Buying Options


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Buying Options

Many traders find that an efficient means of making money in the stock market is by buying options.
Traders can use Candlestick analysis to anticipate movement in stock prices to improve their chances of profiting from buying options.

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Buying Options

  1. 1. Buying Options
  2. 2. Many traders find that an efficient means of makingmoney in the stock market is by buying options.
  3. 3. Traders can use Candlestick analysis to anticipate movement in stock prices to improve their chances ofprofiting from buying options.
  4. 4. Traders pay an optionpremium for buying optionswhich gives them the optionbut not the obligation to buy stock or sell stock.
  5. 5. The price at which stocks willbe bought or sold is the strikeprice which is determined by options contracts.
  6. 6. There are two directions to go in buying options.
  7. 7. These are buying puts and buying calls.
  8. 8. A put is an option to sell the stock at the strike price.
  9. 9. A call is the right to buy the stock at the strike price.
  10. 10. The buyer of a call optionexpects the stock to rise in price.
  11. 11. In buying United States options the buyer has theright to exercise the optionscontract at any time before expiration.
  12. 12. Thus, many traders do notintend to wait until expiration of the contract to profit.
  13. 13. When the underlying stockmoves sufficiently in price itsoption value will reflect the change in stock price.
  14. 14. Buying options is a means ofbenefitting from stock pricemovement with substantially less investment than by buying stocks.
  15. 15. Paying the premium to buy acall or put option is locking in the opportunity to make money during a market rally or decline.
  16. 16. Technical analysis of stockshelps traders in anticipatingstock price movement andbuying stock options at the right times.
  17. 17. Someone who buys a stockruns the risk of losing when the price falls.
  18. 18. Buying options is different inthe trader will not exercise the options contract unless doing so will lead to a profit.
  19. 19. The monetary risk of buying options is that if the stock does not move in price asexpected the trader does not earn money.
  20. 20. However, so long as theoption has intrinsic value thetrader call sell the option and regain part of the premium.
  21. 21. In fact most traders will earntheir profit in trading options by selling their contract toanother trader after the stockprice moves and the value of the option increases.
  22. 22. As an example, a traderpurchases a $100 put on XYZ Corp. for $3. The options contract gives the trader theright to sell 100 shares of XYZ at $100 a share. Thus the premium paid is $300.
  23. 23. The stock is still trading at$100 a share. Then the priceof XYZ drops with news of an ill conceived merger.
  24. 24. It is now selling at $91 a share.
  25. 25. If the contract were to expireimmediately the trader could quickly execute the contract, sell his shares at $100 each and buy at $91.
  26. 26. The $900 profit minus the $300 premium gives thetrader a profit of $600 on a $300 investment, minus commissions and fees.
  27. 27. However, the contract will notexpire for another month. The market may anticipate arecovery of XYZ or may expect that its price will fall farther.
  28. 28. Thus the option may betrading above or below $91.
  29. 29. Traders use technical analysis tools such as Candlestickpattern formations in order to anticipate stock price movement in this sort of situation.
  30. 30. If the trader’s Candlestick charting analysis resultsindicate further price declinein XYZ he or she will hold the options contract.
  31. 31. If Candlestick chart analysisindicates that XYZ will recover the trader will likely sell thecontract and pocket the profit.
  32. 32.