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Options trading methods
Option trading is defined as a contract by which one party is given the right, but not the duty to buy or sell bonds, stocks, securities, underlying assets, etc. Maturity is usually short term i. Options are popular because they are versatile and potentially high yield.
The discussion will be as simple as possible in order to get the attention of beginners in the industry. But, it serves as a good lesson that you, or any trader, cannot predict the future and that by using effective tools, like Leaps Options, as part of a strategy to protect your money during any market decline is the smart way to go.
However, you have to understand the what, why, and how of Leaps Options to use this tool effectively. Both acronyms mean the same thing and stands for Long-term Equity Anticipation Security. LEAP applies both to equities or indices. These options expire at around 2 years, almost always on a January.
First and foremost, dealing in stocks, securities, derivatives, currencies, etc. Second, the ability to dictate your price and then determine if you want to buy, sell or not act is akin to having your cake and eating it. The advantages presented by LEAPS, especially as against speculation did not escape traders offering the same. As such the absolute cost of the option contract is higher.
To be more specific, the longer the maturity date, or the longer the time before the same matures, the higher the cost of the option. The second disadvantage is much debated. This is because some experts believe that much like other long-term strategies, LEAPS is not price sensitive in that the investor cannot adjust investments according to market fluctuations.
On the other hand, this lack of sensitivity means that fluctuation in price brought about by speculation or occasional spikes and falls that do not affect the inherent desirability of the stock, security, underlying asset, currency, etc. The year is and Mr. A wants to invest in the same. However, He wants to make sure that the same company is not merely a bubble brought about by speculation.
Now, there is nothing wrong with bubbles, in fact, you can make a lot of money trading in them but that is another trading strategy. Maturity is in 2 years for a predetermined price that is above the current market value but below what he expects the securities to reach. A exercises the right to purchase the same. A can then choose not to exercise the option. Let us take this a step further, supposing there are 3 competing securities Apple, Dell, Facebook that showed extreme promise but Mr.
A only has enough money to invest in 1 enterprise. A can enter into 3 option contracts and then after 2 years or more determine which one performed the best. Going back to the same example, supposing all three securities performed exceedingly well.
A can choose to invest in the best performer and then sell the 2 promising options to third parties prior to or after exercising the options, at a profit. Want to learn more effective strategies for trading the markets? Due diligence is needed in determining what options to purchase and what options to ignore. Take into consideration trading history, relevance, and desirability of the underlying asset, as well as the long-term policy or product development of the company, to invest in. This is because even if you choose not to exercise the option, the option contract itself is for consideration.
That money is already lost to you. In addition to the actual cost of the contract, there is also opportunity loss because you are holding your capital until the maturity to be able to exercise the option. This money could have been spent on other investments, instead of being kept idle or in a bank where interest income is minuscule.