Options Day Trading: The Risks Involved Are High
When you take up and complete all transactions relating to stocks, options and futures, within a particular day, so that nothing is left for overnight transactions, it is called "day trading". The trader does not hold any position overnight. Day trading costs are always less than the trading of shares held overnight. Usually stocks, options, equity index futures, the rate of interest futures, and commodity futures are the subject matters of day trading. Options day trading is a system in stock trading practices.
Investors with specialised knowledge about the stock market form the majority of traders in day trading. The transactions are mostly done online after the advent of development of computer technology, and the Internet. The risks involved are high and it is sort of gambling. However, it has also huge potential. People with good knowledge and expertise can make large profits from day trading.
When the buyer and the seller enter into an agreement of a security having specified price, fixed over a period of time, it is called the option. This has similarity with the insurance policies, where you are assured of a certain sum in some specified contingencies. The basic difference is that insurance cannot be traded, while the option could be.
There are two types of options in trade. They are called "call options" and "put options". During the period when the price of certain stock rises, the buyer makes a call option of a certain amount of the stock in question. Similarly, when the price goes down the buyer takes the put option to buy a certain number of stocks at a certain specified rate. The measurement of options is made in multiples of 100 units. Ordinarily a contract covers 100 units of the stock. No other measuring system is permissible. When, at a certain point of time or date, the price reaches the expected level, the position is closed. Trader uses a host of divergent strategies in option trading of stock. These are termed as naked call, put call or put spread, straddle, strangle, covered call, collar, condor, combo, butterfly spread and calendar spread. Advantage of option day trading is, that the cost of buying an option is usually a fraction of the actual price of the stock. Whenever there are price fluctuations, the relative difference will be much larger in case of options. This may be ten times or even hundred times. Thus, trading through options can generate a huge profit for the trader, because he is investing only a fraction of what he would have ordinarily invested buying the stock. The above advantage of option trading is called leverage. Therefore, option trading is more appealing and favoured, compared to other forms of trading. But there are also disadvantages of option trading. Just as the profit may be huge, the loss may also be huge when incurred. Therefore, it is imperative that the investor has good knowledge, expertise, and experience about the basics of option trading. A sound strategy built up on experience and knowledge would be the key to success. One of the most popular option day trading systems is the OEX that lists the stocks on the index of 500. You take into account the market trend and decide which way your transactions should run. The advantages are that it does not require hard work, and the performance of the index causes the difference in the price of the options. In such cases the leverage is comparatively higher.
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