Today I want to discuss if it is a good idea to trade options alone. Option is a type of derivates, and gives investors the right to buy or sell a specific stock at a specific price. There are some differences between American options and European options, but the existence of the option market narrows the difference between these two types of options. Buying an option is a bit like adding leverages to investors' portfolio, but there is some difference.
The prices of option are definitely more volatile than the stock prices; however, the prices of option will eventually collapse to the difference between the strike prices and the actual stock prices by the exercise dates or zero. Because option prices include the prices for timing, the longer time period involves higher uncertainty, since one of the option functions is to seek certainty, the prices of options with longer time periods to exercise dates are higher. Therefore, the values of options based on seeking for uncertainties are declining overtime, so it is very risky to hold options as assets for a very long period.
When investors do not hold options for long, they behave just like opportunists. When behaving like opportunists, investors turn to be more like noise traders rather than sophisticated investors who study the fundamentals. This increases individual risk. Therefore, it is not a good idea to trade options alone.
No comments:
Post a Comment