How To Extend Returns From Stock Options Trading

There was a steady rise in the employment of stock options by stockholders to maximise their leverage and returns during the last 12 months. Chicago Board Options Exchange affirms this observation when they reported recently the month of March was their busiest on record with volume up fifty five % over the same month last year. In truth all prior stock option dealing records were damaged when over 5.6 million stock option contracts were traded in one day.

Stock options dealing enables stockholders to extend their leverage and so their rate of return over simple securities dealing. If a speculator has a solid approach to picking stocks that go up in the near term, the returns can be increased by 10 to fifteen times using stock options. The trade off for this increased return is that the financier has to also judge the period of time over that the increase will happen.

Having the ability to pick the stock, direction, and period of time are all urgent for successful stock option dealing. A probabilistic research of over thirty years of stock info has disclosed certain reoccurring patterns that may yield serious returns in stock options trading. The research was done with custom developed software and then the method was applied to all stocks for the last 5 years. Share trading led to a median return per trade of 3.2%, but with stock options dealing the average return per trade was over 55% for 2005.

Investors have already begun to exploit the patterns found in this research and are reporting highly profitable trades. Whenever investors find inefficiencies in the market, there is a rush to take advantage of those inefficiencies.

Though stock options aren’t available on all stocks, about 1/2 the stocks found in the analysis did have tradable options. If the trend of skyrocketing use of stock options by stockholders continues, we should see far more stocks add options for financiers. It is simple to see that 60 to 70% of actively traded stocks will have option contracts available in the approaching year if this trend continues.

Investors are advised to look carefully at the open interest and volume when considering which option contract to buy. A low volume/open interest will generally result in large spreads between the bid/ask prices and thus reduce profits, plus it may make it difficult to sell the option contract.

Another consideration in selecting the option contract is volatility. Stocks with high swings in prices will translate to more expensive options since the options will have a greater likelihood of being in the money. If you have a reliable method of forecasting stock movement, this higher price may not be a consideration.

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