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Selecting Profitable Options
Options trading volatility is commonly the key to success in selecting profitable options. It is obvious that the best options to buy are commonly the cheapest and that the best options to sell are those that have changed greatly in price from when they were purchased. But in selecting profitable options how does a trader know when an out-of-the-money option will sky rocket to huge profits?
Picking an Equity Market and an Equity
Commodity futures options trading can be quite profitable, if you know your commodities. One can purchase futures contracts on commodities such as corn, wheat, pork bellies or soybeans. If you are doing this you are following the weather in various parts of the world and United States Department of Agriculture reports relating to the commodity that you are interested in. A drought in a major grain producing area such as the Ukraine, Brazil, or the American Midwest will drive prices up. Great weather will increase yields and typically drive prices down. If ranchers decide that cattle are becoming less profitable they will cull their herds driving prices down in the short term and up in the long term. Pick the product that you know and keep track of its pricing. That is a key factor for selecting profitable options in commodities futures. And, then there is stock option trading. Again, selecting profitable options depends on following prices and the basics that drive prices in the long term. A successful options trader knows the fundamentals and where the market will end up. He buys calls or puts on a stock when he expects to see a substantial price change within the time frame of a standard options contract. If he expects to see changes but in a longer time frame he may consider LEAPS options.
Slow LEAPS to Profits
An options trader may wish to trade with a longer timeline than with regular options contracts. Then he chooses LEAPS options. LEAPS is an acronym. A Long Term Equity AnticiPation Security is an option with longer term until expiration than other options. There are LEAPS available for more than 2000 equities more than two dozen indexes. LEAPS are way to buy or sell puts or calls on contracts that commonly run for up to three years. This is as opposed to the three, six, and nine month terms for standard traded options. LEAPS are used by investors to hedge risk. For example, an investor can purchase shares of a rapidly rising stock and also buys LEAPS puts on the stock. This way he guards against an unexpected downturn. If the stock does fall he executes the LEAPS put option and sells his stock. Because LEAPS contracts last for a long as three years there is no need to continually exit one contract and enter into another unless the stock price rises so far that the initial LEAPS contract is totally out of date.