Many individuals interested in the stock market consider options and warrants as a long-term investment (position in swing trading). However, both warrants and options can easily be used as a short term day trading tool. Many day traders have proven to be highly successful in taking full advantage of the options and warrants market.
All of the non-options markets, including individual stocks and futures, allow for one way to enter into a long trade and another to enter into a short trade. However, with options, the market provides two distinct ways to enter a short trade, and another two for a long trade. An investor can enter an underlying, long trade as a put (selling) or a call (buying). The investor can use the same call or put to make a short-term trade.
Whether the investor uses a call or a put option, will rely on whether he or she is making a longer short trade. Most traders working the options market-related calls to the price of the market moving up and a put with the market going down. Learning the strategies of buying (not selling) a put option for a short trade is an easy way to make money for the investor. Likewise, selling a call option (not buying) can produce significantly profitable results.
Many day traders use options as an integral part of their day trading system. The option price, or the cost of the option, is based on a premium (like a fee for the option) along with its exact intrinsic value (or the current value of its profit). Should the option have an intrinsic value it would be referred to as “in the money.” Without an intrinsic value the option would be called “out of the money,” or “at the money,” simply because there is no profit in it yet.
To reduce the risk of a loss, most short-term option trades should be performed using options that are “in the money” only because the amount of their loss or profit will be most likely to sink way with the current underlying market. Additionally, it is not as important that a long option trade is extensively “in the money.”
While options are often thought of as being complicated and extremely mysterious, many day traders have been able to significantly increase their portfolios by generating profits while the market is open. By formulating a basic understanding of what an option is, how it works, and how it can serve the investor can act as an effective day trading tool.
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