Complexities Of Stocks And Options
In today's issue of Talk Wall St. by San Jose Options we are going to discuss the differences between trading stocks and options. First, let's talk about stocks. As most investors know stocks are directional vehicles. If the price of our asset goes up, we make money. If the price falls, we lose money. Well, that is true if we are long the stock. If we are short the stock, then we can make money when it drops. Anyway, whatever your position is on a stock, it's directional. One direction we make a profit and the other direction we lose. With stocks, we don't focus on time or volatility in the markets, we just worry about the way the price is moving...up or down.
When it comes to Options, however, you need to take into consideration; time, volatility, plus the dimension of price. This makes options a three-dimensional trading vehicle. Let's consider this scenario to compare stock and options head to head:
A stock takes a full year to move up 10%. If you bought and held on to it, you just made 10%. However, you may have made nothing at all or even lost money if you just bought an option.
So let's talk about why the option trader lost money even though the stock went up. It's quite simple; the option trader lost the time value of their options. Each option has time premium as a part of the option price, and if the move doesn't happen fast, then the option trader will probably lose money if they're simply buying Calls. The volatility will most likely drop on the asset as the price rises, as well, and this will also cause the price of the option to fall.
Since new investors don't fully understand options before investing with them, they often buy Calls and Puts, attempting to make money on price direction. However, they fail to understand the 3 Dimensions they are really trading and rarely see consistent returns.
Article Source: FxTradingStock.com
About the Author
Want to find out more about Option Trading? Then visit San Jose Options Mentoring on how to choose the best Options Course for your needs.
by: Donald Scott
Total views: 38
Word Count: 337
Date: Thu, 10 Jun 2010
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