Understanding options the EASY WAY

Beyond all the 'hype' what is it that makes option trading so good?

This is a question that I wish more people would ask, but the thing is not too many people know they even exist!

The main reason that I love option trading is that options provide the opportunity to turn a small or modest amount of money into a large amount of money quickly!

How is this possible you might ask?

Well before I get into the 'how' that let me show you exactly 'what' options are.

Options are simply 'contracts' that give the buyer the right or choice (but not the obligation) to buy or sell shares in a particular company, at an agreed price, on or before a set date.

Now the thing is, as an option trader I am not interested in buying or selling stocks, I am only interested in buying and selling the options on stocks.

I want to buy an option for one price and then onsell it to someone else for a higher price and make a profit before the option expires.

Now whether or not I am able to do this depends on two main things:

1) Whether the underlying stock (the stock that the option is concerned with) goes UP or DOWN in price.

and

2) The type of option that I have bought.

Now, there are 2 types of options, CALLS and PUTS.

Call options give us the right to BUY shares in the underlying stock.

PUT options give us the right to SELL shares in the underlying stock.

As I said before, we are not interested in buying or selling the underlying stock, only in making a profit by buying the options (on a stock) and then onselling those options to someone else for a profit.

However, the only way we can make a profit is if the option itself increases in value.

So What makes options go up or down in price?

CALL options increase in value when the underlying stock goes UP.

PUT options increase in value when the underlying stock goes DOWN.

This may sound confusing if you are new to option trading, but basically what we want to do is to buy CALL options on a stock when we think it is about to go UP in price or buy PUT options if we think the stock is about to go DOWN in price.

If we are right and the stock moves in our desired direction, UP for CALLS or DOWN for PUTS, we will make money.

The concept is really quite simple once you accept that it is possible to make money whether the underlying stock moves UP or DOWN.

Now here's the thing that makes option trading so appealing.

Options only cost a fraction of what it would cost to buy the underlying stock itself and a small move in the price of the underlying stock, creates a much larger move in the price of the option by 10 times to sometimes 100 times!

Interesting Option Trading Strategies

• Vertical Credit Spread: Where you profit from a stock staying above or below a specific price level,and also enjoy the benefits of the time decay of option premiums.

• Butterfly: A limited risk strategy that gives you BIG profits when the stock ends at or near your price on expiry.

• Iron Condor: Profit from the time decay of options and limit your exposure, with this neutral strategy.

• Directional Trades: Buying Calls and Puts in fast moving stocks . When the stock moves quickly in the right direction, this high risk / high reward strategy pays off.

• Straddle / Strangle: Profit from substantial and fast price movements in either direction.

Time decay of options

I had come across the term TIME DECAY OF OPTION.
It was a interesting concept.Actually with time the premium value decreases with time.It was interesting because almost 70 % of the times I had bought naked options ( put or call) the value eroded with time ( towards expiry) & it would become worth less.

So guys why not short sell out of money options near expiry week & mint money. Though the return are not so attractive as one would expect of the stock market but are relatively very safe & yearly returns would be 50 to 100 % .

There is also a emotional side also : -

Most of us may have encountered that when you buy out of money put / call at any price say -10,15,25,30...80,100 & so on & the underlying is not near the strike price the price diminishes to 20 - 05 paisa only infront of our eyes at expiry.

But now GUYS reverse your emotions short sell & as the price of option falls towards 5-10 paise near expiry you will be enjoying.

Will be posting my LIVE options trading

Come track me & trade if u WISH