Trading Options

Welcome to the options trading section. Options trading is not easy however provides significant potential for profit, and people have been trading options for many many years. In this section, I want to provide information to help you decide whether options trading is for you and then to assist you with trading options.

With the exception of this introductory page, all of the content within this options section has been kindly provided by Nick Katiforis. Nick lives in Melbourne, Australia and is a former professional floor trader of the Sydney Futures Exchange. He is now an active client advisor specialising in recommendation based trading in financial and commodity options. His website is www.nickkatiforis.com

Many people either actively trade options or are very interested in including them in their trading due to the significant advantages they offer over trading stocks alone.

You might not think that option trading is for individual traders, however it is. The principles that give professional option traders their edge are available to you as well. They are universal in nature. With practice you can learn to apply them yourself to help put the odds more squarely in your favour. Also consider, the top 10 secrets of the professionals - the keys to trading success.

Options are a type of derivates, which are so named as they derive their price from something else. This is normally a stock, commodity or an index, which is often referred to as the ‘underlying’. Whilst there are many derivative products available, options have been popular for many years.

An option is a contract between two parties giving the buyer the right, but not the obligation, to buy or sell a parcel of stock at a predetermined price either on, or before a predetermined date. To acquire this right the buyer pays a premium to the writer (seller) of the contract.

Trading options introduces a lot of new trading terms and concepts that potential traders need to understand before they start. Terms like calls, puts, underlying, time decay, expiry date, strike or exercise price, volatility, the greeks, contract size, intrinsic and time value, open interest, market maker, premium, margins, pay off diagrams, out of / in / at the money, strangles, straddles and the list goes on. Click here to read about the basics of option contracts.

There are many people that trade stocks, options and futures. Of these only a small proportion use an edge when trading. The lack of a trading edge, along with poor money management and insufficient capital, is the main reason why unsophisticated traders generally lose money trading in financial markets.

These are the four most important principles of option trading that you will learn to apply in your own trading to gain a trading edge:

• Limited Risk
• Time Decay
• Volatility
• Option Mispricing

The key thing to remember with trading options is that the price of the option is ultimately determined by what the underlying does. So, if you cannot analyse the underlying (stock, index or commodity etc) and trade it profitably, then options will only have you losing more money quicker.

Why do people trade options then? There are a number of reasons why. First, is the leverage that they provide as they are a derivative and provide you greater potential return than just trading the underlying stock. Through calls and puts, they allow you to trade in both directions; eg. profit when a stock falls in value.

They allow you to manage risk and protect your downside risk in a stock you may own. Finally, amongst other, various option strategies allow you to profit from a whole range of different scenarios, even when you think a stock price isn’t going to move for a period of time.