Option Trading: Profit on a Minimum of Capital Outlay

David Baxwell — Sun, 07 Feb 2010 17:28:22 +0000

When most people think of how money is made off the investment markets, they immediately think of stocks. This is a very limited view that conflates the entire of the stock market investment field down to just the buying and selling of valuable stock. However, real money can be made from the stock market through option trading.

The reason behind why option trading can be so lucrative is that what is traded allows a trader to reserve the right to buy or sell an underlying stock, but without tying the trader to a binding obligation to do so. In practice, this means the trader who possesses a call option has the right to purchase a stock before it increases in value past a listed strike price, effectively enabling him to profit when a stock goes up but before the price change takes effect. However, there is a time limit that limits this right.

This means that regardless of whether the markets are entering a period of recession or a period of growth, one can profit from option trading simply because it lets you speculate on many possible occurrences that can influence stock value such as growth, decline or even a split. All that you will probably need to get started is well developed stock option education achieved through study, research and relevant tutorials.

Getting into stock options trading means that you will expand your market activity beyond simply buying and your portfolio will diversify beyond simple stocks. Stock options differ from plain stock in that they are essentially derivative instruments that allow you to reserve the right on certain stock choices but without being obligated to do so. The only limitation is the time window specified on that option.

However, to get the most profit out of option trading, one must learn to not only develop effective trading strategy, but know when to best deploy them. This requires a modicum amount of vigilance from the trader, as well as the use of a few market assessment tools such as the MACD indicator in order to notice when sensitive trends are beginning to manifest.

Note that the MACD indicator is only one example of such an instrument. In recent years, it has been subject to much criticism and is recommended for monitoring use only. Still, what traders must quickly learn is that reliance on one indicator is no way to trade. Furthermore, the number of people who base their decisions on one market indicator directly affects its accuracy, resulting in a self-fulfilling prophecy.

This article promotes exploration explore the great potential which lies in stock options trading, which despite the ups and downs of the stock market will ensure traders graduate to a higher level of stock market expertise. Through option trading, one can truly exploit and profit off of value changes which are experienced by stocks. All that is necessary is to start developing one’s knowledge base, master strategy and watch the market with tools like the MACD indicator.

- David Baxwell

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Option Trading: Profit on a Minimum of Capital Outlay