When formulating a trading plan for options, it is important to think about what approach you want to take in the options markets before you trade. It is important to develop an investment philosophy that reflects the strategy you have for your trading.
Understanding Options Markets Trading
Understanding the options markets is a product of understanding options trading. Options are an agreement between two parties where one agrees to sell a stock to the other party within a specific time period and for a specific price. Ownership as commonly defined does not apply since you don’t need to own a stock in order to implement a position.
A stock order, whether it is a “call” (an agreement to purchase) or a “put” (an agreement to sell), gives the holder the right to trade options. The holder is able to simply let the options order expire without investing further or go ahead and purchase the stock as agreed.
Preparing To Enter The Options Market
With an understanding of options the next step before entering the options market is to solidify your trading rules or your trading plan. These rules should include:
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- Verification – This is a critical part of the process. You wouldn’t want to drive a car that wasn’t inspected prior to you getting behind the wheel; the same principle is true with your trading plan.
- Strict Guidelines – Your trading plan must be specific and precise. Having a tested, reliable trading plan we give you something solid when you hit a losing period.
- Testing – you can successfully test your trading plan via paper trading on the Internet. Without testing, your trading plan is left to chance. Does it work or fail? Testing will give you the confidence you need to be a successful trader.
Basic Options Market Orders
The final step is to enter the options market and start trading. There are two basic kinds of options market orders, “Calls” and “Puts”. Calls are contracts made by a buyer offering the conditions under which he or she will buy a particular stock. Puts are contracts offered by sellers outlining the conditions under which he or she will sell a particular stock. Each contract consists of the following information:
- Purchase Item – This is the stock
- Strike Price – This is the price that is the target for the contract
- Expiration Date – The day on which the investment timing is no longer binding
- Quantity – Usually in groups of 100
These items are included whether the options market order is a Call or a Put. When buying a call, if the terms are not met, the contract is not binding. In addition, if the terms are met but the options market conditions have changed to make the deal unfavorable the buyer can simply let the contract expire and if desired, purchase the stock from the open options market.
Improving Your Odds In The Options Market
There is one more thing you can do to increase your odds of success in the options markets. By implementing a trading system like Japanese Candlesticks you will add a powerful charting system for your options markets investing. Candlesticks was invented over 300 years ago as a method for trading in the rice markets of ancient Japan. The system has become an amazing tool for today’s options markets. With the charting abilities you will gain from Japanese Candlesticks you can literally give you a clear view of the directions of options before they even move. Added to your trading plan, Candlesticks can help you to be a successful trader in the options markets.
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