Trading Standards
Before entering the arena of stock market investing, an individual should understand and establish trading standards. An investor should always seek a marketplace that offers premium conditions in which to make their transactions. Most of the transactions completed in the United States are conducted on the New York Stock Exchange or the NASDAQ, while popular global exchanges around the world also afford high liquidity for trading purposes.
A wise trader will examine the trading standards exhibited for any stock exchange to make sure the equities market meets specific criteria. A veteran trader will also understand basic facts about the disparate exchanges and understand those trading standards and any risks that may be inherently associated with them.
It is important to establish certain standards before you opt to enter a transaction. Failure to do so can often result is a loss, perhaps even the loss of your entire investment. All stock market transactions come with risk, but you can mitigate some of that risk by establishing trading standards.
When trading options, consider these standards:
- The stock or index in which you're interested must be actively traded in order to be considered for an options purchase. Rarely should you buy options on any stock that does not trade at least one million shares a day.
- Make sure you've done the proper technical analysis on a stock before delving into an options purchase. The stock should be fundamentally sound, or otherwise you could end up with an unprofitable transaction on your hands. Once the stock is investigated and found to be solid all around, only then it can be considered for purchase.
- Make sure there are enough contracts in play on any options purchase before becoming personally involved. You never want to own more than one-tenth of the contracts for a stock's specific strike price. If you are the big fish in the pond – or worse, the ONLY fish in the pond – you can be manipulated at will by the stock's market maker. Make sure there is plenty of interest before getting drawn into the deal.
- Don't pay more for the intrinsic value of an option than you'll pay for time value when you purchase short-term options. The premium of an "at-the-money" option is totally time value, since the stock price and the strike price are the same. The premium of an "out-of-the-money" option is all time value, since there is no intrinsic value in the option.
- Be sure to close you option position before a company announces quarterly earnings. This can be a potentially volatile situation for any stock, which means you have no idea which way the option can move. An untold number of traders have lost a lot of money by failing to follow this standard rule.
By understanding these trading standards, a trader can shorten the time required to become skillful enough to make money in the stock market. It is important to learn and practice, both facets necessary to bridge the gap from knowledge to skill, and make yourself ready to be a profitable trader.
