Investing in Stock Options

Most investors would buy stocks that they think will give have a higher price in the future especially for those who are into long-term investment plans. However, there are some investors who look into making profit within shorter time duration. They can invest in stock options which will allow them to make use of the capital that in a better way. Option investing involves some key features namely leverage, protection and also volatility trading. Traders who understand these elements may be able to succeed in their stock option trading activities.

Through leverage, traders are able to control a bigger volume of equity as they only need to have a certain percentage of the entire capital that is needed. They are able to speculate on the prices of the stocks on a given period of time. Traders can make use of the long call option strategy if they project that the future price of the underlying security will increase above the strike price before the expiration date. There may be no limit when it comes to the price of the stocks at expiration date. Hence, traders can attain good profits if they choose to make use of this strategy.

Stock options may also provide protection to traders through the insurance that they can include in their trading plans. They can make use of protective put options to serve as a hedging strategy in case the market turns against them. Traders can use this strategy to protect their investments from uncertainties before the expiration date and while they are still trading in a bullish market. They may also be able to protect their potential profits on the shares that they have previously purchased as well. Traders who employ this strategy may also be able to realize unlimited profit just like the long call option strategy.

Traders can also take advantage of the market whichever way the trend is moving. They can make profit through volatility trading. Traders for example can buy a put and a call option simultaneously on a certain underlying stock that has the same strike price and the same expiration date. This strategy is known as the long straddle and it reduces the amount of risk that the traders are getting into. Traders can gain profit through the volatility of the underlying stocks or securities over the time frame specified. These are some of the strategies that traders can make use of if they would like to limit their risks while they increase their chances of gaining profit from their investments in stock options.

Source by David Rivera

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