Buying Options

Buying Options
By
www.CandlestickForums.com

Many traders find that an
efficient means of making
money in the stock market is
by buying options.


Traders can use Candlestick
analysis to anticipate
movement in stock prices to
improve their chances of
profiting from buying options.


Traders pay an option
premium for buying options
which gives them the option
but not the obligation to buy
stock or sell stock.


The price at which stocks will
be bought or sold is the strike
price which is determined by
options contracts.


There are two directions to go
in buying options.


These are buying puts and
buying calls.


A put is an option to sell the
stock at the strike price.


A call is the right to buy the
stock at the strike price.


The buyer of a call option
expects the stock to rise in
price.


In buying United States
options the buyer has the
right to exercise the options
contract at any time before
expiration.


Thus, many traders do not
intend to wait until expiration
of the contract to profit.


When the underlying stock
moves sufficiently in price its
option value will reflect the
change in stock price.


Buying options is a means of
benefitting from stock price
movement with substantially
less investment than by
buying stocks.


Paying the premium to buy a
call or put option is locking in
the opportunity to make
money during a market rally
or decline.


Technical analysis of stocks
helps traders in anticipating
stock price movement and
buying stock options at the
right times.


Someone who buys a stock
runs the risk of losing when
the price falls.


Buying options is different in
the trader will not exercise the
options contract unless doing
so will lead to a profit.


The monetary risk of buying
options is that if the stock
does not move in price as
expected the trader does not
earn money.


However, so long as the
option has intrinsic value the
trader call sell the option and
regain part of the premium.


In fact most traders will earn
their profit in trading options
by selling their contract to
another trader after the stock
price moves and the value of
the option increases.


As an example, a trader
purchases a $100 put on XYZ
Corp. for $3. The options
contract gives the trader the
right to sell 100 shares of XYZ
at $100 a share. Thus the
premium paid is $300.

The stock is still trading at
$100 a share. Then the price
of XYZ drops with news of an
ill conceived merger.


It is now selling at $91 a share.


If the contract were to expire
immediately the trader could
quickly execute the
contract, sell his shares at
$100 each and buy at $91.


The $900 profit minus the
$300 premium gives the
trader a profit of $600 on a
$300 investment, minus
commissions and fees.


However, the contract will not
expire for another month. The
market may anticipate a
recovery of XYZ or may expect
that its price will fall farther.


Thus the option may be
trading above or below $91.


Traders use technical analysis
tools such as Candlestick
pattern formations in order to
anticipate stock price
movement in this sort of
situation.


If the trader’s Candlestick
charting analysis results
indicate further price decline
in XYZ he or she will hold the
options contract.


If Candlestick chart analysis
indicates that XYZ will recover
the trader will likely sell the
contract and pocket the profit.


Buying Options

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