Let's discuss the complexities of options and how they differ from trading stocks. First of all stocks are simply one-dimensional trading vehicles, the dimension of "price movement." For example, one can go long a stock if he/she is forecasting a rise in the price of the underlying asset. The stock trader doesn't need to worry about time or changes in volatility affecting the outcome of his trade. The stock trader only needs to focus on the asset's price movements.
With options, a trader has to consider all of the trading dimensions discussed earlier. Thus, price, time and volatility are the three dimensions consisting options. Now, to give you a more profound comparison between options and stocks, take into account the following setup:
It takes a full year period for a stock to crawl up 10 percent. On this particular stock trade, the trader who bought and held on this stock just made 10 percent. But in the case of an option trader, it is possible for him to get nothing out of this trade or even squanders his money if he simply just bought an option.
Why does an option trader lose money in the aforementioned trade? The answer is simply Time Decay. His option simply failed to seize much Time Premium as the trade has taken quite long to develop. In addition to, volatility of the asset might just have fallen thereby resulting in the devaluation of the Call option. In brief, options are losing premium as time goes by.
This is why we need to be correctly educated in order to trade options. Simply buying Calls and Puts makes option trading very difficult because of the elements of time and volatility. Remember, options are three-dimensional vehicles, and if we don't understand how to manage these 3 complexities, we shouldn't trade them.
If well understood, options can be very adaptable and gives investors the freedom to be creative in their trades. I can assure you that once we go deeper into understanding options, such investment vehicle can truly make money in any market scenario.
With options, a trader has to consider all of the trading dimensions discussed earlier. Thus, price, time and volatility are the three dimensions consisting options. Now, to give you a more profound comparison between options and stocks, take into account the following setup:
It takes a full year period for a stock to crawl up 10 percent. On this particular stock trade, the trader who bought and held on this stock just made 10 percent. But in the case of an option trader, it is possible for him to get nothing out of this trade or even squanders his money if he simply just bought an option.
Why does an option trader lose money in the aforementioned trade? The answer is simply Time Decay. His option simply failed to seize much Time Premium as the trade has taken quite long to develop. In addition to, volatility of the asset might just have fallen thereby resulting in the devaluation of the Call option. In brief, options are losing premium as time goes by.
This is why we need to be correctly educated in order to trade options. Simply buying Calls and Puts makes option trading very difficult because of the elements of time and volatility. Remember, options are three-dimensional vehicles, and if we don't understand how to manage these 3 complexities, we shouldn't trade them.
If well understood, options can be very adaptable and gives investors the freedom to be creative in their trades. I can assure you that once we go deeper into understanding options, such investment vehicle can truly make money in any market scenario.
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