Options are considered to be complicated by most. However, this is not necessarily true if one is willing to take a step back and look at things from an outside perspective. To most people, trading options seems like a game of “guess my hand”. The harsh reality is that it’s far less complex than people may think; Simply put, they’re only worth what someone else will pay for them (this is known as their value).
One must always keep in mind that options expire after a specific time, limiting your time frame. So just because a stock has been going up or down doesn’t mean that option prices will automatically follow. That’s when it becomes helpful to look at the time frame of trading options, which will be discussed below in further detail.
The three categories for trading options
We can break up the time frame of trading options into three major categories:
The longer trends last, the more likely it is for them to continue (as long as nothing else comes in the way)
If a pattern can be seen on any given stock or option, such as an ascending or descending triangle, that presents an opportunity for those who know what they’re doing.
When a gap occurs on any given stock or option straight up and down, things tend to stay this way until something comes along to change it.
As you can see from above, not all time frames are created equally. It’s important to remember that options have a life of their own, meaning they don’t automatically follow the trends of stocks (or vice versa). One should always keep in mind that information must be presented to either one before acting on it. For example, if a stock has not risen in the past week while an option has – then this presents an opportunity (and vice versa).
Understanding the time frame of trading options
When trading options; It’s important to remember that there are other factors involved than simply what you or I decide. We may make good decisions, but ultimately it’s up to the market whether or not they’ll take us (the bottom line is known as risk vs reward). If you put yourself in their shoes for just a moment, it becomes clear why many people may not wish to trade options; for once you do, there’s no guarantee that you’ll get anything out of it.
This is true with any investment (stocks or otherwise) but becomes amplified when dealing with options (you’re entering into a contract, after all). While I don’t think there will ever be a time where everyone decides to take the same path, the point remains valid to an extent.
Understanding how long trends last can help you make better decisions about whether or not this would be the right move at the moment. For example; If an option has remained stagnant in price while the stock continues to rise, that may present good opportunities depending on what kind of investor you are.
As previously stated in this article, the time frame of trading options is extremely important when looking at any given investment. If you don’t know what kind of time frame you’re dealing with in terms of options, it becomes tough to decide. For example; If an option has been flat for the past three months while the stock continues to go up – then that won’t mean much (unless there happens to be some other factor that comes into play).
Understanding how long trends last can help you make better investments, but like anything else, it’s up to the market itself whether or not they’ll take us (the bottom line is known as risk vs reward). It’s always better to have more information regarding a topic before acting on it, so keep these guidelines in mind and always use a reputable online broker from Saxo Bank before starting your investment journey.