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