Option Stock Trading - In The Know

Anyone can master option stock trading with some education and practice

. There are a number of investment terms and concepts related to this type of trading, and having a firm understanding of them is important for success. You should not attempt options trading unless you are able to understand the risks of the trade but also the upside potential in order to maximize your results.

Some of the concepts are fairly simple like put and call. But there are other terms that are just as important and involve more complexity. For example, you should be familiar with what are called the Greeks. If you don't know what they are then your investing knowledge has a big gap that can cost you money or prevent you from taking advantage of investing strategies.

Delta

The delta is actually just one of the terms used in options investing that are called Greeks. The delta measures the change of the price of an underlying asset on the premium of the option. It measures change in terms of a single one-point move in the underlier. Puts are expressed as negative delta numbers because they have an inverse correlation to the underlying asset. Calls are the opposite because calls have a positive correlation to the underlier.

The delta can provide a lot of information to an investor. For example, a delta that is at .5 and still moving towards 1.0 is in the money. Learning how to interpret delta values is important for developing option strategies.

Gamma

The gamma is related to the delta because it measures the deltas rate of change compared to the rate of change in the option contract underlier. It is used as a predictor of gain or loss through a reference to the price movements in the underlier.

Theta

The theta is a measure of the rate of change in the time premium. It actually measures the rate of decline as time passes and the option moves closer to its expiration date. The theta is often used with the delta and incorporated into a trading strategy. The theta can tell you if the option is losing money due to time.

Vega

The vega is a measure of risk. It is a value that measures the impact of volatility on an option's price. Volatility is an important concept in options trading including option stock trading. Volatility addresses both market expectations and historical price movements. It is a complex concept and complicated formulas are used to assign value to volatility. The Black-Scholes model is one of the oldest and most used of the models available.

Option stock trading can be exciting and profitable as long as you invest money you can afford to lose and understand the market and the risks before trading. As you begin to study the various strategies used in equity futures investing, you will find that understanding the Greeks is important. In fact, most of the options software packages calculate these values for you and then use the values to find investing opportunities.

Millions of people successfully complete option stock trading every day. The more you trade, the more comfortable you will get using the more advanced strategies. But whatever you do, don't try to over-extend yourself financially. That is where new investors find their greatest risk while learning options trading.

by: EeLynn Lee

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