Things to Consider When Starting to Trade Options
The securities industry offers a lot of opportunities to make money if you are able to choose the right direction […]
The securities industry offers a lot of opportunities to make money if you are able to choose the right direction and be there at the right moment. It is known that options trading cannot be reduced to a simple process. There are a lot of variables here, such as the supply and demand, the price of the stock, and the interest rate. Options have a wide range of versatility, which allows you to change your position according to market movements. On the other hand, there are also costs and risks that have to be taken into account. This article aims to show you several things to think about when you start your trading activity.
Buying out-of-the-money Calls
A call is considered to be out of the money (OTM) if its strike price is higher than the usual market price of the stock. Such an option, which has no intrinsic value but only extrinsic value, gives you the right to purchase the asset at a price higher than the current market price. If there is an uptrend in the market, this call will gain value shortly by surpassing the strike price, bringing you important earnings in the process. Being a cheap choice, a lot of beginners rush to invest in OTM calls, ignoring the fact that they expose themselves to the risk of losing their money at the expiration if the stock fails to exceed the strike price.
Selling out-of-the-money Calls
Instead of buying calls, you could choose to sell OTM calls on stocks that already are in your possession. This is the less risky strategy, referred to as the “covered call.” You have the obligation to sell the stock at the strike price set for the option. If the market stock price goes up close to the strike price, you can earn cash by selling your call. If the market continues to be flat, you receive the premium collected from the buyer. If the price decreases, you need to buy the option back and sell the stock. The risks of covered calls rely more so on owning the stock than selling the option. This method provides immediate cash with limited gains instead of future incomes of larger amounts.
Have a “Plan B” to Minimise Losses
No matter whether you are a holder or a writer, you need to have an exit plan close by. Learn carefully the option trading basics so that you can anticipate you chances to profit, or the possible losses you may be exposed to in the worst-case scenario. Once you establish your target income and how much you can afford to lose, you have to stick to this plan and avoid exposure to further risks by keeping your emotions under control. Even if everything goes great and you reach your financial goals, do not be greedy, because the option price often has fluctuations that might take you from ecstasy to agony if you are not wise.