Options Trading Tips

By Tom Lidge

I've been investing for a long time, and more recently I've had some great success in the world of stock options. While they're risky, they can also be an extremely rewarding means of making money if they're handled right.

I'm going to share a few things I've learned along the way in an effort to help you to as much success as you can possibly find. The world of options is an extremely tempting one, but a dangerous one at that. Some traders end up losing their whole investment on one bad trade.

You may or may not be aware of the fact that options lose value over time. This is known as time decay, and it basically means that the longer it is until an options contract expires, the higher of a price it will sell at relative to nearer contracts at the same strike price.

Let's say you buy a contract for December while we're in the month of April. The stock price is at $13, and the strike price on the contract is $16. Clearly, there's a higher percentage chance that this stock will break $16 between now and December than there is between now and May. As a result, contracts with an expiration date that's further out will sell at a higher price.

Many smart traders also like to hedge their risk by doing things like straddles, or buying puts on their calls and the opposite as well.

A patient and wise investor will generally do this for the protection and the piece of mind.

Had they hedged by giving up just a few dollars, they would have kept 90% of what they lost.

The last thing you want to do is lose your entire investment with options. Sometimes, unfortunately, this happens if your option never surpasses the strike price. - 23221

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