November 30, 2006
Jumping Head First in Option Trading
I am currently reading about investing in options. The first book I read, even though it was marked “for beginners,” was extremely hard to understand. The writing style isn’t wonderful and the author really doesn’t explain the key words to option trading. After snooping around the internet, I found some great resources that educate the real beginners to online option trading.
Investopedia has a great novice course that explains what option trading really means. When I first started reading about options, I thought it was highly speculative. But after some further investigation there is some sense to the madness they call option trading. There are two types of options that you can either buy or sell. I will only talk about one kind because I don’t fully understand the other yet. A call option is when you have the right, but with no commitment to purchase a stock at a certain strike price.
Now how can this be a rewarding opportunity for young people in their investment nest eggs? High returns with less money being involved. Here is a quick example (I will be covering more about this subject later on).
Let’s just say you have the option to buy a stock like Circuit City at a strike price of $27.50. Currently Circuit City is selling at 24.18. The break-even point for this option would be 28.65 (27.50 + the cost of the premium; which will be $1.15 for this example). But all you have to invest is $115 dollars “A stock option contract is the option to buy 100 shares; that’s why you must multiply the contract by 100 to get the total price.”
|
Date |
December 1 |
December 18 |
Expiration Date |
|
Stock Price |
$24.18 |
$31 |
$33 |
|
Option Price |
$1.15 |
$3.15 |
$4.15 |
|
Contract Value |
$115 |
$315 |
$415 |
|
Loss/Gain |
$0 |
$200 |
$300 |
You’ve just gained nearly 300% on a stock deal! Pretty nice eh? BUT! Huge BUT.. The first thing I learned about options is you do not want to invest any money you are willing to completely lose. Educating yourself as much as possible before purchasing options will drastically help your chances for turning a profit.
The investment game that eFIPO.com will be introducing in January will allow option trading; which will definitely help you learn about them. So you can buy all the options you want with no risk! When I start getting into buying options in May, I will have enough knowledge to limit my risk. Like I said before registering for the game will be free and extremely rewarding (cash prizes!).
Options trading is fun! I’ve been doing it for a few years now. Some option strategies can be quite complicated, but simply buying puts and calls is really not much different than buying a stock. You just get to use leverage to enhance your earnings and losses.
It’s certainly not for everyone, but if you like to speculate a bit and do some frequent trading it can not only be fun, but potentially yield big profits.
I am not sure what book your reading but “Options, Futures and Other Derivatives” by John Hull is considered the Bible for understanding options and options trading strategies. One of the nice things about options is that you can trade spreads which have the effect of limited reward/limited risk. They are great because you can post even less money, potentially allowing your options portfolio to be diversified. Another benefit of spreads is that you don’t have to take a directional bet on a stock.
Hi,
Great articles about some basics of the options trading. Everything is hard at first, but easy after do some learning about it. Agree ?
Anyway, if you are serious to do options trading.. I strongly suggest you to pay visit at my blog and read this article:
http://www.options-university.biz/blog/options-trading/ous-options-university-strategist-review
Any comments will be greatly appreciated.
Sincerely,
Tanady
Founder of Options-University.Biz