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How to Play with Stock Options Safely

By Edited Nov 13, 2013 0 0

Stock options can be a very risky investment in the stock market. A lot of it depends on which stock it is and what type of time frame your options have. By being a careful investor you can help insure that you will be making a large profit at a lower risk.

The timeframe on stock options.

People who have just invested in stocks will not have to worry if a stock is not moving quickly enough, but someone who has invested in stock options will. This is because over time the price of a stock option will depreciate, and if not exercised, will become worthless. Start comparing different expiration dates on stocks. You might be right about a move that a stock is going to make but may need a longer timeframe. Some stock options do not cost that much more if you want to hold them for longer. While you might be paying more for the premium, you will not have to worry as much about a stock moving quickly. Also since you are holding the stock option for longer, it might be able to make you even more money. It will not take long to find out which stock options are good deals and which are bad. Look and see how much it will have to move to make a decent profit. If the options are cheap, and a move seems possible, start researching to confirm your guess.

Buy stock options close to the strike price.

This way if the stock does not move very much, your options will not end up worthless. If you buy your stock options too far away from the strike price it can end up costing you everything you invested. As time ticks away, it is going to become less and less likely that the stock will be able to reach your strike price. So if that happens, you will not have anyone wanting to pay for the stock options you are selling. While you might not make as much money if the stock does move in the direction you want, you will have at least played it safe. This will make investing in stock options not seem like it is all or nothing.

Look for a stock with the potential to move.

Some stocks have stayed in a certain price range for years and years, so purchasing a stock option with a strike price that is out of this range would be very dangerous. Unless there is something big approaching that could launch this stock into a certain direction, it is not a good idea. While these can make great investments for long term investors, it can drain an option trader's pocket book quickly. Look at the stock's chart to see where it has been and how much it has been able to move in the past. You have a better chance of seeing one of these stocks continuing to make larger movements, then the ones that have just been sitting passively. To make money with stock options, you need a stock that is going to move aggressively. The shorter time until expiration, the faster it needs to move.


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