How to Trade with Trading Options Effectively

Some investors become anxious just hearing the term options. By revealing some of his all-time favorite options trading techniques, Trading Options Effectively by Paul Forchione will help you conquer your fear of options and you will master how to trade on options. You’ll learn about both directional and neutral bets, as well as when to start trading based on statistical volatility. You’ll also learn how to correctly employ the Greeks, visualize your position’s performance, and alter your positions in reaction to market movements.

Options Trading Strategies according to Trading Options Effectively by Paul Forchione

Options are a type of derivative contract that gives the contract’s purchasers (the option holders) the right (but not the duty) to buy or sell an asset at a predetermined price at a future date. The sellers of such a right offer a premium to option buyers. Option holders will let the option expire worthless and not exercise this right if market prices are unfavorable, ensuring that possible losses are not greater than the premium. On the other hand, if the market swings in the direction of increasing the value of this privilege, it will take advantage of it.

Contracts for “call” and “put” options are the most common. A call option gives the contract buyer the right to buy the underlying asset at a fixed price in the future, known as the exercise price or strike price. A put option gives the buyer the right to sell the underlying asset at a preset price in the future.

Let’s look at some fundamental risk-reduction tactics that a novice investor may apply with calls or puts. The first two entail placing a direction bet utilizing options with a minimal loss if the bet fails. Hedging methods are used on top of existing holdings in the others.

Buying Calls (Long Calls)

For individuals wishing to make a directional bet in the market, trading options has several advantages. You can buy a call option with less cash than the asset itself if you believe the asset’s price will climb. If the price falls instead, your losses are limited to the premium you paid for the options and nothing more. This may be the best option for traders who:

• Are you “bullish” or confident in a specific company, exchange-traded fund (ETF), or index fund and wish to reduce risk?
• Want to take advantage of growing prices by using leverage?

Options are leveraged products in the sense that they allow traders to increase the possible positive reward by utilizing less quantities than would be necessary if trading the underlying asset directly. So, rather of spending $10,000 to acquire 100 shares of a $100 stock, you could spend $2,000 on a call option with a strike price 10% higher than the current market price.

Example 

Let’s say a trader wishes to put $5,000 into Apple (AAPL), which is now selling at roughly $165 per share. They may buy 30 shares for $4,950 with this sum. Assume that the stock price rises by 10% to $181.50 in the next month. The trader’s portfolio will increase to $5,445, ignoring any brokerage commissions or transaction costs, for a net dollar return of $495, or 10% on the money invested.

Let’s assume a call option on the stock with a $165 strike price expires in a month’s time costs $5.50 per share or $550 per contract. The trader’s available investment budget allows them to purchase nine options for $4,950. The trader is basically making a transaction on 900 shares because the option contract controls 100 shares. The option will expire in the money (ITM) and be worth $16.50 per share (for a $181.50 to $165 strike), or $14,850 on 900 shares, if the stock price rises 10% to $181.50 at expiry. When compared to trading the underlying asset directly, that’s a net dollar return of $9,990, or 200 percent on the money invested.

There are a lot more to learn in Trading Options Effectively by Paul Forchione, especially his best options trading techniques. Buy now!