There are plentiful of money in the share market. Even so, not everyone can fetch the profit out from there. A few people can earn a good deal from the share market but few has lost more money at that place. It’s very indefinite. Sometimes, you’ll loss money but after some days, you may gain a profit and sometimes in opposite. So, what should we do to acquire the money from the share market? Generally, there are 2 methods; that are investing and trading. The difference between investing and trading is, share trading involves selling and buying stocks, options or futures in a short period of time;And investing involves buying options, futures, stocks and holding it for a long time, usually a year or more before selling it.
If you have a sum of money that’s sufficient for you to buy 10 units stock, you can use that money to buy 100 units options. But the return of investment is about the identical between options and stocks. Consequently, you’ll bring in about tenfold if you buy options instead of stocks or futures. Even so, if you lose on that trade, you’ll lose almost tenfold also. While we trade options, the sum of money that we can profit and lose is virtually same. However, we want more money to buy stocks compared to options. This makes the percentage of the loss and profit for buying options is much higher than stocks even though the stocksprice fluctuates in a small amount.
Due to the high profit and loss while buying options, investing or trading option is just like %*!. It is quite normal that the bring back of investment is more than 100%. But it’s also quite normal that you could drop off your entire money in trading or investing. In order to earn more than lose, you need to know some basic option trading strategies and technical analysis skill. Option is different from the stock. Option has time value; whereas, stocks don’t. The value of one stock won’t devalue in time. It’s only affected by the supply and demand and as well the company performance. However, option value will devalue with time. Once the time reaches to the option expiry date, there’s no more time value for that option. So, you need to apply strategy to trade option, so that you’ll be able to minimize the loss and maximize the profit.
The basic option trading techniques are bullish call spread and bearish put spread. Bullish call spread is employed when the share price is expected to advance in the forthcoming months. The bearish put spread is applied when the share price is awaited to dip in the following months. The steps that are implied in this scheme are buying in the money option and selling out of the money option. Money option is the option that has intrinsic value and time value; Out of the money option only has time value. While the share price moves to the positive side (generated money side), money option will bring forth profit and the out of the money option will make loss. However, the minus of the profit and the loss is the net profit that’s yielded from this scheme. When the share price moves over the out of the money strike price, the profit will be maximum. Continous movement of the stock price to the positive side will not generate any profit. Therein situation, we will close both positions to take the profit out from the stock market.
Whenever the share price moves to negative side (opposite side that cause loss), in the money options value will undervalue and the out of the money option will render profit. Even so, the profit, which is rendered from the out of the money, is bounded to the price that you have sold.
Besides, the aim of selling out of the money option in the spread strategy is to minimize the loss of the time value of the in the money option. In reality, both in and out the money option’s time value would devaluate when the time passes. Since we do not possess the out of the money option; so, we can hold the money that we have gained from selling that option. As the time value of this out of the money option has devaluated, we use lower price to buy back the option. Thus, we sell at high price and buy back at low price; consequently, we earn money. The profit that we have gained typically is adequate to back the loss of the time value from the in the money option. Yet, you still lose the intrinsic value of option if the share price moves to the negative direction.
Therefore, bullish call and bearish put spreads are 2 of the primary option trading schemes. Even so, it will not guarantee 100% win from the share market. You still require to learn to anticipate the stock price direction precisely using fundamental, technical and news analysis.
