Options trading, and specifically writing options, is normally poorly understood, and more often than not, poorly communicated. This is why most people dismiss it as too complicated or too difficult. So many traders are put off trading in options purely because of lack of knowledge. But once educated in this area you will find you can actually work options to your favour to produce regular income and reduce your risk.
Options are just one type of Derivative. They’re a financial instrument which has another asset as its underlying base and includes futures and warrants. They provide exposure to shares but they deliver greater leverage and enable you to trade bullish or bearish markets and make money regardless of the direction the market is trending.
People trade options for the leveraged factor. For a minimal capital outlay you can generate great profit, but leverage is a double-edged sword. When you win, your profit can sometimes be ten times the amount the underlying share has moved, but when you lose your loss is magnified to the same extent.
There are two types of options, call option and put option. An option is a contract written by a seller that conveys to the buyer the right, but not the obligation, to buy (in the case of a call option) or to sell (in the case of a put option) a specified quantity of shares at a specified price (strike price) at or before a certain date in the future. In return for granting the option, the seller collects a payment called the premium from the buyer. A call option will rise in value exponentially when the underlying share rises in value and a put option will rise exponentially when the underlying share decreases.
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Trade the right way, and entering the stock market will doubtless be the best and most profitable investment you will ever make. Even into the millions. But trade stocks the wrong way, and you will simply be giving your hard earned cash away. Read on to see the right way to trade, top 5 must know tips for new comers, and deadly traps to watch out for.
1. Forget your gut feeling. Too many new traders are finding a stock they think will be good, invest too much with it, and wave it all goodbye. Your gut feeling is no substitute for coaching from a professional.
2. Careful who you listen to. Most market analysts are outright guessing. And don’t fall for all this ‘holy grail’ nonsense. Many traders waste the best years of their life searching for it when it really doesn’t exist.
3. Start small. Invest sums like $50 to $100 to start out with. This can save you tons of money while you’re gaining valuable experience for big trades in the future.
4. Don’t invest what you can’t afford to lose. Though you may be exited, this isn’t the time for rushing in blindly. The recent stock market fall shouldn’t be anything to scare you, but you will want to trade with only spare money.
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Do you believe buy & hold is safe? Or that selling short is risky? Read below the top 4 myths that are widely believed, and keeping people from their trading potential. When you properly understand these myths, you will be leaps ahead of everyone else.
Myth #1 Selling Short Is Risky
This trading myth comes from the fact that some stocks can trade down to zero while there is no limit to how high that stock can trade. So losses for long positions are limited on the downside, but short positions can suffer unlimited losses.
But the belief that short selling is risky is preventing you from minimizing risk and preventing you making money. You see, selling short works just as well as buying long if done properly. The level of a positions risk depends on good money management methods.
A small percentage of traders have realized this and have developed a trading strategy to sell short and profit easily regardless of which way the stock market is moving.
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