| |
| |
|
Investing Information |
|
|
|
Creating Momentum with Options - Pro and Cons of At-the-money, In-the-money, and Out-of-the-money
To create momentum in your options trading you need to understand the advantages and disadvantages of at-the-money options, in-the-money options and out-of-the-money options. An at-the-money option has both advantages and disadvantages over stock and in-the-money options. First, the at-the-money option will be cheaper then both the stock and the in-the-money option. So there is less capital requirement and less total risk. Remember, when buying an option, you can only lose what you spend. Creating momentum is understanding this problem, what is the amount of extrinsic in the at-the-money option. In order for you to profit from buying an at-the-money option, you need the stock to make a move very quickly. Because you have so much extrinsic value, you will be battling against the option’s daily rate of decay. So, the movement of the stock must happen quickly enough and large enough to offset the amount of money you will be losing daily as expiration draws near. With this said, the best chance you have to make money when buying a naked at-the-money option is to use it as a short term trade. The longer you hold onto this option, the harder it is for you to be profitable due to the options decaying extrinsic value. At The Money Call vs. In The Money Call For chart below, stock price = $35.00 Strike Option Delta Breakeven Extrinsic Price Price Value $30 5.20 85 35.20 $.20 $35 1.00 52 36.00 $1.00 $40 .30 20 40.30 $.30 An out-of-the-money option presents many of the same advantage & disadvantage parameters to the investor. The out-of-the-money option is even cheaper then the at-the-money option which means more leverage and less risk. However, with a smaller delta, the stock must move much more than either the in or at-the-money options in order for the options to become profitable. Again, we need the option’s delta to outpace the option’s rate of decay. Now, with the out-of-the-money option, there is less extrinsic value than the at-the-money option so the amount of total possible decay (cost of the option) and the rate of this decay is less than the at-the-money option. By being further out-of-the-money, this option needs more movement from the stock. As a naked option, this out-or-the-money example is extremely speculative and should only be used naked when the investor feels there is a very good chance of a stock having a large percentage move. An investor must understand that the odds of them profiting from the purchase of a naked out-of-the-money option is very slim. When purchasing a naked out-of-the-money option, be prepared to lose your entire investment. Out of The Money Call vs. At The Money Call For chart below, stock price = $35.00 Strike Option Delta Breakeven Extrinsic Price Price Value $30 5.20 85 35.20 $.20 $35 1.00 52 36.00 $1.00 $40 .30 20 40.30 $.30 Although options can be traded by themselves for directional plays, and can perform well under the right conditions, they are much better used in coordination with stock or other options in formatted strategies which will be discussed in the next section. While buying naked calls and puts can provide some of the biggest leverage and highest returns, they can also involve the most risk. This momentum strategy should only be used by experienced options traders or traders using risk capital. -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- Click Here --> http://www.options-university.org
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
Credit Scores = ROI Profits for Real Estate Investors Strong credit saves real estate investors money on mortgage finance costs. A good credit score, along with the other credit and mortgage qualifications, means that investors can pay lower fees for financing, such as points and interest charges. Just Say NO to Your Stock Broker We have all heard that slogan that started back when Nancy Reagan was in Washington. It was all about drugs. Why the Rich Keep Getting Richer Rich people: fortunate, lucky, selfish, and arrogant? Or highly educated, caring, brilliant individuals? Becoming rich isn't hard, but it does require a bit of time and knowledge. Having time to get rich, educating oneself, and buying assets are the three key factors in attaining untold wealth. Playing With Money - And Making More Ready to start playing with your money? Not interested in complicated businesses or boring bank C.D. Consolidation Period The economic data reported Fri showed continued above trend growth with disinflation (at the core level, excluding food and energy) in the second quarter. Real output growth has slowed from about 4% in 2003 & 2004 to just over 3 1/2% so far this year, while a core inflation rate fell from 3% last quarter to 2%. Why You Need To Buy and Sell Gold Coins (Part 3) Putting Rare Coin Market Cycles to Work for You.. Retirement Is A Scary Proposition If Youre Without A Plan, And Running Out Of Time Of the 75 million baby boomers nearing retirement today, many are:* Debt Ridden* Severely unprepared for retirement* Under Funded* Without a StrategyThis is a very serious problem in a country that we can all remember used to assure most people of a retirement where you are taken care of financially.We all know that social security alone is not the answer to this problem. Trading Tips No 7: Developing a Casino Mentality for the Day Trader I submit that the successful day trader would profit well to adopt a casino mentality. At first glance, this sounds reckless and nothing more than a gambling attitude - but it's not. The Conflict of Interest Game Disgruntled investors are going after Wall Street once again, this time accusing one of investment bank Morgan-Stanley's high-tech mutual funds of making biased stock picks.Recent lawsuits allege the Morgan Stanley Technology fund was influenced to buy and hold stocks of companies that delivered huge investment banking fees - or could potentially bring big business - to the investment bank. IF - The Wonders of Investing If it seems as if all investors are selling, who is buying? If trading has become entertainment for you, it may be time to refocus on profits. If your stock has reached an annual low, can it go any lower? If your stock has reached an annual high, can it go any higher? If all the television analysts jumped off a bridge, would anyone care? If your portfolio is based solely on fundamental analysis, perhaps it is time to learn technical analysis. Before You Invest You Must Read This It is important to answer the following questions before you begin to invest any of your money. The answers to these questions will help to guide you to when, what, where, and how much to invest. Stocks, Oil, and Bonds A barrel of oil bounced to over $60 Thu, which triggered a steep sell-off in the stock market Thu and Fri, although oil pulled-back to around $59 a barrel, and closed at $59.84 a barrel Fri. Global Markets: A Window on the World Economy Expectations drive the market. Every stock price is driven by what people expect the company to do. Secret Stock Options Trading Strategies the Experts Don`t Want You to Know To understand stock options, we need to look at Webster’s Dictionary’s definition of the word strategy.Webster’s Dictionary defines the term strategy as1. How to Analyze the Veracity of Investment Newsletters When trying to analyze whether a promotional ad for an investment newsletter or a market timing investment trading system is worthy of investigation, the following questions should be asked:Does the strategy have a track record? Without this you are really allowing your emotions to be in play. All of us want to believe that if someone says something it must be true. Stock Market Horizons: Gold $3,000, Oil $70 In the last two decades, even though gold prices have dwindled from $850 to $350 an ounce, there are still market gurus who predict gold price to hit $3000 an ounce. Hecla seems to be quite bullish about the future. The Real Cost of a Bad Habit What is the value of a good habit? Think of some daily habits, like brushing your teeth, or buckling a seat belt, or flushing. All of these habits have value important to some part of life. New U.S. Mint Coins a Golden Opportunity In April, the U.S. Six Principles of Successful Investing 1. Begin investing immediatelyProcrastination is the number one enemy of investing. Real Estate Clubs Hot Among Investors Six or seven years ago, the stock market was booming, Internet companies that no one had ever heard of were valued at billions of dollars, and anyone and everyone was investing their money in tech stocks. Then, in 2000, the stock market crashed, the Internet companies closed their doors, investors lost trillions of dollars, and life went back to normal, more or less.
|
| home | site map |
| © 2006 |
