In this article, I explain the correct timing of the options market as a strategy to make money. To do this, we look at how you can time the market using call and put options because those are the ones that provide the most trading opportunities.
In general, people who want to make money in trading have found that acquiring a significant amount of wealth is possible by capitalising on price fluctuations in securities, currencies, and commodities.
However, traders will not be able to generate high returns unless there is a way for them to determine when to enter into a trade and exit from trade with minimal losses.
Buying call and put options
This is where strategies such as buying call or put options come in handy. In fact, even though they allow investors……and even though they allow investors to purchase these options at a much lower risk than if they bought the underlying securities, several factors can either limit their earnings or lead to significant losses.
Some of the factors include changes in the volatility of the security, changes in implied volatility and interest rates, and dividends paid by stock options.
Furthermore, unexpected news about a company’s financial performance can also increase or decrease the value of its shares and those of its option contracts. In this article, I will explain how you can time the market using call and put options because those are the ones that provide trading opportunities.
Buy low, sell high
To make money from buying these derivatives, an investor has to enter into a trade only when the underlying security price is low. Once they have acquired it, they can then wait for its value to rise to sell it at a much higher price than what they paid for it.
The goal of this strategy is obviously to make money by buying and selling securities for an amount that is higher than the original one.
Out-of-the-money call options
The first thing you need to do if you want to time the market successfully using call options is purchase out-of-the-money call options because these are more likely to produce significant profits in a short span of time.
However, since your returns will be reduced if you buy options too far away from their strike price, I recommend you only go for them if they are just a few cents or a dollar away from the market price.
Follow the news
You should also pay particular attention to news about a company’s earnings because it can significantly impact the value of its shares and options.
In addition, you have to keep in mind that while expectations may be accurate, they will not always come to fruition as expected. There is no guarantee that the events that transpire will affect the value of underlying security.
For instance, investors who had been expecting good results from Amazon last October were disappointed when they didn’t materialise as expected by analysts. This happened because Amazon only guided revenues instead of actual numbers, which Wall Street had anticipated.
This is why you need to know how to time the market successfully if you want your investments to be profitable. This site also offers up-to-date news that is important to options traders.
Here are some of the best strategies for timing the options market in the Netherlands:
- Try not to buy weekly or monthly options because they tend to expire before you even have a chance to realise your full potential.
- Stay away from trading them on weeks when an economic calendar is issued by governmental agencies, companies, and central banks. These days are usually characterised by high volatility, which can lead investors to buy or sell securities at incorrect prices.
- Do not forget that option pricing models are only intended as guides. That means that while they depict future price movements of underlying securities based on certain factors, they are not always accurate.
- Read the news carefully to see whether developments affect the value of an underlying security or, instead, will have little impact on it.
- Do not join in trading activities when there is a high level of interest rates. Also, take time before making any decision because it can positively or negatively influence your earnings.
- Try to keep away from options close to their expiration date because they no longer offer enough time for you to realise any gains regardless of how certain events might affect them in the future.
- If you want to increase your returns, purchase out-of-the-money call options when there are less than 30 days left before they expire. However, if you do not think it is feasible, you can also go for the ones that are just a few cents or one dollar out of the money.
- Do not forget that news about companies’ earnings can affect the value of underlying security and its options.