk is limited to the cost of that option. There are not so many instruments that bring that degree of leverage. It is possible to master the ins and outs of making good money through stock options trading especially if you learn the art and science of trading stock options as a business.
Trading Stock Options As a Business-How the Gurus do it
The following steps will help you trade stock options like a guru, the way businesses do it.
Get an Experienced Stock Broker
The first step involves surveying the internet for an experienced stock broker. If you have grasped some basic concepts of stock options trading you will be in a better position to conduct interviews towards selecting the best stock options broker. In doing this you need to find out how long the broker has been dealing with stock options trading. You can bring more technical questions such as, “What is the difference between ratio back spread and calendar spread”. Getting an experienced stock options broker is the foundation of building a meaningful stock options trading business. The stock market is very volatile and without an experienced broker your trading experience will be like walking alone in the dark in a foreign land.
Pick the Best Stock Options Trading Platform
The second step involves exploring all the options you have in the category of stock options trading platforms. The key is to settle for a stock option trading platform that strikes the perfect balance between tools, resources, analyses and good customer service. The system must be the kind that has a good integration of price charts, brokerage account as well as the buy and sell features directly availed to the broker you have selected. It will pay you well in due course to invest your time learning different features as well as how to use them proficiently.
Open an Options Trading Account
To get things in motion, the third step involves opening an account with your selected stock options brokerage. The minimum deposit required depends on the brokerage you have settled for. There are brokerages that will let you take off for as low as $1000 as minimum deposit. The good amount to have for taking off with stock options trading is $5000 on average. In many cases, your experienced broker will limit your stock options trading account to basic option trades. More advanced trading strategies that carry a lot of risk such as naked put selling can be accessed at later stages of your trading thrust.
Set up Trade Moves
The fourth step in trading stock options like a business involves setting up price charts to keep tabs on underlying stock on at least one of the price charts. This should take place while you keep a separate screen for the stock symbols. What you also need to set up at this stage is a separate screen for option quotes for the stock you are tracking. Depending on the trading platform you are using, you may have the flexibility to link all the screens together so that as you go through different stock symbols you get an automated flash of the price chart together with the option quotes.
Map out a Solid Trading Strategy
The last step of this trading thrust is to map out a solid stock options trading strategy that outlines your trading approach as well as your money management method. Take note that a comprehensive stock options trading strategy will detail all the kinds of trade you want to target and those that you will not target. The trading plan will also detail your trade management as well as risk control.
Trading Stock Options with Darvas Box Theory
Trading Stock Options with Darvas Box Theory
If you have been around the world of stock options trading for some time chances are high you have come across something about the Darvas Box theory. The theory is termed after Nicolas Darvas. Darvas, a ballroom dancer, built a stock trading system while in his journeys around the world. Nicolas Darvas is famous for making over $2 000 000 in about 18 months. What you need to keep in mind here is that this was way back in the 1950s, So, yes you’re right, the many zeroes you saw are not a typo. The figures translate to a tune of 5% annual compounding in the contemporary money market milieu. The Darvas Box Theory refers to a stock trading system created by Nicolas Darvas.
The Darvas Box Theory
The theory is underpinned on an area of price consolidation where stocks plod over a long period of time. The trading technique as implemented by Darvas involved buying stocks that were trading at new 52-week highs with corresponding high volumes.
What makes up the “Box” in the theory is the scenario where the price of stock rises higher than the previous 52-week high and then falls back to a price range close to the recorded high. In this framework, if a price falls too low that can be viewed as a signal of false breakout. In this theory, the lower price is regarded as the bottom of the box while the high price is held as the top.
The story has it that Nicola Darvas would get hold of the copies of the Wall Street Journal and then look at the stock prices and then make his decisions based on that. What seems to be more remarkable and memorable about Nicolas Darvas is the simplicity and effectiveness of the inventive option trading system he created more than the fortune he made through implementing the trading system. If you need some inspiration, take a leaf from the fact that Nicholas acquired the profit raking feat while travelling the world as a ball room dancer. It took the man 18 months to make over $2 000 000 with just $10 000 risk capital.
How Trading Stock Options with Darvas Box Theory Works
Those that are skeptical of Nicolas Darvas feat have maintained that his trading concept was successful since he was operating in a bullish market. The argument in this case is that the system he invented cannot bring in the same returns if the system is implemented on a bearish market. Despite the skepticism there are remarkable innovations that tap from the Darvas Box Theory. Traders can implement these innovations and trade options successfully.
What we need to mention here is that when Darvas was trading stocks in 1950s options were not yet available. Options came to the public market in 1970s. Technological and financial innovation in the realms of money and stock markets has enabled the development of stock options trading methods based on the Darvas Box Theory. In these strategies, investors can buy the right to profit from positive and negative stock movements through the use of an options trading strategy known as straddle.
What the straddle involves is the buying of calls and puts on the same underlying stock at the same strike price with the same expiration dates. In that case, it does not matter which direction the stock moves. As long as there is significant movement the trader is bound to make money.
The key to profitable trading using this strategy is making sure that once one leg is making profits, you can sell that leg and hold onto the other. This ensures that should the stock get on a reverse course, the insignificant option will suddenly begin to make good money for you.