Learning to Trade Options

Learning to Trade Options

Option trading has many advantages over other investment vehicles. Trading in option contracts can give an investor the flexibility to place bets on very specific market outcomes.

For example, an option trader can make a bet that in 6 months time a stock will be trading either above a certain price or below a lower price – an each way bet if you will. If the stock trades between these two prices in 6 months, the trader will lose a predetermined amount. This type of option strategy is known as a Long Straddle or could also be a Long Strangle.

Option contracts also provide traders with an enormous amount of leverage. In the US, 1 option contract represents 100 underlying shares. In other countries, such as Australia, option contracts can be in multiplies of 1,000 times the underlying stock or commodity. So, with a relatively small amount of money an option trader can control a very large underlying stock position. Because of this, option trading can also be a very risky venture for the inexperienced. Of course, option trading can make you very large returns in small amount of time, but trading options can also lose you the same amount if you are not careful.

Options was written to introduce new comers to option trading terminology. As you go through the basics you will be exposed to key terms that will become clearer as you progress through this short course in option trading.

Option Strategies

After you have become more familiar with the basics of option trading, why not take a look at some of the possibilities of Option Strategies. This section describes the main strategies used by investment professionals.

Option Pricing

I have also developed an option pricing spreadsheet that you can download for free. It prices European options using the Black Scholes Model and can also calculate all of the option greeks. You can also use it to test risk/reward profiles for various option strategies to help you better understand option trading.

Option Trading Tutorials

The tutorials section will go through actual examples of how to use options to make directional bets in stocks and futures. Even though the trades are hypothetical they are illustrated on a real time basis and updated frequently.

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