Tuesday, April 8, 2014

Option trading basics

 The beauty of paper trading is that you get to test your ideas without risking real dollars. Learn from your mistakes at no cost. At the same time, follow these paper trades as if your real hardearned dollars were at risk  which should teach you how to monitor open positions . There’s an emotional and psychological element to trading that causes human beings to react differently when we feel something important  money  is on the line, versus how we trade when we feel no such pressures. Please take the simulation seriously, as it is a core element in the flow of this program.You will very quickly understand that call options can give you the right to buy a stock at a specified price for a specified period of time, and that put options gave you the right to sell rather than to buy a stock.
You will also learn that if you were very bullish on a particular stock, you wanted to buy a call option, because if  you were correct and the stock rose significantly in price, your call option would allow you to buy that stock well below the market price. You could thus buy low  by exercising the terms of your call option and buying the stock at the specified price  and then sell high by selling the stock that had rallied . And relative to your small initial investment, your profits could be huge. Of course, all of this favorable stock movement needed to occur before the option expired, and if the necessary rally in the stock did not occur by the expiration date you would lose the entire sum you paid for the option.