Options trading and the speculation aspect in the market are closely linked. This type of trading contains two elements-Speculation or hedging. Through speculation you can build the mansion of profit or break it. The chances of breaking are real and making it to the goal is for the exceptionally shrewd investors, who have wide experience of the market moods. A speculator needs to know that anything can happen in the market at the most unsuspected time. For example, until a few days ago, the shares of banking and the financial institutions were in the limelight and were much fancied, even by the long-term investors. With the tight money conditions, and increase in the interest rates on deposits, the bank sharesare on the downward march, as t profits are expected to shrink. In such circumstances the speculator may get wiped out as for his capital base.
The speculator has the varied scope to make money, provided his intuitions are right. Not alone when the market moves up, but one can reap benefits even when the market moves down or moves “sideways”. Only the movements need to be tracked correctly-that’s all the game!
Hedging in options means you take insurance for your investments for the possible downturn in the stock market. Hedging is a good safeguard in volatile conditions of the market. In this age of fast technological advances a segment of industry or a particular company may face problems. Certain products may become outdated and vanish from the market. Hedging is protection against such eventualities.
For the bold and expert in the options trade, volatility of the market is a welcome proposition. With his skill he will profit in such uncertain conditions. He is in control of the ‘red signals’ and ‘green signals’ in the market and thus sees through the movement of traffic calledinvestments, smoothly, and progresses further. The trader who is right is assured of big profits and the trader who is wrong, succumbs to huge losses.
The importance of volatility in options
How to judge the volatility of the market for the purpose of options trading? A huge mass of investors shape the activities related to trading. Your technical and fundamental analyses may be sound, but successful-investors need to anticipate as to what others are likely to think about a particular share. How the majority of the buyers and sellers will react. The final target of the price of the share will be decided according to those sentiments-and that target will constantly vary through the trading hours of the day. You have to perceive consistency of the market amidst its various types of inconsistencies and hit the moving target. While exercising options an investor is not afraid of the volatility; rather, he plays with it. The game of options is like the moves in a football match. Sometimes, you back pass the ball, only to kick it forward to a pre-decided move, for one of your team-player is waiting for that pass, the ultimate objective being to hit the goal.
The strategy aspect of options
The main issue of options trade is you need to decide about the strategy. If it works well, options happens to be the best source of profits for the individual investor. Volatility is the greatest boon for an options trader and the premium collection arrangement of a spread trade permits the investor to make money whether the market moves in his direction or stands still.
Let us try to understand the working of the options trade through an example. This right to choose in options trade is its main attraction. Suppose you exercise the right to buy the share of X firm for $150 and the price is $180 at the expiration of the option, you can exercise your right to sell it for $180 thus locking in a $30 profit. If X share is less than $150 allow the option contract to expire as it is worthless. Thus an investor has the inherent advantage to decide when to buy. However, the buyers of options need to pay money for the unexpired portion of time of the contract that is called the time premium. The other names for such a charge are “time value” or “extrinsic value.”