Continued from page 1
Okay, so if I haven't scared you so far, talking about using leverage via options - let's carry on.
When you read my ebook you will see % figures, that like following example demonstrate difference in movement of stock prices versus option prices.
If you have not invested in a trading package you can do so by going to link below:
http://www.tutorhelp.com.au/sharemarket.html
Now let's move on.
If you buy stock XYZ at $37 and price increases 12% to $41.50 you are using lots more of your precious money to capture move than if you purchased say a $35(strike priced) option for $3.50 per option.
Now each contract in U.S. represents 100 shares. So your total cost is $350 per contract. In Australia one contract represents 1000 shares.
If your stock goes up it will influence option price. Options can be extremely volatile - so you need to monitor prices very closely.
So let's say your stock goes up to $41.50 and now $35 option series is selling for $6.50. This represents an 86% price increase.
So what has happened:
stock up 12% option up 86%
Which trading situation do you think will make you biggest trading profits?
Would you rather hold option or stock?
If you answered "the stock", I'd be very worried about you!
Drawbacks of Options:
1. Volatility - needs close monitoring. 2. You can lose your option money if you don't sell it before it expires. 3. Short life of options - usually months. 4. You need education in option trading.
Advantages of Options:
1. Leverage. 2. Volatility - can make more money per trade. 3. Less money needed than owning stocks. 4. Play market UP or DOWN - flexibility.
If you increase your understanding you could do what every other trader is doing - making money from time to time!!
You see losses are part of game - not all your trades will succeed.
Playing game with this fact in mind will help you to trade better and to have a healthy respect for market and controlling RISK.
We control risk firstly by being educated! I've chosen this link because I think it will help you understand and trade options so much better.
http://options-university.com/go.php?3440_A72092_21175
Regards, Joseph Sgro THE 10 Simple Rules Ezine http://www.tutorhelp.com.au/ezine.html
Joseph Sgro has spent 18 years as trader. He is also a writer and educator. He has recorded his trading experiences and offers "Learn to Trade" information. Visit the BLOG: http://www.tutorhelp.com.au/BLOG.html
For more resources go to: http://www.tutorhelp.com.au/resources.html
Copyright (C) 2005 Joseph Sgro