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Options Trading Advice
Having traded stocks for over a decade, I've recently gotten very involved with options. I find these to be a great means of expanding my risk portfolio a little bit, and the rewards of a successful trade are truly a great thing.
If you're new to the trading world, or even experienced but find yourself struggling, I'd like to give you a few pieces of advice that I think will help you out in your quest to become a great trader. Follow these tips and you'll be in better shape when it comes to trading options.
First of all, realize the concept of time decay in options. This basically means that the further out you buy a contract for, the more of a premium it's going to sell at today since it has more time to fluctuate in terms of price.
Once the expiration date of the options contract approaches, this price gap will begin to close, as the prices of options decay. Those people who bought these contracts months before and still hold them will see their investments shrink relative to the movement of the stock. Therefore, you don't want to buy options and hold onto them for too long.
Additionally, the concept of protecting your investment on an option trade is a really important one. Too many people throw all of their eggs into one basket, not accounting for the possibility of the opposite of what they expect.
Try buying a few contracts in the opposite direction. That way if you lose out big time, those contracts will win big.
Sure, you might not make as much money as you otherwise would have, but investing something like 5 or 10% in the opposite outcome can ensure that you lose much less than all of your investment should your option never hit its strike price.
Follow this advice and you'll be in a much better position than most.
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