Trading options can be an excellent way to supplement your income and make a lot of money. There are risks involved with option trading and it is important to be careful when trading options to reduce these risks as much as possible. Options are inherently risky financial instruments. Some people even start trading options initially by using paper trades as opposed to buying them under a live trading room; until they start to become familiar with the different weekly options strategies out there that you can use. Research and due diligence is the name of the game when undertaking various option strategies.
While there are option trading tips that can help you along the way particularly in identifying mispriced options, the key to this is understanding the underlying securities that you are trading options for income on. This is particularly true when you are undertaking short-term strategies such as weekly options trading. There are a number of different ways to structure short-term options strategies depending on your risk tolerance.
Buy or Sell (write) Option Contracts
The two basic options when undergoing options trading are whether you want to buy or sell (write) option contracts. When you buy option contracts you are purchasing an option to buy or sell an option at a predetermined (exercise) price. This can be a useful tool if you are predicting that the underlying security will fluctuate over the next week. The price that you buy the option for is called the option premium. If you are writing options you are receiving a premium from someone in the form of cash. You are giving them an option to purchase (call) or sell (put) the underlying security at a predetermined price.
Time and Intrinsic Value Determine Weekly Options Strategies
Each option contract has two factors that determine the value of the option. The time value is one of the factors and involves how long the option exists for. The shorter the time frame before the option expires the lower the time value associated with the option is. The second factor is the intrinsic value which means how near the exercise price is to the current market value of the stock. When you are using weekly options strategies or other short-term strategies, the intrinsic value is often the primary factor that is determining the price of the option value.
When you are buying options under weekly options strategies the position is inherently risky as you have a short time frame before the option expires. The opposite is true with writing options. The short time frame is to your advantage, though the premium you are receiving is often not as significant as it is when using longer time frame strategies for option trading. Finding a way to balance out the premiums you are looking for and the short time frame inherent in weekly and other short term option strategies can be difficult though there are opportunities in volatile securities that offer significant premiums if you trade well.