Thursday, September 26, 2013

The Option Premium Always Follows the Stock

There has been a lot of interest in Options Trading again as new investors and traders have heard about Binary Options.  Unlike the high risk Binary Options, the traditional buy call or buy put simple option contract is regulated traded on US exchanges and is a low risk, low cost way to trade the stock market.
To be successful at options trading, you need to learn how and why The Option Premium Always Follows the Stock.  The option contract price and the stock price are always linked and move in harmony.  When you understand the connection the option has to the stock, trading options becomes as easy and simple as buying a stock outright.  The difference is that the option contract is far less expensive, and often the risk of the option trade is much lower than the risk of the stock trade.
What this means is there are two types of investors or traders who could use options trading instead of buying a stock directly.
  1. The investor or trader who has a small capital base.  
When you have a small capital base which is less than $10,000.00, then you need to be particularly aware of risk, and be far more careful with your trading decisions and your choice of trading instruments.  A stock is a trading instrument, but so is a stock option. Using a stock option dramatically lowers your costs. For example, the stock below is trading at $73.63 and you think this is a good entry after a correction. You have only $4000.00 in your trading account so you can’t afford to buy even 100 shares because you would need $7363.00 to put on this trade.  Instead you can buy a call option at the money for only $1.43 per share for a total investment on 100 share contract of $143.00 at the money contract. This means you can trade this stock because the option contract is within your budget, and your risk is now only $143.00 rather than $3000.00 based on proper stop loss and buy entry prices.

  1. The investor or trader who has plenty of capital, but the proper stop loss placement is far too much risk.
If you have plenty of capital to trade this stock, but when you study the actual entry price based on a professional bracketed order that protects from whipsaws and stocks that reverse suddenly, you find that the proper stop loss placement is far too much risk. You do not want to take this much risk but you really like the stock and are confident it is going to recover, and move back up based on strong indicators and strengthening fundamentals. To insure that the stock is going to continue to move up, that you are buying into strength, and are therefore avoiding the risk of a whipsaw the entry must be at $75.50 and the stop must be at $71.00. That is a 4.50 point risk or $4500.00 on your intended 1000 share purchase of this stock.
Rather than buying the stock for $75.50 x 1000 = $75,500.00 which ties up a lot of capital that you have to trade and is a high risk trade, you could use an option to  leverage into the stock using an option you intend to exercise.  
This means that for $1430.00 for 100 contracts, you have lowered your risk for this trade by $3070.00.  This is a huge difference in the risk of buying this stock.
Exercising a stock option is as easy as buying a stock. When the stock moves up to your intended entry all you do is place an exercise order for your stock option, and immediately your broker will execute your option contract, pay for it out of your broker account and now you own this stock.  Your initial investment was low and your risk was lower, than if you had bought the stock outright.
TechniTrader is the only company that teaches these techniques for trading options and exercising options.  When you use the stock chart to determine your entry, your stop loss, the risk of the trade, the potential profit of the trade, and the proper option chain it makes trading options simple, accurate, more profitable, and far less work than the out-of-date options strategies taught by other companies.  You do not need options indicators, you do not worry about implied volatility, or delta neutral. You don’t need to learn complicated, convoluted options strategies because The Option Premium Always Follows the Stock.
All you need to do is to learn to read a stock chart, where to buy, how far the stock will move, where to place your stop loss, and the risk of trading the stock versus trading the option contract. You can trade options whether you have a small or large capital base and dramatically lower your risk of the trade.
For additional information sign in to watch a free TechniTrader video titled “Options Essentials” at
Trade wisely,
Martha Stokes CMT
Member of Market Technicians Association Master Rated Technical Analyst for Decisions Unlimited, Inc. Instructor and                                                          Developer of TechniTrader Stock Market Courses

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Chris said...

Thanks for the article. It's a good primer for beginners. Good use of examples too.

Anonymous said...

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