Generally speaking, when people think of the money that can be made from the stock market, most think of the buying and selling of stocks. This is a rather limited perspective, one that overlooks what is beyond the value of publicly listed companies and their respective markets. However, the real money to be made from the stock market lies in option trading.
If you’re already engaged in stock market trading, and the possibilities for profit that can be had from option trading have only recently been made known to you, then it’s likely you’ve been hesitant because of the seemingly byzantine complexity of options and markets. However, such a sentiment, though perfectly understandable, can easily be overcome by learning the basics of trading options.
The reason why option trading can be so lucrative is because they work by reserving traders the right to buy or sell a given stock but without tying the trader to an outright obligation to do so. For example, when you have a call option for a certain company’s stock it means that you reserve the right to purchase the stock just before it goes up in value. However, there is a deliberate time limit on an option, which means they are not all-powerful and do not allow you to reserve the stock forever.
This means that no matter what kind of economic circumstances might emerge – recession or growth – options allow you to earn money because you are in effect, speculating on these circumstances and not on absolute stock value. Whether stock value grows or shrinks, profit opportunity exists with options.
When a trader intends to anticipate different directions in which a stock’s value can take, he or she makes use of option strategies. By doing so, the trader can maximize the profit potential of options. The simplest example of such a strategy would be the straddle, which requires the trader take a call option together with a put option on the same underlying stock.
Such option strategies can reach the apex of their profitability when their use is timed to coincide to circumstances in which the markets are most receptive to their conditions. To that end, a trader who desires to maximize the potential of such strategies must watch the market closely with various technical instruments such as the MACD indicator. By doing so, he or she can observe when trends begin to emerge in which the market may benefit a strategy handsomely.
This article explores how the real money to be made from the stock market lies in option trading. However, it also recognizes the reluctance held by stock market trading novices towards options and encourages them by noting how education can alleviate such feelings. By educating one’s self on options and taking vigilant watch of the market with such tools as the MACD indicator the option wary trader can easily gain the confidence necessary to begin employing highly rewarding option strategies.
- David Baxwell
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