Buy CallsWhy does one buy calls in options trading? What advantage does buying calls confer on the trader? If you buy calls on a stock, what is the risk? For the seasoned options trader these are questions long since answered. But, for someone beginning investing in the stock market an overview of options investing and why to buy calls, puts, or both will be useful and eventually profitable. An individual will buy calls if technical analysis with tools such as Candlestick patterns indicate a coming rise in stock price.
Buying calls on stocks, versus buying stocks, provides two benefits. One is that if you buy calls on a stock you pay for the option to buy the stock later when, as expected, the price rises. However, you will buy at the original, contract price, known as the strike price. Your profit will be the difference between the higher price and the original price, minus fees, commissions, and the premium paid for the call. If, contrary to expectations, the stock price drops, you will not exercise the contract and your only cost will be the premium. If you buy calls as an options trading strategy your only risk is that if you do not do appropriate fundamental analysis and use technical analysis tools such Candlestick stock charts you will habitually pay out the premium and make very little, if any, money. You will, however, never lose money on the stock itself if the stock price goes down as only you, the buyer, own the option to execute options contracts.
The leverage obtained when you buy calls is the most attractive feature for many investors. The investor does not need to tie up a large amount of capital in order to profit from short term increases in a stock’s price. On the one hand an investor will buy the stock and on the other he will buy calls on the stock In each case he should do his fundamental and technical analysis of a stock. He should look for a margin of safety and intrinsic stock value. He should do his Candlestick analysis in order to get a good sense of what the market is about to do with this stock. He should look aim to be buying at the bottom of a price cycle or after a market reversal. He should do all of these things whether he is going to buy stock or buy options on a stock.
So, what is the difference between buying calls and buying stock? First of all there is always investment risk in any situation. No one ever profits from every single trade. One successful in stock trading makes a lot more successful trades than unsuccessful ones. The successful stock trader will also buy calls on a stock in a situation where he sees a risk of great market volatility that could defeat his best efforts at analysis of the stock in question. The point is that you buy calls on a stock whose price you expect to see up. Something, unforeseen, happens and the price falls precipitously. You only lose the price of the premium you paid for the option. If, on the other hand, you buy the stock, you always run the risk that that same unforeseen circumstance could, in a heartbeat, substantially reduce your investment capital. In this case, you will purchase calls on stock to reduce the inherent risk of investing.
Market Direction: Candlestick signals create a very effective reversal signal based upon visual specifics of the open and close. The exact locations of the open, close, high, and low dramatically improve the analytical capabilities of each specific signal or pattern. Each signal represents a characteristic of investor sentiment. Last Friday, the Dow formed a Bearish Engulfing Signal after three days of Doji's in the over bought condition. It had a dramatic pullback. It had done this a few times during the uptrend, selling off fairly heavily early in the day. However, the Bulls had usually stepped in before the end of the day, bringing the price back up toward the top end of the trading range.
This past Friday saw the same trading process but this time no buyers came in before the end of the day. The hard selloff created a bearish candle after three Doji's in a row and it closed below the T-line. This was a definite cause for the Bulls to be concerned. Fortunately, each signal in itself provides distinct information. Monday formed a Bullish Harami in the Dow. This would indicate the selling had stopped. Should that signal have been given very much attention. Analyzing that signal alone might have been much more difficult without analyzing what the NASDAQ did at the same time. It gapped up through the T-line and continued to trade higher. This gap up also occurred after a bullish Harami. With both indexes showing strength after a breach below the T-line brings one more analytical factor into the pool. The trend had been remaining consistent along the T-line. That evidence was still being made clear.
Understanding which way the market is moving enhances an investors capability of producing large profits. Along with being able to identify good reversal signals or pattern breakouts, a candlestick investor can also take advantage of price moves that are about ready to break out or bouncing off of moving averages. As seen in our recent recommendation, the NAK chart revealed an indecisive sideways move until it connected with the T-line. It produced two spots that would have been excellent entry points. Bullish candles following a Doji moving up off the T-line.
Utilizing candlestick analysis provides a clear format for identifying a price direction. More importantly, the information built into signals and patterns provide excellent market timing capabilities. This is extremely important for the day trader and the swing trader. It allows traders to maximize the use of their funds by eliminating the the prospects of sitting in a position that is not moving.
Chat session tonight at 8 PM ET open to everybody, we will be discussing how to visually recognize the potential breakout areas, creating large profit trades. 9 PM ET market timers will be giving a presentation on their software. please join us for this double session tonight.