33 lines
2.3 KiB
Plaintext
33 lines
2.3 KiB
Plaintext
Trading Strategies
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Buying stock is a trading strategy that most people understand. In practical
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terms, traders who buy stock are generally not concerned with the literal
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ownership stake in a corporation, just the opportunity to profit if the stock
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rises. Although it’s important for traders to understand that the price of a
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stock is largely tied to the success or failure of the corporation, it’s essential
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to keep in mind exactly what the objective tends to be for trading a stock: to
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profit from changes in its price. A bullish position can also be taken in the
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options market. The most basic example is buying a call.
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A bearish position can be taken by trading stock or options, as well. If
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traders expect the value of a stock they own to fall, they will sell the stock.
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This eliminates the risk of losses from the stock’s falling. If the traders do
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not own the stock that they think will decline, they can take a more active
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stance and short it. The short-seller borrows the stock from a party that
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owns it and then sells the borrowed shares to another party. The goal of
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selling stock short is to later repurchase the shares at a lower price before
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returning the stock to its owner. It is simply reversing the order of “buy
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low/sell high.” The risk is that the stock rises and shares have to be bought
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at a higher price than that at which they were sold. Although shorting stock
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can lead to profits when the market cooperates, in the options market, there
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are alternative ways to profit from falling prices. The most basic example is
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buying a put.
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A trader can use options to take a bullish or bearish position, given a
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directional forecast. Sideways, nontrending stocks and their antithesis,
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volatile stocks, can be traded as well. In the later market conditions, profit
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or loss can be independent of whether the stock rises or falls. Opportunity
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in option trading is not necessarily black and white—not necessarily up and
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down. Option trading is nonlinear. Consequently, more opportunities can be
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exploited by trading options than by trading stock.
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Option traders must consider the time period in question, the volatility
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expected during this period, interest rates, and dividends. Along with the
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stock price, these factors make up the dynamic components of an option’s
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value. These individual factors can be isolated, measured, and exploited. |