Business Technology

There’s been a steady rise in the utilising of stock options by speculators to maximise their leverage and returns over the last 12 months. Chicago Board Options Exchange affirms this observation when they reported recently that the month of March was their busiest on record with volume up fifty five % over the same month last year. In truth all previous stock option dealing records were damaged when over 5.6 million stock option contracts were traded in just one day.

Stock option trading enables backers to extend their leverage and therefore their rate of return over straightforward share trading. If a stockholder has a solid approach to picking stocks that go up in the near term, the returns can be increased by ten to fifteen times using stock options. The trade off for this increased return is that the financier has to also judge the period of time over that the increase will happen.

Having the ability to pick the stock, direction, and time period are all vital for successful stock option dealing. A probabilistic research of over 30 years of stock information has made public certain reoccurring patterns that will yield significant returns in stock options trading. The research was done with custom developed software and then the technique was applied to all stocks for the last 5 years. Stock dealing ended in a mean return per trade of 3.2%, but with stock option dealing the average return per trade was over fifty five % for 2005.

Investors have already begun to exploit the patterns 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.

Though stock options aren’t available on all stocks, about 1/2 the stocks found in the research did have tradable options. If the trend of skyrocketing use of stock options by backers continues, we should see more stocks add options for stockholders. It is simple to see that 60 to 70 % of actively traded stocks will have option contracts available in next year if this trend continues.

Backers are suggested to look rigorously at the open interest and volume when considering which option contract to purchase. A low volume / open interest will most likely result in huge spreads between the bid / ask costs and therefore reduce profits, and it may make it tricky to sell the option contract.

Another consideration in selecting the option contract is volatility. Stocks with high swings in prices will translate to more expensive options since the options will have a greater likelihood of being in the money. If you have a reliable method of forecasting stock movement, this higher price may not be a consideration.

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