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Top Performing Trades
There are many reasons to trade options -- namely, to spend a little bit of money for the possibility to make BIG returns -- but we can boil them down to three main objectives: hedging, collecting premium, and betting on a stock, sector or market's direction.
Let's face it -- everyone wants to trade options to make 'big bucks.' Learn how not to take big risks in order to make those outsized returns you're hoping for.
Gain the Professional Trader's Edge by Understanding Risk.
NO. 1 RISK: TIME ISN'T NECESSARILY ON YOUR SIDE.
All options expire -- most at zero value. Unlike stock investing, time is not your friend when you're trading options. The closer an option gets to expiration, the faster the premium in the option deteriorates.
This deterioration is very rapid and accelerates in the final days before expiration. As an option investor, you should invest only a dollar amount that you are comfortable losing, because you may lose it all.
There are three things you can do to put time on your side:
- Buy options at- or near-the-money.
- Trade options with expiration dates that comfortably encompass the investment opportunity.
- Buy options where you believe volatility is underpriced and sell options where you believe volatility is overpriced.
