When To Buy Stock Options Instead Of Stock
If you are a new trader and you have stock options explained to you adequately, you are probably wondering exactly when it makes sense to buy a put or call rather than simply buying the underlying stock. It’s a fair question, one whose answer we should fully grasp before attempting to wade into buying stock options.
Buying stocks simply involves taking a stake in the fortunes of a company, as represented by purchasing stock that it has issued. If we are bullish, we can buy stock in it without regard for any time frame for the move that we are anticipating.
The critical difference with stock options is that they are a decaying investment, one whose eventual expiration makes “buy and hold” an inappropriate investment philosophy. Especially if we purchase an option that is “out of the money”, we must constantly be aware of the “time decay” to which our contracts are subject. Even an “in the money” option’s value is partially made up of time value, so for any option we hold whose value is constantly decaying, we must ask ourselves much more often than if we were owners of the stock: “do I want to continue to hold this position?”
This time decay is literally part of the price that we pay to play the options game. But on the upside, the leverage that we achieve by buying options can make be extremely attractive if our expectation of a future price move turns out to be correct. Leverage like this should never be bought with a large part of our discretionary investment funds, of course. Most investment advisers would recommend investing in options with only a small percentage, certainly less than 10%, of one’s portfolio. The idea as always is to increase the overall value of one’s portfolio incrementally with options, over time, because the nature of options is that you will be wrong on some of your trades.
Even for people who understand stock or share options very well, trading them is very risky. Paper trade with options for months before buying them with real money. This is probably the best way to find out just how difficult it is to make money consistently with them.
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Reading Stock Charts – The Basics
When you first take a look at a stock chart, the information you find may a bit overwhelming. Sure, it kind of looks like the same type of graph you’ve seen since 2nd grade, but what does everything mean? To truly understand your investment portfolio, you need to learn how to read stock charts.
If you’re looking at the stock charts in your local newspaper, the type of chart you’ll typically see there is a line chart. This chart simply takes the closing price for each day and connects them in a straight line. On the right hand side of the chart you will see numbers that correspond with the price of the stock. These prices usually are broken down to the penny, so if you’re stock has closed at $10, you will see the line’s last point at 10.00. If your stock raises a dollar in price, to 11.00, it is said to have raised a point. On the stock market, a point is equal to $1, or 100 pennies. On the bottom of the chart you’ll find the date. So that means a stock chart is plotted as time vs. price.
If you’re looking at time-frames shorter than a day, typically used for short-term trading, the time on the bottom of the chart will be broken down into smaller increments. They can be as small as 1 minute (typically used for day trading stock charts), or as large as 4 hours (which is frequently used when trading the Foreign Exchange). By using these small time-frame charts, traders attempt to capitalize on the fluctuations a stock goes through during the trading day. If you’re looking at stock only on a daily basis, you may only see small shifts in the price, but a stock can move several points up or down during the day, only to bounce back to being very close to its opening price. Line charts are not very useful in this capacity, so either a bar chart, or a candlestick chart is used. Both of these types of charts display either a bar, or candlestick per unit of time. These bars/candlesticks show the highs & lows as well as the opens & closes. This is much more useful when day trading or swing trading, because it gives a bit more insight into the stock’s past, and potential future movements.
That pretty much sums up the basics of reading a stock chart. To begin to be able to use this information for your investments, you’ll have to look into technical analysis. Technical analysis is the study of a stock’s data, including its charts, to understand past movements, and attempt to predict future movements.
Tags: candlestick chart, daily basis, day trading, foreign exchange, investment portfolio, line charts, Stock, stock chart, stock charts, stock market, trading stockRelated posts
Stock Market For Beginners
Have you been trying to figure out how the stock market works? There is a lot to know and you will want to take the time to learn everything you can so that you do not throw your money away. After all, you work hard for your money and you do not need to waste it by making an investment just because someone else told you to, or you read somewhere that it was a good investment to make. By learning and understanding the stock market you will be able to make a wise investment decision and see a good return on the money that you invest. Here is a quick guide of the stock market for beginners.
One thing that you will need to do is research. Research is the key to knowing how a stock has performed in the past. If the company that you are investing in has been around for a long time then there will be a lot of information about how well that stock has performed in the past. You will want to look at the historical data of the stock that you are thinking of investing in to make sure that you are getting a good deal on the shares that you are buying, and that the company will be able to give you a steady return for the time that you are going to invest in it.
You will also want to calculate the Beta of the stock that you are thinking of investing in. This will tell you how well the stock performs in relation to the rest of the index that you are buying in. If the Beta score is greater than 1.0 then that means as the index raises the stock will rise to a greater amount than the rest of the index. If the Beta is lower than 1.0 then it means as the index goes down the stock will go down lower than the index average.
There are several other things that you will want to take the time to learn when understanding how the stock market works. If you are going to be investing your hard earned money then make sure that you know what you are doing with it. You want to know everything that you can about the company that you are investing in, how well the stock has performed in the past, and you want to get a general idea of how it will perform for you in the future. Once you learn and have a good idea of what you are doing you will be able to come up with a good investment strategy that you can use to make money with the stock market.
Tags: Stock, Stock Market For Beginners, Understanding The Stock Market