Option trading is more complicated than trading stock. And for a first-timer, it can be a little intimidating.

Especially out-of-the-money calls strike price above the stock price , since they seem to follow a familiar pattern: Watch our first-class video content in the comfort of your home. Use promo code FREE But for most investors, buying out-of-the-money short-term calls is probably not the best way to start trading options. Because you can buy a lot of them. And remember, one option contract usually equals shares.

STOCK AND OPTIONS TRADING USING BEER MATH | The Crosshairs Trader

And that kind of move can be very difficult to predict. At first glance, that kind of leverage is very attractive indeed. One of the problems with short-term, out-of-the-money calls is that you not only have to be right about the direction the stock moves, but you also have to be right about the timing.

That ratchets up the degree of difficulty.

Call And Put Options Spreads Trading Math

It needs to go past the strike price plus the cost of the option. How many stocks are likely to do that? So in order to make money on an out-of-the-money call, you either need to outwit the market, or get plain lucky.

You were right about the direction the stock moved. Even if your forecast was wrong and XYZ went down in price, it would most likely still be worth a significant portion of your initial investment. So the moral of the story is:. In fact, this section alone includes three plays for beginners to get their feet wet, and two of them do involve calls. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.

Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

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The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.

There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. System response and access times may vary due to market conditions, system performance, and other factors. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.

Option Trading Math Part 1

Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

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