Much like any other form of trading, options allow you to make money in various ways. If you’re an experienced trader and understand the financial markets well, plenty of opportunities are available. You can use various strategies in options trading; we’ll focus on two main types: long and short positions. You can trade with positions through Saxo Bank, visit their website here.
The first form, a position known as “long,” means that the investor believes the price will rise over time. In this case, they purchase an option or group of options to sell them at a higher price when the contract expires. This provides them with cash flow during their hold period and allows them to continue trading if their prediction is incorrect.
A second form, a position known as “short,” means that the investor believes the price will fall over time. In this case, they sell an option or group of options to repurchase them at a lower price when the contract expires.
Deciding which options you want to trade
It would be best to review various factors when determining options to trade. These include volatility, price direction and the amount of time left until expiry. Some traders will focus on one or two particular criteria; for example, a trader might only buy in-the-money calls in a high volatility environment with lots of time left.
When deciding what options to trade, it’s essential to know how much you expect the price to move. If your prediction is too subjective or vague, your trades will probably not perform well over the long run.
Calculate the cost of opening each position
To open any option positions, you’ll have to pay a premium to the writer. Even if you’re opening a short position, you’ll still have to purchase an option or group of options from someone else. You can calculate this price using available data and market rates, for instance, the last sale price and the ask.
Sell (write) your option(s)
When writing options, it’s essential to keep in mind that every contract represents 100 shares – even if you write a single contract. For example, if you want to settle five lots, you would receive 50000 Australian dollars plus any dividend payment that might be due. In 24Option, however, only one lot is required as they offer micro-lots.
Keep track of your positions
It’s a good idea to keep track of all the positions you have open, using a trading journal. It is critical because it allows you to review past trades and ensure that your current trades are following the right course. It also helps reduce stress by keeping track of open positions during volatile markets – even if these lots aren’t always in-the-money.
Once you’ve opened a trade, it’s essential to manage your risk levels effectively. If possible, don’t invest more than 10% of your total equity into one position; this reduces the likelihood of an excessive loss. Ensure that any stop losses are written in advance, so there is no dispute when they are triggered. Depending on market conditions, you may also want to consider using a trailing stop loss.
Prepare for expiry
To maintain an options position and receive any dividend payment that might be due, you must keep your contract until expiry. A contract is automatically terminated on the third Friday of the month should there not have been any trades in your lot. Negligence will result in a total repurchase of the option.
Trading after expiry
There are several reasons why traders hold onto their positions even though they expire worthless every month—allowing them to continue trading with those same strikes without paying commissions. It is imperative when trading with a small account because commissions can quickly eat into your capital.
Repeat the process
To be at the top over the long term, you will need repeated self-discipline and hard work. You should remember that not every trade will earn a profit, so it’s important to stay level headed and keep going even if you have some losing trades. Don’t get too greedy or give up when things get tough because this leads many traders down the road of ruin.