Godspeed
Registered: Oct 2012
Posts: 4 |
10-23-12 04:51 PM
Hi Sudo,
First of all, welcome to the world of options trading. It is a very dynamic field with lots to consider, to choose from as well as to gain and loose. It is good that you are paper trading.
First of, the point to option trading is to buy and sell contracts. Some do buy options so that they can exercise it and get the stock for a better price, but most option traders are in it for the quick movement, large leverage for your money, as well as not having to spend tons and buy the stock up front.
As far as timing goes, your options will loose money as you approach your option expiry date. So if you bought Nov 2012 options, then the closer you get, the more the price of the options decrease. You can find out the rate of decay of your price by studying and familiarizing yourself with option greeks. In this case, it is the Theta of the option. Google option greeks to find out more.
You also never want to wait till expiry date to sell your option, when you choose to get into an option, make sure you give yourself some time for the option to run up (or down, if you buy a put) to a resistance or support line on the stock that you are buying into. If I have a good idea that, say, Apple is going to move in a certain direction within the next few days, then I usually buy an option a couple months out. So if this is November, I buy the December Calls. That is my preference. It gives me some leeway in case Apple does not go the way I had intended and I have time for it to adjust to where I hope it might end up. Others may buy the front month (the closest month) and others may buy leaps, options that are 6 months to a few years out.
An exit strategy is essential. This is where you need to familiarize yourself with basic technical analysis. Basically, how to look at a stock chart and have a sense where the price will meet resistance on its way up, or support, on its way down. There are many stages that the stock price takes as it charts its route, experience will tell you an approximate time as to when it is best to exit. You also have to factor in your own trading style. Are you longer term or shorter term.
This is an exciting field and you are just on your way. Take your time and don't trade real money until you have more education. There are many factors to options trading and you need to have a good handle on them before you take the plunge. Good luck my friend!
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