Basics

Tricks and secrets of options trading have the potential to make you a fortune within a day. While minimizing the amount of money you could loose. The options trading market is one of contracts made on an underlying asset, and these contracts are not issued by the company or entity representing that asset. In essence, it’s like an insurance contract; you can use it to protect yourself from an unexpected accident, but you might end up not using it at all, even though you did pay the premium. However, if you use it, the insurance often covers you for several times more then the premiums you’ve paid. That’s where it gets interesting, for example in a market crash or sudden rally.

Whether you’re already a stock trader and want to add options to the soup for protection, or if you’re a neophyte curious about options, I’ll go through the ins and outs of succeeding in this options world.

If you already understand the basics and how options work you can skip to the strategies section where we discuss several mathematical tools, secrets, and patterns useful to options trading, as well as tricks to maximize your profit, while minimizing the risk.

If not, here’s an example that that helped me first make sense of options when I decided to learn options trading:

Suppose a local sports team has a game in one month against a city with no supporters (so locals are the only ones who’d buy tickets), and tickets are on sale now for 100$. Lets say you believe ticket prices will soar in one month because the team will perform well, but that you don’t want to pay the full ticket price right now, so your ticket seller tells you you can put a down payment of 10$ tto buy the right to pay  the full 100$ at any time before the game.

During the season, your team plays against other teams, and depending on the outcome of each of those games, ticket prices rise and fall, changing the value of the ticket for the big game. Lets say for example that your team beats the best team in the league! The prices for the final game will soar to 200$, however you still only have to pay the 100$  to your dealer. When you do you can sell back your ticket to any one who wants to watch the game, for 200$ and you’ll get 100$ of profit!

On the other hand, if in the mean time your team has a bad season, the value of tickets will drop, lets say it goes down to 50$, but you have a voucher that allows you to purchase it for 100$. You are at loss in this situation, of course you could just let go of the 10$ and not pay up the 100$, that way you’d only lose 10$. That is what I find really wonderful about options.

What you should remember from the example above is that buying options comes down to buying a contract. There are several types of options contracts, and we will see each of them in this Learn options trading section.

So what you can profit comes down to the actual volatility (variation) of the asset ( stock or commodity). Where as you can only lose as much as it cost you to buy the contract, often times that is much less than the actual strike price, however keep in mind that a contract has leverage of 100 stocks.

An other important aspect of options for someone holding a long position, is that Selling or buying the asset aforementioned in the contract is Not obligated, you can do it at any time too. However if you are a seller, you will learn later what obligations apply to you. Often times contract’s prices fluctuate greatly, a lot more than the actual asset’s variations.

So if you’re still with me here, you’ll understand that this means volatility on top of volatility, and potential for gain once more (loss as well).

Of course, the potential for loss is compounded by the time-value of your option, which is the value it often loses as the deadline to sell your contract approaches. However if by that time there is no real proft to be made by going ahead with the sale of your asset, you can just let it lose it’s value completely (the time value will match the so called intrinsic value, and the premium, the actual value of the options contract, sum of these two, will now be 0)

Note that this example explains options trading mostly from the buyer’s perspective.

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