Stock Option Trading To Increase Returns

Over the previous twelve months, investors’ usage of stock options to enhance leverage and returns has increased steadily. Chicago Board Options Exchange recently stated that March was their busiest month on record, with volume increasing 55% compared to the same month last year. In fact, all prior trading records for stock options were smashed when nearly 5,6 million contracts were traded in a single day.

Compared to simple stock trading, stock option trading enables investors to raise their leverage and, thus, their rate of return. Using stock options, an investor’s returns can be multiplied by 10 to 15 times if he or she has a sound method for selecting equities that rise in the short run. The trade-off for this higher return is that the investor must also estimate the duration over which the return will increase.

The ability to choose the stock, the direction, and the time period is crucial for effective stock option trading. Recent statistical analysis of more than 30 years of stock data has uncovered certain recurring patterns that can result in high profits when trading stock options. The study was performed using custom-built software, and the method was then applied to all equities over the past five years. In 2005, the average return per trade for stock trading was 3.2%, whereas the average return per trade for stock option trading was almost 55%.

Investors have already begun to exploit the trends uncovered by this study and have reported incredibly lucrative deals. Whenever investors discover market inefficiencies, there is a rush to capitalize on such inefficiencies.

Although options are not accessible on all stocks, almost half of the stocks analyzed had options that could be traded. If the trend of increased use of stock options by investors continues, more stocks should offer options to investors. If this trend continues, 60 to 70 percent of actively traded companies will have option contracts available in the upcoming year.

When deciding which option contract to purchase, investors are encouraged to examine the open interest and volume closely. A low volume/open interest will typically result in wide spreads between the bid and ask prices, reducing profits and making it more challenging to sell the option contract.

Volatility is another factor to consider while selecting the option contract. Options on stocks with large price fluctuations will be more expensive, since they will have a greater possibility of being in the money. If you have a dependable approach for predicting stock movement, you may not care about this increased price.