Why Buying Options Works

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Information about Why Buying Options Works
News & Politics

Published on February 25, 2014

Author: InvestingTips

Source: slideshare.net

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http://www.candlestickforums.com/

Why Buying Options Works

Buying options can be profitable, can reduce investment risk, and can provide a welcome degree of leverage in stock trading. Why buying options works is highlighted in the recent travails of LinkedIn, the online professional networking company that just went public and began options trading. LinkedIn rose quickly from its $45 a share opening to over $90 a share on its opening day a month ago. The fact that LinkedIn employees hold stock options worth a fifth of the value of the company did not deter first day investors and traders from bidding the stock price up. Traders doing technical analysis of LinkedIn with Candlestick analysis were able to see the stock market indecision at the top of the LinkedIn price curve and could commonly predict the subsequent and continuing fall of LinkedIn to progressively lower stock prices. Those who were buying puts on LinkedIn over the last weeks have demonstrated why buying options works.

Why buying options works is not limited to buying puts before a stock price falls or buying calls in anticipation of a rise in stock price. Traders profited by buying puts on LinkedIn before the stock price fell. Given what happened to LinkedIn stock, stock traders could also have profited by selling short on LinkedIn. Why buying options works in this sort of situation is that even with the best fundamental and technical analysis a stock price may move contrary to expectations. Why buying options works is that the trader can buy options and practice trading risk management as compared to buying stock directly or short selling in which case the trader can incur substantial losses when there is an unexpected and dramatic price move. In all cases of stock and options trading the trader or investor is well advised to use technical analysis tools such as Candlestick patterns to assist him in profitably anticipating price changes. In doing so he limits his risk of being caught in a market reversal or whipsawed by heavy market volatility. The point of using options trading is that the trader limits his risk while using Candlestick pattern formations as a tool for increasing profits though prediction of price direction.

Why Buying Options Works www.CandlestickForums.com

Buying options can be profitable, can reduce investment risk, and can provide a welcome degree of leverage in stock trading. www.CandlestickForums.com

Why buying options works is highlighted in the recent travails of LinkedIn, the online professional networking company that just went public and began options trading. www.CandlestickForums.com

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LinkedIn rose quickly from its $45 a share opening to over $90 a share on its opening day a month ago. www.CandlestickForums.com

The fact that LinkedIn employees hold stock options worth a fifth of the value of the company did not deter first day investors and traders from bidding the stock price up. www.CandlestickForums.com

Traders doing technical analysis of LinkedIn with Candlestick analysis were able to see the stock market indecision at the top of the LinkedIn price curve and could commonly predict the subsequent and continuing fall of LinkedIn to progressively lower stock prices. www.CandlestickForums.com

Traders doing technical analysis of LinkedIn with Candlestick analysis were able to see the stock market indecision at the top of the LinkedIn price curve and could commonly predict the subsequent and continuing fall of LinkedIn to progressively lower stock prices. www.CandlestickForums.com

Traders doing technical analysis of LinkedIn with Candlestick analysis were able to see the stock market indecision at the top of the LinkedIn price curve and could commonly predict the subsequent and continuing fall of LinkedIn to progressively lower stock prices. www.CandlestickForums.com

Traders profited by buying puts on LinkedIn before the stock price fell. www.CandlestickForums.com

Given what happened to LinkedIn stock, stock traders could also have profited by selling short on LinkedIn. www.CandlestickForums.com

Why buying options works in this sort of situation is that even with the best fundamental and technical analysis a stock price may move contrary to expectations. www.CandlestickForums.com

Why buying options works is that the trader can buy options and practice trading risk management as compared to buying stock directly or short selling in which case the trader can incur substantial losses when there is an unexpected and dramatic price move. www.CandlestickForums.com

In all cases of stock and options trading the trader or investor is well advised to use technical analysis tools such as Candlestick patterns to assist him in profitably anticipating price changes. www.CandlestickForums.com

In doing so he limits his risk of being caught in a market reversal or whipsawed by heavy market volatility. www.CandlestickForums.com

The point of using options trading is that the trader limits his risk while using Candlestick pattern formations as a tool for increasing profits though prediction of price direction. www.CandlestickForums.com

Why options trading works for profits is also because of the trading leverage it offers. www.CandlestickForums.com

Let’s look at the case of a stock like LinkedIn. www.CandlestickForums.com

Its IPO gets everyone excited and the psychology of trading takes over for many traders and investors. www.CandlestickForums.com

They drive the stock price up and then, in despair, sell for progressively greater losses as the price falls. www.CandlestickForums.com

Traders using Candlestick trading tactics take a dispassionate view and avoid paying too much for a stock. www.CandlestickForums.com

When they see the stock peaking they buy puts on the stock. www.CandlestickForums.com

Why buying options works so well in this situation has to do with the trader’s return on investment. www.CandlestickForums.com

Trading an American option style the options buyer pays for the right to execute the options contract at any point up until expiration. www.CandlestickForums.com

Thus the trader can wait until the stock price falls, buy stock at the new spot price and then sell at the strike price, then contract price. www.CandlestickForums.com

However, he does not need to buy or sell stock. www.CandlestickForums.com

options trading works well for return on investment is that the options trader can simply exit his contract by executing the opposite trade. www.CandlestickForums.com

His profit is virtually the same and his investment is limited to the options premium, not the price of the stock. www.CandlestickForums.com

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