There has been a steady rise in the utilization of stock options by investors to maximize their leverage and returns over the last twelve months. Chicago Board Options Exchange confirms this observation when they recently pointed out that the month of March was their busiest on record with volume up 55 per cent over the same month last year. In fact all previous stock option trading records were broken when over 5.6 million stock option contracts were traded in a single day.
Stock option trading enables investors to improve their leverage and thus their rate of return over simple stock trading. If an investor has a solid approach to picking stocks that go up in the near term, the returns can be increased by 10 to 15 times using stock options. The trade off for this increased return is that the investor has to also judge the time period during which the increase will occur.
Please read on…
Being able to pick the stock, time period, and direction 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 past 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.
Mr. McCausland paid his taxes and the firm received the exercise price. His option exercises were permitted by Airgas’ stock trading policy. Mr. McCausland held his shares. His option exercise was entirely proper.
Investors have already begun to carry on the patterns found in this study and are reporting highly profitable trades. Whenever investors find inefficiencies in the market, there is a rush to take advantage of those inefficiencies.
Although stock options aren’t available on all stocks, about half of the stocks contained in the analysis did have tradable options. If the trend of greater use of stock options by investors continues, we should see even more stocks add options for investors. It is easy to understand that 60 to 70 per cent of the actively traded stocks will have option contracts available in the next year if this trend continues.
Investors are advised to look closely at the open interest and volume when considering which option contract to buy. A low volume/open interest will generally result in large spreads between the bid/ask prices and thus reduce profits, plus it may make it hard 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 higher likelihood of being in the money. If you have a reliable method of forecasting stock movement, this higher price can only be a consideration.
QUESTION: If you only lost money on option trade, do you still need to report your trades on tax filing?If you only lost money on option trade, do you still need to report your trades on tax filing? Also, is there a way to not enter EVERY single option trade…? I have hundreds…
Yes, you have to report the trades. More importantly, if you have a net loss you WANT to report the trades. You can write off losses to offset other gains, and up to $3000 per year against other income. No idea if you can put in a summary line (various options, various dates). If you try it, make certain that the totals match the 1099 from your broker. There is a new form this year (8949) that you must file in addition to Schedule D. More importantly, if your options trading is losing money, why are you still making hundreds of trades in a year? If you lose consistently, the only logical decision is to stop. Read. Study. Take a class. Do something to improve your skills before trading again. Perhaps even forget about options and buy a nice index fund from Vanguard.
Yes you still do, but you can deduct the losses from your income up to $3000 and if you lost more than that you can roll them over into future years (to deduct versus gains in the future). There are some computer programs where you can load in your monthly statements and they'll reconcile the trades automatically – try googling this. Anyhow, this is necessary but could also save you lots of $$$ down the road.