How To Make Money In The Stock Market

How To Make Money In The Stock Market



There are abundant of​ money in​ the​ stock market. However,​ not everybody can get the​ money out from there. Some people can gain a​ lot from the​ stock market but some has lost a​ lot of​ money there. it​ is​ very indecisive. Sometime at​ that moment,​ you​ loss money but after a​ few days,​ you​ may earn a​ profit and sometime is​ reverse. So,​ how should we do to​ get the​ money out from the​ stock market? Usually,​ there are two ways to​ get the​ money out from the​ stock market; that are investing and trading. the​ difference between trading and investing is​ trading involves buying and selling share,​ future or​ option within a​ short period of​ time; whereas investing is​ buying share,​ future or​ option and hold it​ for quite a​ long time,​ usually one year or​ more before selling it.

What is​ the​ difference between share,​ future and option? What we know is​ that option is​ much cheaper than the​ share and future,​ usually is​ tenfold lesser than the​ share price. So,​ if​ you​ have an​ amount of​ money that enough for you​ to​ buy 100 units share,​ you​ can use that amount of​ money to​ buy 1000 units option. And the​ return of​ investment is​ almost the​ same between share and option. Therefore,​ you​ will earn around tenfold if​ you​ buy option rather than share or​ future. However,​ the​ disadvantage is​ that if​ you​ lose on​ that trade,​ you​ will lose almost tenfold also. When we trade option,​ the​ amount of​ money that we can profit and lose is​ almost same as​ if​ we trade share. However,​ we need a​ lot of​ money to​ buy share compared to​ buy option. This causes the​ percentage of​ the​ profit and loss for buying option is​ much higher than share. the​ example is​ like when you​ buy $10 for one unit of​ share and $1 for one unit of​ option. When the​ share price drops for $0.10,​ the​ percent drop for buying share is​ 1% but for buying option,​ the​ percent loss is​ 10%. That’s why the​ percentage of​ the​ profit and loss for buying option is​ huge compared to​ buying share even though the​ share price fluctuates in​ a​ small amount.

Due to​ the​ high profit and loss when buying option,​ trading or​ investing option is​ just like gambling. it​ is​ quite normal that the​ return of​ investment is​ more than 100%. But it​ is​ also quite normal that you​ could lose all your money in​ the​ investment or​ trading. in​ order that you​ can earn more than lose,​ you​ need to​ know some basic option trading strategy and technical analysis. Option is​ different from the​ share. Option has time value; whereas,​ share does not have time value. the​ value of​ one share will not depreciate due to​ the​ passage of​ the​ time. it​ is​ only affected by the​ supply and demand and also the​ company performance. However,​ option value will depreciate when the​ time has passed. When the​ time reaches to​ the​ option expiration date,​ there is​ no more time value for that option. That’s why,​ you​ need to​ use strategy to​ trade option,​ in​ order that you​ can minimize the​ loss and maximize the​ profit.

The very basic two option trading strategies are bullish call spread and bearish put spread. Bullish call spread is​ used when the​ stock price is​ anticipated to​ rise in​ the​ coming months; while,​ bearish put spread is​ used when the​ stock price is​ anticipated to​ drop in​ the​ coming months. Steps that are involved in​ this strategy are buying in​ the​ money option and selling out of​ the​ money option. in​ the​ money option is​ the​ option that has time value and intrinsic value; whereas,​ out of​ the​ money option only has time value. When the​ stock price moves to​ the​ positive side (generated money side),​ in​ the​ money option will generate profit and the​ out of​ the​ money option will cause loss. However,​ the​ minus of​ the​ profit and the​ loss is​ the​ net profit that has generated from this strategy. When the​ stock price moves over the​ out of​ the​ money strike price,​ the​ profit will become maximized. Continuously moving of​ the​ stock price to​ the​ positive side will not generate any profit. in​ this situation,​ we will close both positions to​ take the​ profit out from the​ market.

If the​ stock price moves to​ negative side (opposite side that cause loss),​ in​ the​ money option’s value will depreciate and the​ out of​ the​ money option will generate profit. However,​ the​ profit,​ which is​ generated from the​ out of​ the​ money,​ is​ limited to​ the​ price that you​ have sold. the​ subtraction between out of​ the​ money’s profit and in​ the​ money’s loss is​ a​ negative value. This is​ because the​ profit that is​ generated from the​ out of​ the​ money option is​ less than the​ loss that is​ caused by in​ the​ money option. Out of​ the​ money option’s profit is​ limited in​ this strategy and in​ the​ money option’s loss is​ unlimited. if​ the​ stock price continuously moves to​ the​ negative side,​ you​ may lose all of​ your capital. So,​ what is​ the​ difference from buying naked option and buying option using spread strategy? the​ difference is​ that you​ may lose more money if​ you​ buy naked option and lose less money if​ you​ buy spread. This is​ because you​ do not generate any profit when you​ just buy naked option; whereas,​ profit is​ generated from the​ out of​ the​ money option if​ the​ stock price moves to​ the​ negative side. the​ disadvantage of​ the​ spread is​ that the​ commission,​ which is​ charged by the​ broker firm,​ is​ double compared to​ the​ naked option. This is​ because,​ naked option only involves one position; whereas,​ spread involves two positions. Each position will be charged with commission separately.

Besides,​ the​ purpose of​ selling out of​ the​ money option in​ the​ spread strategy is​ to​ minimize the​ loss of​ the​ time value of​ the​ in​ the​ money option. Actually,​ both in​ and out the​ money option’s time value would depreciate when the​ time has passed. Because we do not own the​ out of​ the​ money option; therefore,​ we can keep the​ money that we have received from selling that option. When the​ time value of​ this out of​ the​ money option has depreciated,​ we used lower price to​ buy back the​ option. So,​ we sell at​ high price and buy back at​ low price; therefore,​ we earn money. the​ money that we have earned usually is​ enough to​ cover the​ loss of​ the​ time value from the​ in​ the​ money option. However,​ you​ still lose the​ intrinsic value of​ option if​ the​ stock price moves to​ the​ negative direction.

So,​ bullish call and bearish put spreads are two of​ the​ very basic option trading strategies. However,​ it​ is​ not guaranteed 100 % win from the​ stock market. you​ still need to​ learn to​ predict the​ stock price direction accurately using technical,​ fundamental and news analysis.


Alexander Chong

Author of​ “Workable Option Trading Strategies”

http://www.makemoneystocks.com/




You Might Also Like:




No comments:

Powered by Blogger.