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Stock options give you a wonderful way of getting leverage in the stock market. But it is also important to remember that sword goes both ways.
Before you trade options you should consider the following.
1. Options should not make up a large part of your account
Options
are better used for the risky money in your account, the money you can afford to lose. This way if you had a bad trade or two it is not the end of the world. Losing 50% of your options value seems like a lot, but if that option contract is only making up 2-5% of your total portfolio it is not so much.
2. Look at The Risk To Reward
Try to determine how much you will make if you are right and compare that to how much you can lose if you are wrong. This paints the clearest picture of what you can expect to see and allows you to manage your risk.
3. Time Value is Important
Stock options do not move on a 1 to 1 bases with a stock. There are so many factors that influence the price of an option other then the move of a stock. The second biggest factor is time value. As an option gets closer and closer to expiration the option slowly melts away.
Options that have a longer time before expiration are less effected by time value, so you can never go wrong if you decide to buy more time value.
4. The Greeks are Great
The Option Greeks give you a way to estimate how much an option contract will change due to factors such as time decay, stock price movements, Volatility, etc. They really can help you understand what exactly you are trading and how to take advantage of it.
For more on Option Greeks Visit http://www.stocks-simplified.com/option-greeks.html
For more on Stock Options visit http://www.stocks-simplified.com/stock_options.html

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