Successfully trading the capital markets goes well beyond having a good idea.There will be many times where you are right about the direction of a market but completely wrong about your timing. One of the problems that most traders experience is that the markets can be irrational for a period that is longer than most people are solvent. So it is important that you understand that you not only need to be right about the direction, but you also need to be right about your timing.

Now determining the exact timing is very difficult so you have to give yourself some leeway to make trades that are not going to break your bank if your timing is not perfect. There are a number of tools that you may use to help you with your timing including using sentiment.Sentiment looks at the confidence displayed by market participants and determines if there is complacency or fear. Whether greed has infiltrated a specific security or traders are looking to quickly exit.

There are a number of ways to measure sentiment. The options markets help provide a background for trader sentiment. Fear and greed are incorporated into the options market which is reflected by the premiums embedded into each option.

It is helpful to understand the basics surrounding options. There are two types of options, but many types of strategies that may be employed using options. A call option is the right but not the obligation to purchase an asset at a specific price on or before a certain date. A put option is the right but not the obligation to sell an asset at a specific price on or before a certain date. The price at which the buyer and the seller agree that the underlying asset can be bought or sold is called the strike price and the date when the options expires is called the expiration date. Options prices are referred to as premiums, which is the amount paid to own an option. To price an option, a trader would use an option pricing model which incorporates many inputs including implied volatility.

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