Options traders are people who invest in options. Often, this term refers to people who are active investors rather than people with experience in options investing who no longer invest. Options traders have different levels of experience and different trading styles.
An option trader who opens and closes an options position on the same day is called a day trader. Day trading options takes advantage of small movements in the options market.
An options day trader may use more money in an investment to maximize the profit. This is one reason that day trading options is considered a risky practice as is day trading stocks.
Some successful option traders use long-term options called long-term equity anticipation securities (LEAPS). Though most options are short-term investments, LEAPS options can be valid for as long as two years and eight months before they expire.
A new investor may make simple options trades like buying a call option while learning about options investing. Many investment brokers limit the types of options trades that a new options investor can make until that investor has gained experience.
An experienced options trader may use a variety of options strategies to take advantage of many different stock market states and stock movements. Some options strategies involve considerable risk while others have limited risk.
A conservative options trader may choose to use only the options strategies that have limited risk. For some strategies, the most that the investor risks is the option premium paid and the broker’s fee.
Some options investors use part of their retirement savings for their options investments. Some IRA accounts allow the investor to use a portion of the account for options trading.
The investor using an IRA account for options trades may be limited in the types of options trades. Since there are restrictions, an investor interested in options trading with an IRA should consult their investment broker for terms and conditions.
Some stock investors use options trades to limit the risk of their stock ownership. Options can guard against a loss in stock value if the stock owners buy a put option for every one hundred shares of a stock that they own.
If the stock value decreases to the strike price or lower, the stock investor can sell the stock for the strike price. This way, the stock owner’s loss is limited to the difference between the beginning value of the stock and the strike price of the option for each share.
Options investors can be comfortable with advanced trading strategies with combinations of options trades that allow the investor to make a profit if the stock moves in either direction. These investors may limit their investments to risk capital or have a high tolerance for risk in pursuit of higher profits.
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