Trading Options for Giggles and Gold
Posted on Jul 27 2010 | Tagged as: Finance
When many people think of the money to be made through investment markets, they think of the buying and selling of stock. This is a particularly limited view of the stock market, one that confines profit according to the value of publicly listed companies and their respective markets. However, the real money to be made from the stock market lies in trading options.
By choosing to expand your market activity to include stock options trading, you can broaden your trading strategy such that you are no longer limited to simply buying and selling stock. Stock options are essentially derivative investment instruments. With them traders can reserve the right to make certain decisions about stock before certain market conditions take effect, but without being obligated to do so.
By making use of a broad range of strategic option choices expert traders can maximize the profit potential of trading options. Strategies emerge from the combination of multiple option positions – and sometimes, by taking an underlying stock position – to set the potential for profit no matter what direction the market is taking. This means that the options can see you a profit even in the midst of recession.
The straddle is a common strategy employed by many traders. It is executed by placing the security on a put option simultaneously with a call option. With both options in place, the trader makes money regardless of which direction the stock takes when it changes in value. When a stock’s value does not budge from its initial price range, it is then that the straddle can lose money for the trader.
However, to get the most profit out of trading options, one must learn to not only develop effective trading strategy, but know when to best deploy them. This requires a modicum amount of vigilance from the trader, as well as the use of a few market assessment tools such as the MACD indicator in order to notice when sensitive trends are beginning to manifest.
Note that the MACD indicator is only one example of such an instrument. In recent years, it has been subject to much criticism and is recommended for monitoring use only. Still, what traders must quickly learn is that reliance on one indicator is no way to trade. Furthermore, the number of people who base their decisions on one market indicator directly affects its accuracy, resulting in a self-fulfilling prophecy.
This article encourages individuals to graduate from mere stock market dilettantes to trading pros by expanding their portfolio to include stock options trading. By trading options, one can truly exploit the constant ups and downs of the stock market and profit off of value changes which are experienced by stocks. All that is necessary is to start developing one’s knowledge base, master strategy and watch the market with tools like the MACD indicator.
- David Baxwell