The Right Way To Increase Returns From Stock Option Trading
There was a steady rise in the employment of stock options by stockholders to maximise their leverage and returns during the last 12 months. Chicago Board Options Exchange affirms this observation when they reported recently the month of March was their busiest on record with volume up fifty five % over the same month last year. In truth all prior stock option dealing records were damaged when over 5.6 million stock option contracts were traded in one day.
Stock option trading enables backers to extend their leverage and therefore their rate of return over straightforward share trading. If a stockholder has a solid approach to picking stocks that go up in the near term, the returns can be increased by ten to fifteen times using stock options. The trade off for this increased return is that the financier has to also judge the period of time over that the increase will happen.
Being able to pick the stock, direction, and time period are all critical for successful stock option trading. A recent statistical analysis of over 30 years of stock data has revealed certain reoccurring patterns that can yield high returns in stock option trading. The analysis was done with custom developed software and then the strategy was applied to all stocks for the last five years. Stock trading resulted in an average return per trade of 3.2%, but with stock option trading the average return per trade was over 55% for 2005.
Stockholders have already started to exploit the patterns found in this research and are reporting very lucrative trades. Whenever speculators find inefficiencies in the market, there’s a rush to exploit those inefficiencies.
Though stock options aren’t available on all stocks, about 1/2 the stocks found in the research did have tradable options. If the trend of skyrocketing use of stock options by backers continues, we should see more stocks add options for stockholders. It is simple to see that 60 to 70 % of actively traded stocks will have option contracts available in next year if this trend continues.
Backers are suggested to look rigorously at the open interest and volume when considering which option contract to purchase. A low volume / open interest will most likely result in huge spreads between the bid / ask costs and therefore reduce profits, and it may make it tricky to sell the option contract.
Another consideration in selecting the option contract is volatility. Stocks with high swings in prices will translate to more expensive options since the options will have a greater likelihood of being in the money. If you have a reliable method of forecasting stock movement, this higher price may not be a consideration.
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