Trading stock options as an investment tool is an often misunderstood trading concept by both traders and investors yet, once understood, can be very powerful and flexible tool in your investment choices. Consequently, as a result of there potential for profit and flexibility they are often view by many in the investment community... Read more
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Stock option trading presents the opportunity to potentially make a fortune trading options than almost any other form of online trading in today's market. The level of reduced risk combined with above average leverage allows a skilled option trader the chance to make sizable gains but an aspiring option trader must have a solid understanding about what creates a reliable option trading method to insure long term success at option trading. There are five fundamental steps that any option trader must implement when creating a superior stock option system.
To begin with you must realize the affects of time on the premium of the option you are choosing to trade. There are two parts you must factor when considering time into the stock option trading process. The first part that has to be considered is the time left on an option till expiration. Since stock options have a defined time period of anywhere from 30 days up to three years in some cases then you must be sure to select the proper stock option with enough time on it in order to profit. You must be sure that you purchase the correct option containing enough time on it to insure that time decay doesn't erode your investment away before your position has enough time to be profitable. The second skill of trading options profitably is factoring time into your trading system in relation to trading a particular stock option and knowing the statistics of your option trading methodology or option trading setup by knowing the average holding period of a trade signal. If your average holding time for an option trade is seven days then you don't want to buy an option with three months of time premium left on it because you would be paying more for the extra time with the option's purchase price. Nor would you buy an option with less that 30 days till expiration as time decay would erode the value of option so quickly that even if the option's underlying stock movement moved favorably to you the time decay would prevent you from realizing a gain in the option itself. The third step to successful stock option trading is comprehending the relationship of volatility between the market, the underlying instrument that the option is based on, and the effect is has on the cost of the option itself. When the stock market as a whole as an index goes thru periods of low volatility or experiences low trading volume then the stocks that make up the market tend to follow general market and also begin to follow suit with periods of low volatility which cause cause the value of stock options to become cheap. However if the general market's volatility begins to spike it causes individual stock option premiums to increase in value as long as the market moves in the trader's favor. The next key in how to trade stock options successfully is having a stock option trading method that takes these key factors into consideration while giving clear entry signals, clear exit signals, a defined system of trade management, and a profit factor greater than your average loss over a series of trades. Knowing the ins and outs of various trade setups is useless if you don't have a trading methodology that guides you in every step of the trade process. A solid trading method holds you by the hand and defines each step while leading you to being a consistent winner in the markets and a profitable trader when all is said and done. The fifth and final step to trading stock options successfully is trading psychology. Traders and there mental makeup are usually complex so it is very important that stock option traders have a sound stock option trading system or method that factors this into their overall approach to trading the markets as well as the discipline to follow their trading methods. You can give two traders the same exact profitable trading system but its very likely that they will experience very different results. The reason for this is usually is because the one that has the ability to remain as detached from his losing trades as well as his winning trades while maintaining the discipline to follow the system's rules no matter the individual trading result will come thru as the most profitable trader in the end which shows us that it comes down to a superior mental process towards trading the markets. These five key secrets are a foundation to help you help you avoid the mistakes of many other individuals who come into stock option trading seeking fortune but only end up with busted trading accounts that end up being zeroes out in the end. By understanding time decay, factoring an option's time into your trading method, how volatility impacts a stock option's intrinsic value, what details a winning stock option trading system, and your own trading psychology you now have an understanding of five key secrets that help you build a successful trading approach to trading stock options in today's markets.
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