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The Leverage of Trading Options By www.Options-Trading-Educa tion.com
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The Leverage of Trading Options

May 14, 2015

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The Leverage of Trading Options

The leverage of trading options is perhaps its greatest attraction. With the simple investment of a premium a trader can nail down a price at which he or she will be able to buy or sell an equity, no matter high or low the price may go. The leverage of buying and selling options is that after paying the premium the trader may make a profit of the difference between the strike price, the agreed upon contract price, and the spot price, the price at which the contract will be settled, minus, of course, the cost of the premium paid to buy the options contract. When asking what is an option worth, the trader should think of the multiple of initial investment that can be gained with a successful options purchase.

Besides providing investment leverage, buying options provides the trader with an opportunity but not an obligation to purchase or sell equities on or before their options expiration dates. Because the options trader is not locked in to buying or selling the underlying equity he or she can only experience the loss of the premium if the stock or other equity does not change in price as anticipated.
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Page 1: The Leverage of Trading Options

The Leverage of Trading Options

Bywww.Options-Trading-Education.com

Page 3: The Leverage of Trading Options

With the simple investment of a premium a trader can nail down a price at which he or she will be able to buy or sell an equity, no

matter high or low the price may go.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 4: The Leverage of Trading Options

The leverage of buying and selling options is that after paying the premium the trader may make a profit of the difference between the strike price, the agreed upon contract price,

and the spot price, the price at which the contract will be settled, minus, of course, the cost of the premium paid to buy the options

contract.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 5: The Leverage of Trading Options

When asking what is an option worth, the trader should think of the multiple of initial

investment that can be gained with a successful options purchase.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 6: The Leverage of Trading Options

Besides providing investment leverage, buying options provides the trader with an

opportunity but not an obligation to purchase or sell equities on or before their

options expiration dates.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 7: The Leverage of Trading Options

Because the options trader is not locked in to buying or selling the underlying equity he or

she can only experience the loss of the premium if the stock or other equity does not

change in price as anticipated.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 9: The Leverage of Trading Options

These are buying calls and buying puts. In buying a call the options trader will pay a

premium for the right to buy a stock or other equity on or before the contract expiration

date.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 10: The Leverage of Trading Options

The price he or she will pay will be strike price, the price at which the contract is

written.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 11: The Leverage of Trading Options

If the price of the stock goes up substantially he or she will profit handsomely.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 12: The Leverage of Trading Options

If the price does not change the trader has only lost the price of the premium.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 13: The Leverage of Trading Options

In buying a put the trader purchases the option to sell a stock at a given price, the strike price, no matter how low the price

might go.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 14: The Leverage of Trading Options

In this case the trader will hope for the stock price to drop substantially and if it does he or she will buy at the new and lower spot price while simultaneously selling at the higher

strike price.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 15: The Leverage of Trading Options

Using technical analysis of market trends the trader will attempt to predict where a stock

price will go and make the appropriate trade.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 16: The Leverage of Trading Options

In both buying calls and buying puts there is the potential for substantial profit.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 18: The Leverage of Trading Options

In both cases of buying options, puts or calls, it is a good idea when the trader expects to see substantial price movement in a given

direction.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 19: The Leverage of Trading Options

In the case of buying calls the trader will be expecting upward movement and in the case

of buying puts he or she will be expecting downward movement.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 20: The Leverage of Trading Options

In the case that the expected price movement does not occur the trader is only out the

premium

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 21: The Leverage of Trading Options

The leverage of trading options lies in buying calls and buying puts.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 22: The Leverage of Trading Options

However, there is statistically more profit, with wise trading, in selling calls and selling

puts.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 23: The Leverage of Trading Options

When the trader correctly picks stocks that do not move in price he or she gains the premium

for each option.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 24: The Leverage of Trading Options

The problem with uncovered options trading in selling calls or puts is that a substantial price change can be very expensive to the

point where the leverage of trading options works in reverse.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 25: The Leverage of Trading Options

The trader gains a premium but needs to pay substantially to settle the contract.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/

Page 26: The Leverage of Trading Options

Traditionally it is large institutional investors and people who are

making a living trading options who have the skill and the deep pockets to successfully sell

puts and calls.

http://www.options-trading-education.com/14390/the-leverage-of-trading-options/