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How to Trade Options for Profits and Reduce Risk

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Options-Buying and selling strategies, profit as wells as risk

It is important to understand that risk does not have to be bad. Risk would reduce the chances of making money. Without it, the options market in particular would cease to exist. Risk always implies that the future is uncertain, so no one would need to make any predictions about price or other factors. If you want to learn a very powerful trading strategy that brings a lot of profit, you should know about unusual options activity

The risk can come in many different forms and levels. Look at the risk involved in some of your trading techniques.

Long Calls

Long calls are the most basic options trade. This is often the first option that new investors perform after moving beyond bond or stock investing. Call is a contract that gives you the right, at the strike price of the underlying instrument, to purchase it. Buyers will be charged a “premium” – price of option.

When the strike is below the current market, it’s said that the option is in actual money. But if above, it’s referred to as ‘out-of-money’. However, irrespective of whether the strike price was below the current market rate when the option actually bought is that the buyer actually speculates on whether the selling price (strike price + premium + Commission) will be greater than their initial cost prior to option expiration.

The market price over the cost determines how much profit you will make. In theory, because market costs can increase forever, profit potentials are ‘uncapped.’

It is possible to earn unlimited income, but it’s not risk-free. J.P. Morgan’s famous response to a question about how the stock markets would behave was: “Prices may rise as well. Prices will also drop.” Buyers lose money when the cost of the option falls below it or is not able to increase above its price. This is because the maximum risk here is the value of the actual option, plus the small fee.

This type of option is a sensible investment, especially for investors with less experience. However, those who are looking to gain the added leverage of options can benefit greatly from this. This allows a trader to control more than they have. Since the average option closes at 5%, it has an influence of 20 to 1. It is this multiplier that makes the options attractive.