Candlestick Trading Blog
Many traders find that an efficient means of making money in the stock market is by buying options. Traders can use Candlestick analysis to anticipate movement in stock prices to improve their chances of profiting from buying options. Traders pay an option premium for buying options which gives them the option but not the obligation to buy stock or sell stock. The price at which stocks will be bought or sold is the strike price which is determined by options contracts. There are two directions to go in buying options. These are buying puts and buying calls. A put is an option to sell the stock at the strike price. A call is the right to buy the stock at the strike price. An options trader buys a put on a stock that he or she expects to fall in price. The buyer of a call option expects the stock to rise in price. In buying United States options the buyer has the right to exercise the options contract at any time before expiration. Thus, many traders do not intend to wait until expiration of the contract to profit. When the underlying stock moves sufficiently in price its option value will reflect the change in stock price.
Buying options is a means of benefitting from stock price movement with substantially less investment than by buying stocks. Paying the premium to buy a call or put option is locking in the opportunity to make money during a market rally or decline. Technical analysis of stocks helps traders in anticipating stock price movement and buying stock options at the right times. Someone who buys a stock runs the risk of losing when the price falls. Buying options is different in the trader will not exercise the options contract unless doing so will lead to a profit. The monetary risk of buying options is that if the stock does not move in price as expected the trader does not earn money. However, so long as the option has intrinsic value the trader call sell the option and regain part of the premium. In fact most traders will earn their profit in trading options by selling their contract to another trader after the stock price moves and the value of the option increases. As an example, a trader purchases a $100 put on XYZ Corp. for $3. The options contract gives the trader the right to sell 100 shares of XYZ at $100 a share. Thus the premium paid is $300. The stock is still trading at $100 a share. Then the price of XYZ drops with news of an ill conceived merger. It is now selling at $91 a share. If the contract were to expire immediately the trader could quickly execute the contract, sell his shares at $100 each and buy at $91. The $900 profit minus the $300 premium gives the trader a profit of $600 on a $300 investment, minus commissions and fees. However, the contract will not expire for another month. The market may anticipate a recovery of XYZ or may expect that its price will fall farther. Thus the option may be trading above or below $91. Traders use technical analysis tools such as Candlestick pattern formations in order to anticipate stock price movement in this sort of situation. If the trader’s Candlestick charting analysis results indicate further price decline in XYZ he or she will hold the options contract. If Candlestick chart analysis indicates that XYZ will recover the trader will likely sell the contract and pocket the profit.Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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