Most people will say to you that day trading stock options is extremely risky and should not be attempted by new traders. And they’re right, to an extent. Trading options can be risky even for professional traders with 20 years experience.
However, trading stock options can be an excellent way to leverage your investment. For a small fee, with a defined risk, you can control a great deal of stock. The primary thing to remember, options are a wasting asset. When expiration Friday arrives, the option expires. If the option is found in the money, you can either use it purchase the stock or redeem the option for the premium value. If the option expires out of the money, you’ve lost your investment.
And if your option is fully out-of-the money– since your option has no intrinsic value but instead only time value, the less time you have left on your option, the less value that option will have.
Getting back to our example, let us say that option now has just a few weeks left until expiration and it is still out-of-the-money. That option could literally be worth only $20 or $30 (or less) – which is a long way from the $500 that you originally paid. And this is true even though the stock stayed the same or was even higher than when you bought the option.
So the people that say day trading stock options is risky are correct. But if you take these simple steps, so you can lower the risk, and still maintain the leverage that trading options will provide.
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