OPTIONS
The Key To Profitability?
Options: The Missing Link
by Martha Stokes, CMT
What's the link between an option and a stock?
The lure of options is undeniable. Every year, thousands of traders attend seminars and buy books on options in their pursuit of profit. The desire
to leverage a small amount of capital to make huge gains in the market draws
people to options in ever-growing numbers year after year. The Options Industry
Council offers excellent free education on options, and there are good option
courses out there.
However, most option players spend more money studying strategies at
option seminars than they ever make back in profits from trading options.
Option players generally do far worse on their return on investment than
investors who simply buy & hold stocks long term. Why do option players,
with the power of leverage behind them, do so poorly compared to their buy
& hold counterparts? The answer is more basic than you might think.
THE MISSING LINK
There must be a connection or link between the underlying stock price
action and the selected option strategy. Without this crucial link, option
players struggle with mediocre results. To explain this, it is important
to take a brief history lesson.
Candlestick charting, which is frequently taught alongside option strategies,
was first developed in Japan in the 1700s, used in the rice exchange that
was set up in the late 1600s (the world's first, according to Steve Nison).
So futures markets have been around for a long time as well as stock markets.
The differences between futures markets and stock markets, however, are numerous.
...Continued in the May issue of Technical Analysis of STOCKS &
COMMODITIES
Excerpted from an article originally published in the May 2008 issue
of Technical Analysis of
STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
Return to May 2008 Contents
