Options trading can be a great way to make the most of investment dollars. With options, investors can insulate themselves against losses. By trading these products, it’s possible to turn a profit even when a stock is losing value. Options can also be a great tool for investors who have a limited budget. Options trading allows investors to, in effect, bet on the price movements of expensive stocks with just a minimal expenditure.
Options can be either put or call. Call options allow investors to buy a stock at a given price. Put options allow investors to sell at a specified price. The strike price is the price at which the transaction is executed. The investor’s choice of a strike price will ultimately determine the success or failure of a trade. An investor’s risk tolerance will be an important determiner of when they decide to make a trade.
For example, an in-the-money (ITM) call has more sensitivity, or delta, to the price of the stock itself. Delta is one of the so-called Greeks. Greeks are calculations designed to tell investors how profitable they are likely to be at a specific strike price. Delta is one of the most commonly used Greeks and ranges from +1 to -1. A low Delta suggests that an option will be inexpensive. A high delta suggests the option will be more expensive, and more likely to be in the money when exercised.
Today, many brokerages and finance websites offer options, chains, and other tools online. Some sophisticated probability calculators go way beyond the simple Greeks like a delta. These tools are designed to help investors make informed decisions and increase their chances of profitability. Of course, context is everything. It’s important to pair these analytical tools with good general information about the options markets.
For example, time is one of the most important factors when it comes to options. A longer options contract suggests that there’s a better chance the option will eventually make money. However, longer options contracts tend to be more expensive. Finding a balance is key. Liquidity is also an important factor. It’s a good idea to trade in options that are already heavily traded. Moneyness is also a factor. Out-of-the-money options are less expensive, generally speaking than in-the-money options.
About Raging Bull Trading
Raging Bull Trading is a trading program that teaches both new and experienced traders about the art of trading and the stock market. Originally launched in 2010 by professional traders Jeff Bishop and Jason Bond, Raging Bull Trading offers a comprehensive course on mastering stock trading from industry experts. The program includes lessons on stock picks, stock ideas, how to get started in trading, and an overall stock market education.