Trading Options ” Highway To Riches Or Short Cut To Bankruptcy?

Posted on December 16, 2009
Filed Under Investment Bonds | Leave a Comment

Trading options has several advantages over trading in ordinary shares (stocks). This method of trading can also be high risk if you do not know what you are doing. We will briefly look at the different scenarios.

Steps to Success with Option Trades

The biggest advantage of trading in options over trading in shares can be summarized in one sentence; you can make a lot more money. Options trading involves what traders refer to as leverage – a powerful double-sided sword that can help you to make large amounts of money in a short time or lose everything you have if you don’t know what you are doing.

Let’s see how it works. If you have $10,000 to invest and the price of a particular share is $100, you can buy 100 of those shares. If the call option on that share sells for $2, you can buy 1 option and spend only $200. For this $200 you can control 100 shares of the stock also, similar to buying 100 shares of stock. Unfortunately, as we said, leverage is a double-sided sword. If the underlying goes up, you make be a very prosperous option trader, but if not, you could lose your shirt.

However, if you trade options for a while, then you quickly learn that this leverage can be risky. It takes a while, but eventually you’ll see that it’s much better to use spreads if you plan to make any consistent returns with options.

Many people also use trading options to hedge investments they already have. If you have an investment of $1000 in a share that recently went up with more than 25%, you want to hold on to your profits, but you don’t want to sell the shares either because the price might rise even further. In comes put options. If you bought put options on that particular share their value will increase if the share price drops (with the same amount as the drop in the share price). Your investment will therefore be intact. This is a very common hedging technique, and it’s something to be studied more in detail. Whatever you do, make sure you do your homework before trading options.

Discover more about option trading and how it works. With the right option trading system in place you can make money. Set up your future today with a great way to earn cash!

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