Learning The Market

Option trading can be a very lucrative way to trade in the stock market if you study it closely and develop good strategies.  You can lose a lot of money with the wrong methods but if you learn all you can about this type of trading and develop some skills you can also use it as a means of building your wealth.

You should have a good working knowledge of the stock market and know how to pick profitable stocks before you even consider trading options.  Options trading isn’t simple; you will spend a lot of your time researching and doing basic analysis on each option you want to consider.  A wise investor trades options as part of his or her portfolio instead of making it their only method of trading.

Although trading options isn’t reserved for the rich, you should have at least $10,000 of capital to work.  That should be about ten percent of your portfolio.  If you are a new trader and are starting out with a few thousand dollars in an IRA that you want to expand, you are not someone that should dabble in this type of investment!

Options are exactly that, options to buy or sell an asset at a certain price by a certain date.  You are purchasing the right to buy or sell.  For instance, you might research a new company called NewCo which deals in a new product that nearly everyone needs.  Based on your projections, NewCo stock is likely to rise significantly but you don’t want to buy right now.

You can purchase an option to buy NewCo stock for $4 a share within the next month.  It will cost you $100 to buy the right to purchase the stock at that price.  If it rises to $20 a share and you buy one hundred shares by exercising your option, you’ve just made $1600!  However, if the stock falls instead of rising you don’t have to exercise your option.  You’ve lost your hundred dollars but you did not buy stock that fell through the floor.

You should keep your expectations realistic.  You will suffer some losses even if you do exhaustive research and have honed your strategies to razor sharpness.  Be prepared for such losses and don’t get discouraged or thrown off your game.  It’s said that option trading is an easy business to get into but one of the hardest to grow.

The best way to become proficient as an option trader is to practice with virtual money and try out a variety of strategies.  You can set up different scenarios for your options and see what the outcome is.  You can get experience in this way without losing any real money and learn to predict with some accuracy what the results of a trade will be.

Keep a cool head, don’t expect to get rich quick and research your options exhaustively.  That is the key to successful option trading!