An option is a derivative trading product that is best used by investors as a hedging tool providing profit protection and profit enhancement. Although it is a powerful risk management tool, it can also be used effectively as a stand-alone trading vehicle.
Under the proper conditions, options do not have to be paired with stock or another option to be an effective trading tool. To successfully trade naked options, an investor must realize that certain options will fit certain scenarios and certain options will not.
One of the major misconceptions that investors have about options stems from the fact that most do not know how to trade them properly. When they lose money trading them, they feel that there is something wrong with the option. They do not understand that options are on a higher, more sophisticated level when compared to stocks.
Stock trading has fewer variables involved and is therefore easier. No one is saying that the individual investor isn’t smart enough to trade options. The problem is not intelligence; it’s just education and experience. Most investors have not been properly educated in the proper use of options, and even fewer have had any real experience trading them.
One of the biggest problems investors have is this: Even if you buy a call and the stock goes up, you can still lose money. Most traders tend to buy out of the money options at a low price. The stock rises a small amount, which is the right direction, but the option is still unprofitable and the trader is left bemused.
What the investor fails to realize is that in order for the option to be profitable the options delta must out-pace its rate of decay. Implied volatility also plays a key role if the stock does trade up while implied volatility decreases, the options delta must then outperform the decrease in volatility. Remember, when volatility increases, the price of all options goes up. When volatility decreases, the price of all options goes down.
We have categorized options in several ways. One way is by the option’s strike price, and its distance from the stock price. We identified these options as either in-the-money, at-the-money, or out-of-the-money.
Click Here To Get Free Trading Strategies Report. Simply Give Your First Name And email Address
-Free Options Trading Insider Secrets -
Get the latest analysis giving you Day Trading “Insider Secrets” and Options trading. Sign up now, before its too late!