So Why Are Stock Options So Popular?
So a trader that’s able to pick that hot moving stock, be able to know which direction, and the approximate time period of that move are all critical elements required for successful stock option trading. A recent analysis of over 28 years of real stock data has shown that there were certain reoccurring technical patterns that can actually yield and thus result in higher returns in stock option trading. This statistic analysis was performed with custom developed technical software. The trend strategy was applied to each and every stock for the five years. Stock trading (conventional buying and selling of stocks), resulted in an average return, for every trade of around 3.5%, but when applied to stock options trading, the average return per trade was a stunning 55%.
Some traders, investors and professional investment firms have taken notice and has decided to exploit and analyze the patterns that were found in this research, and as a result are reporting higher profitable stock option trades. Whenever investors and traders find such inefficiencies in the market, word gets around quickly and there will be a sudden rush to take advantage of such inefficiencies.
Although the trading of stock options are not available for each and every stock, about 50% of the stocks used in the analysis, were able to be traded as options. If the trading of stock options by investors and traders continue to increase, there should be even more stocks that add ‘options’ as a trading option for investors. It’s easy to see why there will be a predicted 75% percent of actively traded stocks, that may include option contracts available to be traded in the coming year, if the current trend continues.
Investors and traders are advised they look carefully at ‘open interest’ and ‘volume’ when they are considering which option contracts to trade. A low volume/open interest will generally result in larger spreads between the bid & ask prices, and will thus reduce profits. Also, low volume/open interest may also make it difficult to sell the option contract.
Another consideration when selecting an option contract is the stocks volatility. Stocks that have high swings in prices will as a result be a lot more expensive as an option, since the option will have a better likelihood that the stock will be in the money. If a trader has a reliable method or system of forecasting potential stock movement, the higher price swing may not be a consideration.