The Leverage of Trading Options

The Leverage of Trading Options
By
www.Options-Trading-Education.com

The leverage of trading options is perhaps its
greatest attraction.

http://www.options-tradingeducation.com/14390/the-leverageof-trading-options/

With the simple investment of a premium a
trader can nail down a price at which he or she
will be able to buy or sell an equity, no matter
high or low the price may go.


The leverage of buying and selling options is
that after paying the premium the trader may
make a profit of the difference between the
strike price, the agreed upon contract price,
and the spot price, the price at which the
contract will be settled, minus, of course, the
cost of the premium paid to buy the options
contract.

When asking what is an option worth, the
trader should think of the multiple of initial
investment that can be gained with a
successful options purchase.


Besides providing investment leverage,
buying options provides the trader with an
opportunity but not an obligation to purchase
or sell equities on or before their options
expiration dates.


Because the options trader is not locked in to
buying or selling the underlying equity he or
she can only experience the loss of the
premium if the stock or other equity does not
change in price as anticipated.


The leverage without excessive risk in options
trading lies in two kinds of options trading.


These are buying calls and buying puts. In
buying a call the options trader will pay a
premium for the right to buy a stock or other
equity on or before the contract expiration
date.


The price he or she will pay will be strike
price, the price at which the contract is
written.


If the price of the stock goes up substantially
he or she will profit handsomely.


If the price does not change the trader has
only lost the price of the premium.


In buying a put the trader purchases the option
to sell a stock at a given price, the strike price,
no matter how low the price might go.


In this case the trader will hope for the stock
price to drop substantially and if it does he or
she will buy at the new and lower spot price
while simultaneously selling at the higher
strike price.


Using technical analysis of market trends the
trader will attempt to predict where a stock
price will go and make the appropriate trade.


In both buying calls and buying puts there is
the potential for substantial profit.


This is the leverage of trading options. The
new trader may ask when is trading call
options a good option and when is trading put
options a good option.


In both cases of buying options, puts or calls,
it is a good idea when the trader expects to see
substantial price movement in a given
direction.


In the case of buying calls the trader will be
expecting upward movement and in the case
of buying puts he or she will be expecting
downward movement.


In the case that the expected price movement
does not occur the trader is only out the
premium


The leverage of trading options lies in buying
calls and buying puts.


However, there is statistically more profit,
with wise trading, in selling calls and selling
puts.


When the trader correctly picks stocks that do
not move in price he or she gains the premium
for each option.


The problem with uncovered options trading
in selling calls or puts is that a substantial
price change can be very expensive to the
point where the leverage of trading options
works in reverse.


The trader gains a premium but needs to pay
substantially to settle the contract.


Traditionally it is large institutional investors
and people who are making a living trading
options who have the skill and the deep
pockets to successfully sell puts and calls.


The Leverage of Trading Options

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The Leverage of Trading Options