Essential Options Trading Guide

In the options market

Let it also be said that solidified the axiom that when bad things happen to stocks, good things happen to options.

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The pandemic may have roiled the economy, but it also led to evolutionary changes among investors. Options trading volumes surged to in the options market highs, often exceeding equity volumes in many stocks and exchange-traded funds. The interest in puts and calls over actual securities was unprecedented.

The pandemic—which forced so many people to work from home and closed down much sports betting—revealed that the U.

Essential Options Trading Guide

Puts and calls, which have always existed in the shadow of the stock market, emerged as the preferred way to control stocks or wager on the market. Robinhood and other millennial-focused brokerage firms helped metabolize this change among young investors, who Wall Street had previously thought were about as interested in investing as their parents are in body piercings.

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The options market is poised to evolve in ways that could redefine how most investors use and perceive options.

It is accepted as divine fact that selling options is better than buying them. Inthat may cease to be true. Rather than heavily focusing on selling options in the belief that they are almost always overpriced, investors may increasingly focus on buying options as a preferred way of controlling stocks and harnessing the momentum in the equity market.

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If this occurs, the tension between options buyers and sellers could skyrocket. Read more: New to Options Trading?

Why the Options Market Could Get Even Crazier in 2021

Many investors, including many options novices, spent buying bullish call options to wager on stock rallies. They just wanted an inexpensive way to profit from rising stock prices—and buying call options that cost a fraction of the associated stock price offered just that.

Expect to see equity call options trade with slightly inflated volatility, just as index put options have long been more expensive than merited because dealers know that institutions persistently buy bearish options to hedge stock portfolios.

As market forces shook the foundations of global financial stability, businesses wrestled with heretofore unimagined challenges. Between andCaterpillar, the Peoria-based maker of heavy equipment, saw exchange-rate shifts give its main Japanese competitor a 40 percent price advantage. Meanwhile, even the soundest business borrowers faced soaring double-digit interest rates.

The greed premium that normally defines call options around events, including earningsmay become routine. Meanwhile, institutional investors—especially those who are struggling to find yield because bonds essentially pay none—will probably be attracted to the options market like sea gulls following fishing boats.

Overwriting—or selling upside calls against long stock positions—should surge in popularity.

When done properly, selling calls generates what are termed conditional dividends. The options premium often exceeds the standard dividend payments paid to stockholders. An investor must be willing to sell the stock at in the options market strike price, or be nimble enough to roll positions to avoid exercising their options.

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Mispriced call options— call it the Robinhood effect —will make the strategy more enticing. If the economy improves, though, volatility should decline, making options less expensive to buy and less attractive to sell.

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All of this should make an unusually interesting year in the options market. Close Why the Options Market Could Get Even Crazier in Let it be said that has been a difficult year, but the troubles created by the Covid pandemic have made us more resilient, self-reliant, and better able to confront adversity.

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