Too many people try to jump into an option without having a good understanding of what it actually is.
Occasionally there will be times when the stock goes up yet the call option that they bought didn't go up with it, or even went down.
Why does this happen? Well there are a number of factors that go into options.
Factors such as time decay, volatility, and price movement all get lumped together into every option.
That is why it is normally a good idea to have a firm understanding of the option Greeks.
The Greeks can estimate how much each of these factors will influence the price of the option and can be used to.
1.
Deepen your understanding of options Often people trade options without having a clue as to what they are trading.
By understanding what they are and how they move you can make wiser decisions when picking the right option to trade.
There is never anything wrong with learning just a little bit more.
2.
Place Targets Because the Greeks give you a better understanding of how an option will move, you have more realistic price targets.
Of course not even the Greeks will give you the exact amount an option will be worth, but they do give you a much better estimate then "I'm going to buy a call and make a lot of money".
3.
Placing Stops Of course there are two sides to every trade.
You win some, you lose some.
The trick is limiting your losses.
And you can even use the Greeks to help you figure out where to cut your losses short and how much to risk.