The Right Way To Increase Returns From Stock Option Trading

The Right Way To Increase Returns From Stock Option Trading-Image by Getty Images via @daylife

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

Stock option trading enables investors to increase their leverage and thus their rate of return over simple stock trading. If an investor has a solid approach to picking stocks that go up in the short term, the returns can be increased by 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.

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.

Although stock options are not available on all stocks, about half of the stocks found in the analysis did have tradable options. If the 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.

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 thing to be considered in picking the option contract is volatility. Stocks with high swings in costs will translate into dearer options since the options will have a larger chance of being in the money. If you’ve got a trustworthy method of predicting stock movement, this higher price won’t be a consideration.

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