|
OK, let's make it very clear right at the beginning.
Option Trading is NOT a
Get-Rich-Quick Program.
Although options trading is a high leverage trading vehicle,
meaning that it costs lesser to own 1 option contract of 100 shares
compared to owning the actual 100 shares, options have their valid
reasons to cost less. Options are depreciating derivative
instrument ie. if the shares tied to the options did not make a substantial price movement in the anticipated direction,
usually on a short-term basis, the options that you have bought
might probably expire worthless.
Options trading requires learning specific trading skills &
knowledge specially tailored towards options.
It would be advisable to learn your options trading skills
initially through paper trading and build the these skills
extensively through trials & errors.
When you felt you have gained enough experiences to trade options
confidently & hopefully, profitably, you could then decide
whether to trade using real money.
In your options trading journey, your FEAR and GREED
would be severely tested. That's the psychological part of
trading that you would have to master through time & experiences.
You would learn how to apply patience, perseverance,
good money management, and give your respect to
the market. The market would in-turn mold you into an
experienced, composed & better options trader.
In other words, options trading demands a respectable amount
of hard work & dedication from oneself; and thus it's
definitely not a get-rich-quick program.
You could buy a stock option contract of a 100 shares as cheaply
as $50 per contract or you could buy options which could cost as
much as a few thousands dollars per contract. Don’t be misled
into buying a bundle of cheap options and hoping to strike it rich
wishing that the shares tied to the options would move up (or down)
substantially according to your will and fetch you few hundred or
even few thousand percents in profit without you doing any homework.
You must remember that the price of the option contract,
known as the options premium, is set by the options market
makers and if the option premium is priced so cheaply,
there’s usually a good reason behind it.
Stock options premium could be priced cheaply for a few reasons
:- (1) Since the options' performance is tied closely to the
underlying
stocks, if the stocks do not have the habit of making substantial price
movement, the corresponding options would usually be priced cheaper
compared to an option of a more volatile stock (2) the particular
stock option may be expiring soon thus it’s time value is diminishing
rapidly.
|
