OPTIONS TRADING: Mastering the Art of Options Trading for Financial Success (2023 Guide for Beginners)

By Lee Kirk

"Options Trading" is your comprehensive guide to demystifying the world of options trading, providing both novice and experienced traders with the knowledge and strategies needed to navigate this dynamic market successfully.

Inside this informative guide, you'll discover:

• Options Fundamentals: A

• Language: English
• Publisher: Lee Kirk
• Release date: Sep 5, 2023
• ISBN: 9783988314949

Lee Kirk

Lee Kirk, based in the vibrant city of Houston, Texas, is a seasoned options trading expert. With years of experience in the financial markets, Lee has honed his skills in options trading and has helped numerous beginners achieve financial success through this art. His passion for simplifying complex trading concepts and providing actionable insights has made him a respected figure in the world of options trading.

Book preview

TABLE  OF CONTENT

CHAPTER 1

OPTIONS: THE FUNDAMENTALS

WHAT EXACTLY IS AN OPTION?

CHAPTER 2

WHAT AFFECTS OPTION PRICES?

CHAPTER 4

FUNDAMENTALS

WHAT IS A COVERED CALL PURCHASE?

CHAPTER 5

IN THE MONEY, OUT OF THE MONEY

IN THE MONEY

CHAPTER 6

TAKING THE NEXT STEP IN TRADING WITH CALLS

CHAPTER 7

PURCHASING AND SELLING PUTS

CHAPTER 8

NEW TRADER STRATEGIES

LONG-TERM VS. SHORT-TERM STRATEGY

CHAPTER 9

HORIZONTAL SPREADS

Chapter 10:

STRADDLES AND STRANGLES

CHAPTER 11:

MONEY AND RISK MANAGEMENT

CHAPTER 12:

EVALUATING MARKET MOOD SWINGS’

CHAPITRE 13:

BROKERS

CHAPTER 14:

TECHNICAL ANALYSIS AND ITS FUNDAMENTALS

CHAPITRE 15:

‘THE GREEKS

CHAPTER 16:

OPTIONS TRADING TOOLS AND RULES

OPTION TRADING INSTRUMENTS

CHAPITRE 17:

SUCCESSFUL TIPS

TOP TRADER MISTAKES

CHAPTER 19:

THE TOP 5 REASONS TRADERS LOSE MONEY

CHAPITRE 20:

DEBIT AND CREDIT SPREADS

CREDIT SPREAD ON PUTS

CHAPTER 21:

FOR BEGINNERS, HOW TO TRADE OPTIONS ON ROBINHOOD IN 2020

WHAT EXACTLY IS ROBINHOOD?

EXOTIC ALTERNATIVES

CHAPTER 23:

SIMPLIFIED OPTIONS TRADE EXAMPLES

CHAPTER 24:

WHEN TO ENTER AND EXIT THE TRADE

CHAPTER 25:

FINANCIAL LEVERAGE

CHAPITRE 26:

MONEY

CHAPTER 1

OPTIONS: THE FUNDAMENTALS

WHAT EXACTLY IS AN OPTION?

A

n option is essentially a contract on the underlying shares of stock. It is an agreement to swap shares at a certain price over a set period of time (they may be purchased or sold). The first thing you should know about choices is the following.

Why would someone go into options trading in the first place? Most individuals enter options trading with the intention of profiting from the options themselves. And most readers of this book will most likely fit that description. But, in order to properly appreciate what you're doing, you must first understand why alternatives exist in the first place. There are probably three basic reasons why stock options exist.

The first reason is that it enables those who own stock to earn money from their investment regularly. As a result, it might serve as an alternative to or supplement dividend income. As we will see later, if you possess at least 100 shares of any stock, this is a possibility. Then, in general, you may sell options against the stock and generate cash over time periods ranging from a week to a month.

Obviously, such a move involves some risk, but individuals will take such positions when the relative risk is modest.

The second reason individuals invest in options is because they provide protection against a stock's downfall. So, once again, an option entails being able to trade shares of stock at a predetermined price determined at the time the contract is formed. One sort of contract enables the buyer to acquire stock, while the other permits the buyer to sell stock. This enables customers who possess a big number of shares to buy something that protects their investment by allowing them to sell the shares at a predetermined price if their stock falls by a substantial amount on the market. As a result, the premise is identical to paying insurance premiums.

It's unknown how many people really utilize this, but it's one of the reasons choices exist. This would operate by paying someone a premium to obtain the right to sell your shares to them at a preset price over a certain period of time. If the share price falls much below that level, you will still be able to sell your shares and escape the market's massive losses.

The third reason for the existence of options, in my opinion, is that it allows individuals to create agreements to acquire shares of stock at attractive prices that aren't always accessible on the market. As a result, there is some guesswork here. But suppose a certain stock you're interested in is priced at $100 per share. Furthermore, pretend that investors are highly enthusiastic about the stock and anticipate it to skyrocket in the following weeks. Perhaps it's earnings season.

During results season, stocks may fluctuate dramatically. However, nobody knows whether the stock will rise or fall or how much it will change before the results call. An options contract might enable someone to speculate and build up a scenario in which they could benefit from a large upward increase without actually investing in the stock.

The Benefits of Option Trading

Investors may benefit greatly from options trading. Essentially, it is an investment that allows people with the funds to enter into an income-generating endeavor. The benefits of options trading are many and should entice individuals to enter the industry of trading stocks, selling and buying assets, and earning income.

The first is this venture's potential to assist in risk management while investing in stocks and securities. They can protect you from incurring investment losses. This is due to the fact that investing in stocks and shares typically entails risks in the value of the shares.

This depreciation may reduce income and, in certain cases, reduce the value of shares held. However, options marketing ensures that one is hedged against such uncertainties and also assures that one may generate value from the selling of shares.

Options trading is also useful in that it gives someone time to determine whether or not to acquire anything. This is a special benefit of call options. The contract normally includes a term during which a person contemplates exercising implied rights. Before deciding whether or not to acquire the shares, the individual researches the market and its performance and has the opportunity to comprehend his financial status. As a result, well-thought-out investment judgments are made. It always comes with increased preparation to deal with the repercussions of one's actions. This assists in breaking the habit of making trading choices based on whims, which may subsequently lead to tension and stress when market forces come into play.

Leverage

Leverage is a particularly favorable characteristic of options trading that individuals attempt to use in order to engage in the securities market. When using leverage, one must make lesser outlay with the hope of reaping larger gains. This motivates individuals who lack the funds to invest in underlying assets or shares to find another avenue to invest and earn rewards. One of the most essential aspects of leverage is that one generally receives returns on the underlying assets or shares while not having to pay the entire cost of the shares.

The concept of leverage includes the benefit of diversity.

This is accomplished by establishing a portfolio without making large initial investments. This diversity may then provide a stream of investment channels, which in turn can lead to profits, boosting one's earnings. When one purchase call options that are placed back on the shares held, this revenue may sometimes exceed dividends. This additional revenue may even come from shares that were obtained via a loan arrangement. Option premiums also arrive ahead of trading operations, buffering one from potential losses.

What exactly is an option contract?

When you choose to work with an options contract, you will be granted a variety of privileges. Each contract you choose to deal with will have the following information:

The sort of choice you're considering. This is a call option or a put option.

The option contains the underlying security.

dealing with options has the advantage of allowing you to choose whether or not to execute them, which reduces the risk of dealing with them somewhat. If the market does not perform as you expected, you simply let the expiry date pass and do nothing. You will lose the original payment, but you will not lose as much money as you would if you were obliged to execute a terrible decision.

When it comes to day trading, the expiry date of the option should be as short as possible. Even though options for other trading techniques might last days, weeks, or even months, you must still complete both the buy and sell of the option and its underlying asset on the same day. Make sure to choose an expiry date that corresponds to the day trading you are conducting.

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Option Contract Components

There are many standardized components of option contracting that make options trading easier. These components define how options trading binds the parties involved and illustrate how profits may be created if market dynamics are favorable. Options trading includes the following components:

- Underlying securities

- Contract size

- Expiration date

- Exercise pricing

Subsidiary securities

Options traded on the market only apply to certain assets. These assets are known as underlying securities. In certain cases, the term shares may be used for the word shares.

Companies offer the asset against which the option operators list options. ASX is one options trading market operator that has played an important role in the listing of underlying securities.

The phrase option classes refer to the listing of puts and calls as options on the same asset. As an example, consider when puts and calls are applied to the shares of a leasing company. This does not take into account the contract conditions in terms of the fixed price or the expiration length of the call and put contracts. For the advantage of investors, an options trading operator generally gives a list of possible classes.

Size of the Contract

The market standardizes the size of the option contract on the ASX options trading platform at 100 underlying equities. As a result, one option contract equals 100 underlying shares. Changes may occur only when reorganization occurs on the original outlay of the underlying share or capital therein. Index options typically lock in the contract's value at a certain dollar rate.

Day of expiry

Options are time-limited and have a shelf life. The platform operator establishes expiration dates that must be followed. These deadlines are often strict, and once they pass, the rights under a contract in a certain class of unexercised options are lost. The final trading date is often the last day of a contract's life period. Options on shares that will expire in June of 2020 have their final trading day on a Thursday that is prior to the month's last Friday. Those that expire after June 2020 have their expiration date on the third Thursday of the month. For index choices. Expiries occur on the third Thursday of the month in which the option was written. These dates, however, may be altered by the options platform operator if there is a cause for doing so.

Platform operators have provided additional short-term choices for several underlying in recent years. Some are done weekly, while others are done every two weeks. These have the relevant weekly or biweekly expiration dates. When an option's life span expires, the operators set new deadlines. However, all kinds of options have expiry dates that correspond to financial calendar quarters.

CHAPTER 2

WHAT AFFECTS OPTION PRICES?

W

hen it comes to options trading, pricing is a complicated matter. Not only is the price of an option determined by the asset's value, but other external variables also have a role.x

As an options trader, you want to make the most of your efforts in order to benefit. Learning how to estimate the pricing you should pay for options is one of the most fundamental techniques to guarantee that your return is as high as possible. You do not want to be taken advantage of by paying greater premiums than necessary. Several variables influence the pricing of options. Each will be mentioned below.

The Asset's Market Value

The impact on option pricing is simple. If the value of this asset falls, executing the option to sell becomes more valuable, while exercising the option to purchase gets less lucrative.

On the other hand, if the value rises, the right to sell it becomes less attractive, but the right to acquire it gets more enticing.

The Intrinsic Worth

This sum reflects two values when an options trader pays a premium. The premium is made up of the intrinsic value of the option, which is its present value, and the potential rise in value that this option may receive through time. The potential rise over time is referred to as the time value.

We're talking about inherent worth. The intrinsic value is the amount of money that the option is now worth. It shows what the buyer would get if he or she opted to exercise the option right now.

Intrinsic value is computed by subtracting the current price of an asset from the strike price of an option. An option must be out of money in order to have an inherent value of zero. As a consequence, the buyer would decline to exercise the option