Most people buy options without even considering what they are buying or how the option will move. They do not look at the risks of an option and try to predict the possible profits and losses. Instead they just buy hoping that eventually the option they bought will make them rich beyond their wildest dreams.
One common mistake people will make is buying the far out of the money option because it is cheap and it still should move up as the stock moves up. These people are surprised when the stock moves up a few pennies and their far out of the money option actually goes down.
People seemed to miss the fact that an option to buy a $40 stock at $50 isn’t going to make a huge return if the stock goes to $43. In fact unless the stock goes up to at least $50 there isn’t really any intrinsic value in the option at all.
I have seen many out of the money options decrease in value even as the stock moves in their favor, why is this? Because options have many different factors at work moving the price of the option up or down.
Options are not only effected by the price of the stock, but by time value, volatility, interest rates, as well as a wide variety of things. So before you trade an option you should have at least some idea of what you are trading.
Learning about the option Greeks is the best way to go about doing this. The Greeks help you predict how much the price of the option will likely change for everything that could possibly happen. They give you a better way to understand what you are actually trading and can aid you in finding the best possible option to buy.
For more on the option Greeks visit http://www.stocks-simplified.com/option-greeks.html
For more on stock options visit http://www.stocks-simplified.com/stock_options.html
When I was young I wanted to learn how to trade the stock market. So I traveled around the country listening to professional traders talk about how they are making money in the market. Now I understand how easy it is to make money in the stock market and started a site stocks-simplified.com to help others learn.