Option Trading : Why You Should Never Compound Profits
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Jason Ng
Apr 20, 2013, 8:10:04 AM4/20/13
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Jason Ng
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Article Title: Option Trading : Why You Should Never Compound Profits
Author: Jason Ng
Word Count: 404
Article URL: http://www.isnare.com/?aid=172543&ca=Finances
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=172543
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Perhaps the most direct way of investing long term in stock options is through buying LEAPs call options. LEAPs call options are stock options that expires 6 months to a year in the future. This kind of long expiration stock options allows anyone to benefit from the same move in the underlying stock in a leveraged manner, using lesser money than stock traders do.
However, the one mistake that most option traders make when investing long term in call stock options is that one magic word that all investors love : Compounding. Compounding one�s profits means to keep reinvesting one�s profits so that the profits also make profits of its own. This is a concept that has made multi millionaires out of stock traders, but this is a concept that kills option traders. When an option trader compounds profits when option trading, he also end up compounding the eventual, inevitable loss and end up with nothing due to the leveraged nature of stock options.
Here is an illustration :
Assuming XYZ Company�s stock is trading at $10 on 1 Jan 2007 and it�s $10 strike price LEAPs call option (Jan10call) expiring on Jan 2008 costs $2.
John invests his entire saving of $1000 into the Jan 2008 call options and bought 5 contracts.
On Jan 2008, XYZ Company�s stock did well and was trading at $20 during expiration of the Jan10call and those LEAPs call options worth $18.
John sells those LEAPs call options and ended up with $18 x 500 = $9000! A Profit of 800%! (The stock trader who bought XYZ at $10 would have made only 100% profit)
John continues to think XYZ will do well and did the unforgivable mistake. John invests the entire $9000 into XYZ Company�s $20 strike price LEAPs call options (Jan20call) expiring on Jan 2009 for $2, betting on another good year.
On Jan 2009, XYZ Company had a bad year and its stocks remained almost stagnant and were trading at $19 during expiration of the Jan20Calls. The Jan20Calls that John bought expired out of the money and John loses ALL his money. (The stock trader would have lost only $1)
See why compounding is dangerous for option traders? Make sure you, as an option trader, do not compound your profits unless you are willing to undertake the risk.
For more option trading risks and education for free, please visit http://www.optiontradingpedia.com .
About The Author: Jason Ng is the Founder of Masters 'O' Equity Asset Management. He is a fund manager specialising in options trading and his Star Trading System has helped thousands. Please visit http://www.MastersoEquity.com.
Please use the HTML version of this article at:
http://www.isnare.com/html.php?aid=172543
*********************** ARTICLE END ***********************
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Message delivered directly to members of the group:
publish-the...@googlegroups.com
*****************************************************************
Please consider this free-reprint article written by:
Jason Ng
*****************************
IMPORTANT - Publication/Reprint Terms
- You have permission to publish this article electronically in free-only publications such as a website or an ezine as long as the bylines are included.
- You are not allowed to use this article for commercial purposes. The article should only be reprinted in a publicly accessible website and not in a members-only commercial site.
- You are not allowed to post/reprint this article in any sites/publications that contains or supports hate, violence, porn and warez or any indecent and illegal sites/publications.
- You are not allowed to use this article in UCE (Unsolicited Commercial Email) or SPAM. This article MUST be distributed in an opt-in email list only.
- If you distribute this article in an ezine or newsletter, we ask that you send a copy of the newsletter or ezine that contains the article to http://www.isnare.com/eta.php?aid=172543
- If you post this article in a website/forum/blog, ALL links MUST be set to hyperlinks and we ask that you send a copy of the URL where the article is posted to http://www.isnare.com/eta.php?aid=172543
- We request that you ask permission from the author if you want to publish this article in print.
The role of iSnare.com is only to distribute this article as part of its Article Distribution feature ( http://www.isnare.com/distribution.php ). iSnare.com does NOT own this article, please respect the author's copyright and this publication/reprint terms. If you do not agree to any of these terms, please do not reprint or publish this article.
*****************************
Article Title: Option Trading : Why You Should Never Compound Profits
Author: Jason Ng
Word Count: 404
Article URL: http://www.isnare.com/?aid=172543&ca=Finances
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=172543
Easy Publish Tool: http://www.isnare.com/html.php?aid=172543
*********************** ARTICLE START ***********************
Perhaps the most direct way of investing long term in stock options is through buying LEAPs call options. LEAPs call options are stock options that expires 6 months to a year in the future. This kind of long expiration stock options allows anyone to benefit from the same move in the underlying stock in a leveraged manner, using lesser money than stock traders do.
However, the one mistake that most option traders make when investing long term in call stock options is that one magic word that all investors love : Compounding. Compounding one�s profits means to keep reinvesting one�s profits so that the profits also make profits of its own. This is a concept that has made multi millionaires out of stock traders, but this is a concept that kills option traders. When an option trader compounds profits when option trading, he also end up compounding the eventual, inevitable loss and end up with nothing due to the leveraged nature of stock options.
Here is an illustration :
Assuming XYZ Company�s stock is trading at $10 on 1 Jan 2007 and it�s $10 strike price LEAPs call option (Jan10call) expiring on Jan 2008 costs $2.
John invests his entire saving of $1000 into the Jan 2008 call options and bought 5 contracts.
On Jan 2008, XYZ Company�s stock did well and was trading at $20 during expiration of the Jan10call and those LEAPs call options worth $18.
John sells those LEAPs call options and ended up with $18 x 500 = $9000! A Profit of 800%! (The stock trader who bought XYZ at $10 would have made only 100% profit)
John continues to think XYZ will do well and did the unforgivable mistake. John invests the entire $9000 into XYZ Company�s $20 strike price LEAPs call options (Jan20call) expiring on Jan 2009 for $2, betting on another good year.
On Jan 2009, XYZ Company had a bad year and its stocks remained almost stagnant and were trading at $19 during expiration of the Jan20Calls. The Jan20Calls that John bought expired out of the money and John loses ALL his money. (The stock trader would have lost only $1)
See why compounding is dangerous for option traders? Make sure you, as an option trader, do not compound your profits unless you are willing to undertake the risk.
For more option trading risks and education for free, please visit http://www.optiontradingpedia.com .
About The Author: Jason Ng is the Founder of Masters 'O' Equity Asset Management. He is a fund manager specialising in options trading and his Star Trading System has helped thousands. Please visit http://www.MastersoEquity.com.
Please use the HTML version of this article at:
http://www.isnare.com/html.php?aid=172543
*********************** ARTICLE END ***********************
- To distribute your articles go to http://www.isnare.com/distribution.php
- For more free-reprint articles go to http://www.isnare.com
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