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Why Buying Options Works
Buying options can be profitable, can reduce investment risk, and can provide a welcome degree of leverage in stock trading. Why buying options works is highlighted in the recent travails of LinkedIn, the online professional networking company that just went public and began options trading. LinkedIn rose quickly from its $45 a share opening to over $90 a share on its opening day a month ago. The fact that LinkedIn employees hold stock options worth a fifth of the value of the company did not deter first day investors and traders from bidding the stock price up. Traders doing technical analysis of LinkedIn with Candlestick analysis were able to see the stock market indecision at the top of the LinkedIn price curve and could commonly predict the subsequent and continuing fall of LinkedIn to progressively lower stock prices. Those who were buying puts on LinkedIn over the last weeks have demonstrated why buying options works.
Why buying options works is not limited to buying puts before a stock price falls or buying calls in anticipation of a rise in stock price. Traders profited by buying puts on LinkedIn before the stock price fell. Given what happened to LinkedIn stock, stock traders could also have profited by selling short on LinkedIn. Why buying options works in this sort of situation is that even with the best fundamental and technical analysis a stock price may move contrary to expectations. Why buying options works is that the trader can buy options and practice trading risk management as compared to buying stock directly or short selling in which case the trader can incur substantial losses when there is an unexpected and dramatic price move. In all cases of stock and options trading the trader or investor is well advised to use technical analysis tools such as Candlestick patterns to assist him in profitably anticipating price changes. In doing so he limits his risk of being caught in a market reversal or whipsawed by heavy market volatility. The point of using options trading is that the trader limits his risk while using Candlestick pattern formations as a tool for increasing profits though prediction of price direction.