optionstrading1982.com Option Trading Why You Shou (go back »)
October 23 2012, 7:46 AM
Perhaps the most immediate way of investing lengthy time period in stock options is by way of shopping for LEAPs get in touch with possibilities. LEAPs phone selections are stock choices that expires 6 months to a 12 months in the foreseeable future. This form of very long expiration stock selections permits any individual to benefit from the similar transfer in the underlying stock in a leveraged method, using lesser dollars than stock traders do.
Even so, the options trading 1 mistake that most solution traders make when investing very long time period in contact stock options is that a person magic term that all traders love Compounding. Compounding types gains implies to preserve reinvesting kinds earnings so that the revenue also make income of its personal. This is a idea that has made multi millionaires out of stock traders, but this is a notion that kills solution traders. When an optionstrading1982.com solution trader compounds gains when choice buying and selling, he also conclusion up compounding the eventual, inescapable reduction and finish up with nothing due to the leveraged naturel of stock possibilities.
The following is an illustration
Assuming XYZ Companys stock is buying and selling at $ten on one Jan 2007 and its $ten strike value LEAPs simply call alternative (Jan10call) expiring on Jan 2008 fees $2.
John invests his total keeping optionstrading1982.com of $1000 into the Jan 2008 get in touch with choices and purchased five contracts.
On Jan 2008, XYZ Companys stock did very well and was trading at $20 during expiration of the Jan10call and these LEAPs get in touch with choices well worth $eighteen.
John sells those LEAPs simply call options and ended up with $eighteen x 500 $9000! A Earnings of 800%! (The stock trader who purchased XYZ at $ten would have produced penny stocks only one hundred% profit)
John proceeds to believe XYZ will do nicely and did the unforgivable blunder. John invests the whole $9000 into XYZ Companys $twenty strike selling price LEAPs contact selections (Jan20call) expiring on Jan 2009 for $2, betting on a different excellent calendar year.
On Jan 2009, XYZ Organization had a lousy yr and its shares remained pretty much stagnant and were trading at $19 throughout expiration of penny stocks the Jan20Calls. The Jan20Calls that John bought expired out of the income and John loses ALL his money. (The stock trader would have misplaced only $1)
See why compounding is dangerous for alternative traders? Make confident you, as an alternative trader, do not compound your profits except you are willing to undertake the danger.
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