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Option trading has many advantages over other investment vehicles. Trading in option contracts can give an investor the flexibility to place bets on very specific market outcomes.
For example, an option trader can make a bet that in 6 months time a stock will be trading either above a certain price or below a lower price - an each way bet if you will. If the stock trades between these two prices in 6 months, the trader will lose a predetermined amount. This type of option strategy is known as a Long Straddle or could also be a Long Strangle.
Option contracts also provide traders with an enormous amount of leverage. In the US, 1 option contract represents 100 underlying shares. In other countries, such as Australia, option contracts can be in multiplies of 1,000 times the underlying stock or commodity. So, with a relatively small amount of money an option trader can control a very large underlying stock position.
Because of this, option trading can also be a very risky venture for the inexperienced. Of course, option trading can make you very large returns in small amount of time, but trading options can also lose you the same amount if you are not careful.
Options101 was written to introduce new comers to option trading terminology. As you go through the basics you will be exposed to key terms that will become clearer as you progress through this short course in option trading.
After you have become more familiar with the basics of option trading, why not take a look at some of the possibilities of Option Strategies. This section describes the main strategies used by investment professionals.
I have also developed an option pricing spreadsheet that you can download for free. It prices European options using the Black Scholes Model and can also calculate all of the option greeks. You can also use it to test risk/reward profiles for various option strategies to help you better understand option trading.
The tutorials section will go through actual examples of how to use options to make directional bets in stocks and futures. Even though the trades are hypothetical they are illustrated on a real time basis and updated frequently.
Comments (16)
Peter
August 19th, 2010 at 6:05pm
Hi Tony, most would say to start off trading stocks and "work" your way up just so you become familiar with the risks associated with trading. It's up to you though.
When I opened up my first brokerage account my first trades were in orange juice and lean hog futures. Then I traded stock options on US equities before I actually did any electronic trades in stocks.
Tony
August 19th, 2010 at 12:41am
Hi,
I want to get into stock trading, can I start by going into option trading right away? or just start with the basic stock trading?
Peter
March 18th, 2010 at 6:41pm
From their website it seems as though MetaTrader only supports Futures, FOREX and CFDs.
milind
March 18th, 2010 at 4:27am
i am trading currencies on metatrader.is it possible to trade options simultaneously on metatrader
venika sharma
March 12th, 2010 at 11:49pm
Very good information.
md
December 30th, 2009 at 11:01am
Good day -we trade in indian stock mkt,if your strategies suits Indian mkt then we too want to learn more on option trading,please Guide me,Ty
sudheesh
August 25th, 2009 at 4:50am
u can add DEMOs in the Tutorials .
hedgex
August 8th, 2009 at 7:26pm
I'd like to say thanks for the contents here in general and the spreadsheet in particular -- it is the most wonderful learning tool one can find. Especially the Tips tab. When I check Natenberg's book (Option Volatility), Page 454, that has the strategy table, I was so confused -- I couldn't believe the book got the market direction reversed. Thanks for getting it right.
Shawna
May 17th, 2009 at 11:44am
Great information, thank you.
Jeremy
April 10th, 2009 at 11:10pm
I love the spreadsheet. Im still needing a U.S. currency formula (or spreadsheet) Thank you for this free advice, and i look forward to studying your sheets more.
Admin
March 22nd, 2009 at 6:40am
Not yet Greg. I will add a Binomial option pricing model soon.
Greg
March 20th, 2009 at 10:25am
Do you have a spreadsheet that price American-style options?
Admin
February 23rd, 2009 at 3:53am
Hi Jim,
Unfortunately I've no experience with their program/offering. If you do try it out, let me know your findings.
jim
February 22nd, 2009 at 12:43pm
what is your opinion of cashflow heaven subscri`ption service, looks very good and seems to have several years track record, have you heard anything on it?
Admin
September 30th, 2008 at 8:09pm
Hi Marie,
Hard to say. Possible sure, but difficult to say without knowing more about their strategy. Could you elaborate a little more on how they expect to achieve this? Or provide the web address of the said company?
Marie
September 29th, 2008 at 11:36am
One company offers to double your money in three months investment in otions trading, they say that their risk is very mininal. Is this possible, or could they be legitimate?
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