subject: Learn How To Trade Options With Success [print this page] There is no doubt about it but earning cash on options is not as straightforward as it seems or must appear.
There are so many diverse issues to discover in options trading that it is no wonder that nearly all beginners can take a while to create some cash through using options.
One of the most serious mistakes nearly all beginner options traders can make is choosing to pursue the incorrect strategy from the beginning.
You see nearly all options traders who start out at the commencement of their careers purchase options and hope to strike it fluky by picking a share which will achieve a enormous move. The only conundrum with this tactic is that nearly everyone of these novices do not know this little trick about trading options. And that secret is this.
It is a little known detail that more than 80% of all options end up with no value. That's correct. Most options which are purchased will lose all their time premium and expire worthless.
Let us just tell again ourselves what an option is (in regard to share and index derivatives). An option gives you the right but not the contractual obligation to purchase a given share or index inside a given time frame (that time frame may possibly be something from 5 days up to 100 days). The purchaser of the option has the right to implement it and the seller of the option has to deliver on the obligation (if the seller sold a call then he has to get rid of the share to the buyer for the purchase rate fixed out in the option agreement. If the seller sold the put then he has to purchase the share from the buyer at the rate set out in the options contract).
Therefore if 80% of options bought expire worthless then that means if you purchase options then 80% of the time you will lose cash after you purchase your options.
For illustration if you purchase a put on IBM after that you have to be correct in relation to your guess that the IBM share will turn down in the compulsory time frame prior to the option expires. For you to produce some cash it follows that you will need IBM to produce a somewhat sizeable move down in the compulsory time frame.
And this is the main problem facing you which you need to make sure you are on top of. It's a real straightforward notion but the majority of individuals just don't comprehend it even though it is so very obvious. Shares can simply do five actions.
They can:
1. Go up a little
2. Move up a lot
3. Move down a little
4. Move down a lot
5. Stay where they are
Again, if you purchase a put after that IBM will need to move down a lot for you to create cash.
So what this means to you is that if you choose to simply trade an options strategy so as to buys options at that time you just have a one in five opportunity of getting the movement of the share right and therefore making cash. Your share needs to move in the appropriate direction a great amount for you to be profitable.
Therefore the secret to making regular cash trading options is to sell options, not purchase them, and be correct 80% of the time. So straightforward...but not that straightforward.
by: Jack Barnes
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