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One of the fundamental
properties of an option is often
ignored by new option traders,
especially day traders. Options
are unique investment tools
and cannot be traded as you
trade stock. It is worth the effort
to learn how to use options
efficiently. Please do not assume
that you can make the transition
with nary a thought.
For example, you cannot
successfully chart the price
of options because the price
(premium) depends on several
factors – some of which can
change in an instant. Thus, there
is no usable pattern in an option’s
price chart. To understand why
this is true, it is necessary to
have a basic understanding of
how an option is priced in the
marketplace. If you use charts for
your regular (non-option) trading,
then continue to do so. However,
these charts should follow the
price of the underlying asset
(stock, ETF, index, commodity,
The Basics of the Versatile Trading Instrument
Options Are Not Stocks
If you are a successful trader who is considering adding options to your arsenal of products to trade, please take the
time to recognise that your trading skills will not transfer directly to options. Options are different. They are a derivative
product and do not have a value on their own. Instead they derive their value from the value of another asset. Options
also have limited life times and expire. These differences affect the way options are priced.