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There has been a steady rise in the use of stock options by investors to maximize their leverage and returns over the past twelve months. Chicago Board Options Exchange confirms this observation when they recently reported that the month of March was their busiest on record with [link widoczny dla zalogowanych] volume up 55% over the same month last year. [link widoczny dla zalogowanych] In fact all previous stock option [link widoczny dla zalogowanych] trading records were broken when over 5.6 million stock option contracts were traded in a [link widoczny dla zalogowanych] single day.
Stock option trading enables investors to increase their leverage and thus their rate of return over [link widoczny dla zalogowanych] simple stock trading. If an [link widoczny dla zalogowanych] investor has a solid approach to [link widoczny dla zalogowanych] picking stocks that go up in the short term, the returns can be increased by [link widoczny dla zalogowanych] 10 to 15 times using stock options. The trade off for this increased return is that the investor has to also judge the time period over which the increase will occur.
Being able to pick the stock, direction, and time period are all critical for successful stock option trading. A recent statistical analysis of over 30 years of stock data has revealed certain reoccurring patterns that can yield high returns in stock option trading. The analysis was done with custom developed software and then the strategy was applied to all stocks [link widoczny dla zalogowanych] for the last five years. Stock trading resulted in an average return per trade of 3.2%, but with stock option trading the average return per trade was over 55% for 2005.
Investors have already [link widoczny dla zalogowanych] found in this research and are reporting highly profitable trades. Whenever investors find inefficiencies in the market, there is a rush to take advantage of those inefficiencies.
Although stock options are not available on all stocks, about half of the stocks found in the analysis did have tradable options. If the [link widoczny dla zalogowanych] trend of increasing use of stock options by investors continues, we should see even more stocks add options for investors. It is easy to see that 60 to 70 percent of actively traded stocks will have option contracts available in the coming year if this trend continues.
Investors are advised to look carefully at the open interest and volume when considering which option contract to buy. A low volume/open [link widoczny dla zalogowanych] interest will generally result in large spreads between the bid/ask prices and thus reduce profits, plus it may make it difficult to sell the option contract.
Another consideration in selecting the option contract is volatility. Stocks with high swings in prices will translate to more [link widoczny dla zalogowanych] expensive options since the options will have a greater likelihood of being in the money. If [link widoczny dla zalogowanych] you have a reliable method of forecasting stock movement, this higher price may not be a consideration.
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