Stock options are a strategy used to be able to make money in any market. The stock market is a tug of war between buyers and sellers. As a result, the market can get pretty choppy.
Have you ever tried to trade in a market what couldn’t chose a direction? It’s not easy. However, there is a way that you can trade those choppy markets and do so successfully.
What are stock options? Investopedia defines stock options as being sold by one party to another, that give the option buyer the right, but not the obligation, to buy or sell a stock at an agreed-upon price within a certain period of time.
One options contract controls 100 shares without having to pay the price for owning the actual shares. This is great if you have a small account that you want to grow.
STOCK OPTIONS – CALLS AND PUTS
Calls and puts are the two components that make up stock options trading. Every strategy in options trading is made up of calls and puts. Calls are the bullish side whereas puts are bearish.
In other words, the buyer of a call option has the right to purchase stocks at the specified price before the contract expires. As far as put options, the buy has the right to sell stocks at the specified price before expiration.
It’s important to remember that there’s no obligation to do so. If you’d rather close out the options trade without ever exercising your right to the stocks, you can. In fact, many stock options trader trade options this way.
You can buy calls and puts, sell calls and puts of use them to make different spreads. Buying calls and puts can be very risky due to time decay. You have to be 100% correct with choosing the right direction.
Selling calls and puts can be more popular among seasoned traders. Because stock options are wasting assets, time decay is not on the buyers side. However, an options seller can take full advantage of time decay.
Read our blog post on put and call options explained to learn more about trading calls and puts.
STOCK OPTIONS – THE DIFFERENT STRATEGIES
You may be wondering how you can make money in any market with stock options. The fact that you can put together different orders is the reason there is the ability to make money no matter what the market is doing.
There are spreads, straddles, condors and butterflies. If that sounds like a lot, don’t worry. First you need to master calls and puts. Then you can go about learning the different strategies.
Spreads can limit your risk if you choose the wrong direction. Typically stock options are used to speculate. If your speculation is wrong, you can use the amount of the entire trade. Hence the difference between shares and options.
However, spreads or straddles can help to mitigate the huge risk of trading naked calls and puts. Then there are the neutral market strategies. Iron condors and iron butterflies allow you to profit when the market is trading in a range.
Many times you need huge price swings in one direction to make a profit. The great thing about the condor and butterfly is that they profit best when they’re trading in a range.
STOCK OPTIONS – PATTERNS AND TECHNICAL ANALYSIS
Since stock options either need a clear direction or a range to profit, it’s important to be able to use the indicators and patterns to find and confirm. Did you know 80% of options contracts expire worthless?
That’s because the wrong direction or bias was made when stock options were traded. Patterns and technical analysis help you to find and confirm a direction. Being able to draw trend lines as well as support and resistance are the key to success.
Reading candlesticks and patterns is a great skill to learn for success.
STOCK OPTIONS – WHY TRADE OPTIONS?
Stock options allow you to make money no matter what the market is doing. That provides a uniqueness that shares don’t have. The advanced strategies will take time. Learning all the parts that affect profit and loss are a must before diving head first into trading stock options.