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Rules to Abide by for Options Trading
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.
I'm going to share a few things I've learned along the way in an effort to help you to as much success as you can possibly find. The world of options is an extremely tempting one, but a dangerous one at that. Some traders end up losing their whole investment on one bad trade.
The first thing I'd like to talk about is the time decay factor. Options tend to deteriorate in value over time due to the fact that as you're further out from the expiration date, the likelihood of volatility is higher.
Let's say you buy a contract for December while we're in the month of April. The stock price is at $13, and the strike price on the contract is $16. Clearly, there's a higher percentage chance that this stock will break $16 between now and December than there is between now and May. As a result, contracts with an expiration date that's further out will sell at a higher price.
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.
A patient and wise investor will generally do this for the protection and the piece of mind.
Had they hedged by giving up just a few dollars, they would have kept 90% of what they lost.
By adhering to these tips, I'm sure of the fact that you'll be well ahead of the typical novice.
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