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Option Trading Tips – Trading Options Is Not Difficult

Option Trading TipsThere are many option trading tips and strategies that a stock market investor or trader needs to consider.  Many investors and traders shy away from options because they think trading options is complicated and difficult.  Trading options can be complicated, but it is only as complicated as the strategy which a trader or investor deploys.  There are simple options trading strategies that are no more complicated or difficult to execute than trading stocks.

If you do not understand how to trade options or how options work, it is a good idea to read Option Trading Basics and Trading Call Options before proceeding with this article on option trading tips.

Option Trading Tips For Solid Option Trading Strategies

Since options are used by investors and traders many of reasons via a wide variety of strategies, not all options trading tips and strategies will apply in every options trading situation.

Before you consider buying an option, make sure that you understand what the target (strike) price is for the option that will make the trade profitable and make sure you know when the option expires.  Upon expiration, if the underlying stock or index that the option is based upon has not reached the target price, then the option expires as worthless.  Therefore, it is very important to consider when the option expires and whether the price moving event that you are buying the option for will occur within that time frame.

Make sure you know the correct symbol for the option you are considering buying, since an option symbol is unique to the target price and expiration date for the option you are considering buying.  Your online broker should have option symbol information for an option you are considering buying.  If you cannot find the correct option symbol or are unsure of it, then contact a live broker for assistance.

The further out an option is from its expiration date, the higher the premium (fee) will be to account for the additional risk taken by the person writing the option.  As the expiration date draws closer, the premium decreases and the option slowly loses value, which is known as price decay.  If you anticipate a sharp move in the price a stock or index to occur within a short amount of time, then buying an option that expires in the next month or two to save on the cost of the premium is a good strategy.  However, if you are unsure about whether a stock or index is going to make a move or when the move might occur, then buying an option that has an expiration date many months in the future (it could be well over a year) is a good strategy.  You will pay a higher premium, but if a price change occurs in the underlying stock or index in a direction that increases the value of your option, the change in value of the option will likely be more than the premium, and you can exit the trade with a profit.

As is the case when trading stocks, it is recommended to use limit orders when buying and selling stock and index options.  This will ensure that you receive the price you expect to receive when executing an option trade.

Holding onto an option trade that is not working as expected can be even worse than holding onto a stock trade that is not working out.  This is because unlike stocks that retain some value over time and can and sometimes do make dramatic price recoveries, the price of options decay over time as the expiration date approaches and it then goes to zero and becomes worthless upon expiration, if the target price has not been reached.  This is the most important of all options trading tips that options investors and traders should keep in mind.

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