Bad times for investing in stocks are often good times for trading options. Such are the times today. Volatility is the order of the day. One is reminded of Alvin Toffler’s book, “Future Shock,” in which he, correctly, predicted 40 years ago that society would not only change going forward but that the rate of change would progressively increase. So it seems with current market volatility. For someone with a nest egg looking forward to a comfortable, safe, and secure retirement the market today stinks. For the options trader with sufficient capital today’s volatile market provides virtually unlimited opportunity. Today would seem to be a much better time for a long straddle on many stocks than for a short straddle on almost anything in sight.

The uncertainty that produces volatility is infectious to the point where many strong companies with good balance sheets and lots of cash get pulled into a cycle of fear. Companies selling things like basic laundry soap, basic phone service, and replacement spark plugs will not likely ever go out of business although such companies, according to fundamentals, will never see their shares multiply a hundred fold. Nevertheless these companies often suffer as the market fear factor sinks all ships. Just like the value investor looks for intrinsic value in stocks the options trader can look past the fear factor for strong fundamentals, watch for technical indications of price movement, and buy options where there is promise of profit. Using a long straddle the trader is betting on price movement and is not sure if it will be up or down. He or she is betting on extreme price volatility. Using a short straddle strategy the trader believes that price volatility, at least for the stock in question, will cease, entirely. If he or she is wrong the results can be devastating. This is why much of the business of selling options resides in the halls of large institutional investors with very deep pockets. Looking at the two kinds of options trading, buying versus selling, buying seems a safer and potentially more lucrative proposition during these good times for trading options.

Good times for trading options can also be expensive times for options. Because of the risk inherent in a volatile market the sellers of puts and calls will be asking for higher premiums. The view of the buyer will be that the price is high. The view of the seller, who is assuming all risk, is that the price could be far too low. Thus the trader need be mindful of the degree of opportunity a option offers and just how much the underlying need change in price for the purchase to be profitable. Risk management in options trading entails a clear view of know cost versus potential profit. However, periodic performance review is essential because potential profits are not profits. The wise trader keeps track of what he or she traded and exactly why he or she picked the underlying to trade at a given premium and given market conditions. This way a trader can trade successfully during bad times as well as good times for trading options. This is how traders develop successful strategies and is a step towards making a living trading options.

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What you ought to be realizing about trading options however, is that there are many benefits that one gets from it. And provided you are smart in handling your trades and with using the proper strategies, you may be capable of avoid liabilities from actually materializing.

Economical

One thing about stock options is that they are well effective at leveraging or borrowing funds to increase proceeds. It can be very feasible for an investor to acquire option positions that mimic stock positions without going overboard with the cost. A strategy referred to as a stock replacement, allows imitating stocks doable but in a cost cost-effective way.

For instance, for you to manage to buy 200 shares of a $50 stock, you have to pay $10,000. But if you were going to purchase a few $20 stock options, with the options representing 100 shares each, you would then only have to outlay $4,000 rather than $10,000. As an investor, you’d manage to gain $6,000 for you to easy use at your discretion.

Naturally, the entire procedure is probably not as instant and as easy as the illustration provided. But if you are in a position to choose the proper stock option for the process, you then could be successful in your attempts in this strategy.

High Potential Returns

An additional truth about stock options is you could actually spend less money, but still make almost an identical profit. Therefore, you can surely expect to gain a greater percentage of returns as versus normal stock trading. Obviously, this would mean you could actually earn so much more and your investment can really pay off.

More Investment Choices Can be found

Another great benefit in trading options is the fact that they could offer more ideal opportunities for investment as when held up against traditional stocks. Because options are very versatile, there are usually many ways to utilize them.

Keep in mind that options are actually the rights to trading a specific stock, and so there may be numerous ways that an investor can use these rights to aide him or herself.

The usage of these options allow an individual to trade not only through stock movements, but by way of the passage of time and unpredictability in the market at the same time. And this is very beneficial because most stocks seldom move drastically. Options strategically provide choices for a trader to do business in each type of market.

These are just a few of the huge advantages of trading stock options, but as we discussed, they are enough reason to inform you that going into this kind of market can really be beneficial. Aided by the low costs, direct access to stock options through the web, and with such benefits available, it’s understandable why stock options trading have become a part of the financial circles recently.

If you do not have enough information about the Stock Options, it is important that you do some research first. Buy a book or go to the seminars organized by stock trading companies. Technical terms can be a little complicated as there are different types of trading, buying and selling available. Determine the type of Options you want to try first based upon the investment amount and risk factor. Make yourself familiar with terms like calls, puts, long call, short call, long put, short put, long synthetic, short synthetic, call back spread etc.

You can always tap into the vast resources available over the Internet and subscribe to the many Stock and Index trading newsletters, join forums and keep yourself informed about latest trading news.

You can always take advantage of learning through online trading tutorials. These tutorials have videos and other interactive elements that are quite valuable to everyone who is new to trading in stock options. There are a number of courses available online and offline that provide electronic books, memberships, forums, videos, spreadsheets and other useful material. These courses are designed to teach you how to trade carefully in Stock Options.

This is not all; there are also a number of trading softwares available. These softwares help you simulate and analyze scenarios and have proven to be quite valuable in making informed decisions related to stock trading.

Trading options is a great way to profit as a day trader. It would also be helpful and an advantage to be able to understand the options of the assets you are trading. In most cases, the buyer will be the one to benefit, since he would have to be the one to shoulder the fee to avail of the option. This is why you must really be certain and understand the option you are trading. It is when you do, which makes options trading very profitable. Options, depending on whether it is short- or long-term, have two very opposite sides of the coin. In the long-term, the option has a low risk but high profit and vice-versa with short-term. Therefore, do your homework when dealing with day trading options. It might be worth the extra work.

If you want to make your living trading options you will start by learning the terminology and the basic four trades. These are to buy or sell call options and to buy or sell put options. Trading options in all four ways can be done “covered” or “naked.” That is to say, you can own the stock in which you are trading options or you may not. If you do not own the stock you will need to have equity in your trading account for trading options in most cases.

Much of learning about trading options is “pencil and paper” work. You need to follow examples, learn the mathematics of trading options, and practice without really risking your money before considering straddles and naked call options, not to mention options in general.

The mathematics of trading options are, first of all, that when you sell an option you receive a premium. The premium is based upon what the market believes is the value of the option. Secondly, what you are trying to predict and make a profit on is the spread, or lack of spread, between the stock price on the contract, the strike price or exercise price, and the spot price, which is the market price if the options contract is exercised

If you are to engage in options trading for a living you need to understand that an option can expire unused, unexercised. An example of an unexercised contract in options trading is when someone owning a stock sells a call option. In options trading this gives the buyer of the contract the right to buy the stock at the strike price, which or she will do if the spot price goes up over the strike price by more than the cost of buying the stock. If the stock does not go up the buyer does not buy and the seller pockets the premium while retaining the stock.

Once you are firmly in charge of how and why the various basic ways of trading options work and the mathematics behind them you need to move on the business of predicting the market moves of the underlying stocks for which you are trading options. As in trading stocks directly a good rule of thumb is to know a very few stocks very well and confine your options trading to familiar territory. Beyond that one can get into very abstract mathematics such as “Ito’s Lemma,” to predict risk in options trading. Unless you are a college math professor you probably don’t want to get into equations such as dX_t = α_tdB_t + U_td_t.

Straddles have to do with using puts and call simultaneously on the same stock. Naked call options and other “naked” trading mean that you trade without owning the stock. This can be very profitable once you are firmly grounded in the basics of options trading and know the intricacies of long and short straddles. Naked call options can work if you are continually in touch with the markets and have protected yourself against downside risk with strategies such as a long straddle.

More to come.