Profitably Trading Options in Australia – Understanding Volatility

Profitably Trading Options in Australia – Understanding Volatility





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Profitably Trading Options In Australia

Successfully trading options in Australia is something that many investors and traders aspire to and who can blame them, as options are a powerful trading instrument. Like anything, to become successful requires a few core skills and some training which means successfully trading options in Australia is something just about anybody can learn.

So what sort of skills are needed?

All successful trading and investing requires a process in order to deliver consistent results over time and trading options is no different. Because Options are a derivative, it should be noted that much of the analysis should be done on the underlying shares.

As a result, learning how to invest in shares is a great starting point if you are new to trading and investing. Core skills should include learning how to read and understand charts, as well as more in depth technical analysis. In addition, fundamental analysis is also an important component to the stock selection decision, and can often help ensure the investor is focused on the right stock and at the right time.

Naturally, when trading options in Australia, or anywhere else for that matter, a solid knowledge of options and options price is just as important as picking the stock. In our experience, this is where many investors fall down, by not having the specialist knowledge and training on the actual asset they are investing in.

Understanding the timing…

Because an option is a derivative and is also a wasting asset, the timing of the trade is critically important. This factor of timing and more specifically Time Decay effectively makes trading options a 3D experience, rather than 2D with just shares. In other words the performance of the trade doesn’t simply come down to the stock price moving in the right direction, it also needs to happen within a prescribed time frame – that of the Option’s expiry.

And Understanding the Volatility

Taking things into 4D is Volatility. Putting this simply, if a share is more volatile, the value of the options will likely be higher. Why – well there is simply more likelihood that the share price will move around and the option will actually have some real value. This can be good or bad, depending on whether you are a buyer or a seller of the option, which leads to the next point, what is your strategy?

There are a lot of strategies for trading options in Australia

In fact, I like to think of trading like playing a game of golf. You are going to use different clubs for different types of shot giving great flexibility and in much the same way, trading options in Australia gives far more flexibility in your trading and investing. Trading Direction or No Direction, Volatility Increases or Declines or simply being paid for Time Passing by are all possible opportunities for educated options traders.

Customising your strategy to suit you and your needs

One of the core strategies I use personally and teach a lot, is Covered Calls. This is strategy designed to generate income, with a level of certainty, albeit at the expense of some potential upside in the stock.

Even within this relatively straightforward strategy, the investor can totally customise the level of returns and the risk to suit their needs. If you have yet to watch it, check out the video accompanying this post, as it very specifically looks at how different types of stocks, but using the same strategy, can yield very different results.

Are there risks?

Of course there are, and these are far higher for those trying to trade or invest without a good understanding of the core principals of trading – specifically the What, Why and When, plus of course great Risk Management.

Again, the good news is that these can all be learnt, and we would love to be your coach, guide and mentor as you learn more on how to potentially bank profits through trading options in Australia.

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