Stock Options, What You Should Know

Stock options give you a way to get leverage in the stock market.  They can greatly increase your returns, if done right.  But before you take the leap to trading options there are a few things you should know.

1.       Not For the Long term

Options eventually expire.  They are not for long term investing.   If you are going to be investing in options it has to be done through the short term, otherwise you may wake up one day and find out all of your options have expired worthless.

2.       Limiting Losses

When you buy an option you risk 100% of your investment, if the trade turns against you it can be very painful.  Because of this it is important to only risk what you can afford to lose.

Don’t put all or most of your account into 1 option trade.  No one option trade should take up a meaningful percentage of your account, most traders prefer not to risk more than 2% of their account on a trade.

3.       You have to be able to trade

In order for you to be a good option trader you have to be an excellent stock trader.  If you are not having success trading stocks you will not have success trading options.  Before you take the leap to the world of options trading make sure you master trading stocks first.

4.       Options Have Time Value

As a stock gets closer to expiration, the value of the option decreases.  If you do not take it into consideration you might have a case where the stock goes your way, but you still lose money.

Buying more time then you think you will need is a good way to counteract this.  The more time an option has until it expires the less it will be affected by other factors such as time value.

For more on options visit http://www.stocks-simplified.com/stock_options.html