30 Oct 09 Strategies for Options Investors

Having traded stocks for over a decade, I’ve recently gotten very involved with options. I find these to be a great means of expanding my risk portfolio a little bit, and the rewards of a successful trade are truly a great thing.

If you’re new to the trading world, or even experienced but find yourself struggling, I’d like to give you a few pieces of advice that I think will help you out in your quest to become a great trader. Follow these tips and you’ll be in better shape when it comes to trading options.

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.

Try buying a few contracts in the opposite direction. That way if you lose out big time, those contracts will win big.

While it limits your upside marginally relative to what you could have made without this strategy, it gives you the necessary protection from losing the entire amount of your investment. Many options traders are naive in not realizing they can lose it all, and therefore neglect this useful bit of information.

By adhering to these tips, I’m sure of the fact that you’ll be well ahead of the typical novice.

For more writing by this writer, read his blog about cheap worldwide travel insurance and single trip holiday insurance.

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