Stocks, Stock Swings, Options, and Option Trades

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A Brief Guide to Options to Swing Trade

May 19 2010

A Brief Guide to Options to Swing Trade

Option swing trading is advantageous as it enables you to maximize potential rewards while minimizing potential risks. Those involved in option swing trading are able to leverage their investments by purchasing and selling in a variety of combinations. Options are termed wasting assets: time significantly impacts option prices and trade profitability. The value of the options falls as their expiration date nears. Investors must therefore liquidate their positions prior to option expiration if they realized their profits. Unprofitable options expire on the final trading day of that particular option.

Options to swing trade include call options and put options. Calls constitute the basic strategy adopted by the majority of traders. If, through their research, option traders come to the conclusion that a stock will take off in price, they can purchase call options that are priced in contracts.  When a contract of a call option is bought by an investor, the investor will anticipate that the stock’s value will rise above the price that it is currently at within a specified targeted date. If this is correct, a profit may be made. However, if there is a decline in price, the option value will also fall.

Puts options on the other hand, are bought when an investor decides that the underlying stock is going to decrease in value. When this occurs, the value of puts increases and the swing trader is able to lock in the profit through the selling of their puts. Over a full day’s trading, this process may be repeated several times over. Furthermore, when the stock price increases again, active swing traders may purchase the puts again.

There are many swing trade options to learn about yet if you are starting out in swing trading, call options and put options are the strategies that you are advised to master first.

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