Daniel Mollat asked:


 

Let’s be clear on this. There is no other option trading strategy that can outshine or even equal the profit generating potential of the sport of writing naked options. The term ‘sport’ is used here because those who practice this money making trading technique not only turn out fabulous profits but also have fun in the process. It is a fun, profitable but dangerous option trading sport that is mostly played by seasoned and skilled option players. That is, until the sport’s peril’s were tamed with the use of trading techniques that, while offering substantial safeguards to the player, still continued to offer high profitability ratios, albeit at slightly reduced rates. Having made it ‘investor safe’ has only slightly altered the profit potential of writing nakeds and certainly, without doubt, continues to be the premiere money making trading strategy in the options market.

 

The birth of the options market in recent decades spawned the creation of dozens of trading strategies and systems that is today being used not only by individual options traders but also by financial institutions. Stock options as an investment instrument is now widely employed as a safe and sound money strategy. The ability of options to give the investor a wide range of choices in stock market investment is what has made the options market grow by leaps and bounds over the last two or three decades. There are dozens of option trading systems being employed by individual investors as well as financial institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value, another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is now popularly known as covered call writing.

 

Trading strategies, techniques and systems available to the option trader are so numerous today that it would take a whole book to describe each and that would be just a brief description not a detailed explanation. It would be far beyond the scope of what we could cover in this short article. Most of the strategies are based on the principle of buying calls and puts or, variations of this strategy such as the use of spreads. The reason for the popularity of buying calls and puts and its variations is quite simple; limited or defined loss against the potential for unlimited and fabulous profits. This is what has driven thousands into the options trading game. But like everything else in life there is always a trade off. While the potential for fabulous profits against limited investment exists the reality of achieving such success is restricted. It’s almost like buying a lottery ticket with the potential for winning fabulous riches. Or putting it differently, it’s also akin to going to a casino and placing bets on gaming tables with the hope that at the end of the evening you will come out with more money than you came in. As we all know there are very few winners in casinos and that is why the gaming business offers tremendous profits for the operators.

 

But one can be an option trader and be in a similar position as the casino operator.  How? By being an option writer or seller instead of a buyer. For every option that is bought in the market, there must be a seller or writer of the option. These writers are the casinos in the options business. As the option seller you take the bets from the option buyers and since 75 to 80 percent of all options in the market expire worthless, you the seller pocket the premiums paid by the buyers when the options they bought expire worthless. For the benefit of those who are not familiar with gambling casinos, the winning odds of casinos over the betting player is only around 5 percent and yet they rake in profits from this business. Now imagine this, research and studies have shown that the option writer (seller) has better than 10 to 20 percent odds over the option buyer.

 

Option traders who successfully use the strategy of selling options consider themselves as having found the Holy Grail of Investments. And of all the variations in option selling strategies (just as many as there are in option buying), writing naked options is considered to be the Cadillac division. No other option selling system offers the profit potential of the naked writer.

 

So why aren’t there more option writers in the market? For two reasons:

 



There is the general belief that writing options carries the potential for unlimited losses. This has served to scare away the thousands of novice traders and those who have not been long enough traders to recognize the benefits of option writing and the many safeguards available that conquers this so-called risk.



 

 



For many, options trading has become synonymous with making big profits quickly from small investments. Option sellers on the other hand, do not have the potential for outrageous profits from any single trade, and by not being a get-rich-quick proposition it is less popular to traders who are looking for big returns on their small investments.



 

 

It must be noted however, that option writing is fast gaining popularity among serious investors looking to grow their wealth at a steady, consistent and secure manner regardless of market or economic conditions. For those willing to venture into this lucrative field for long term capital appreciation don’t let the first reason above frighten you into inaction. There are many ways one can protect himself and conquer the element of ‘unlimited loss’ in writing nakeds. The author of this article is one of many successful naked option sellers. He has put out an e-book detailing a trading system that uses a three pronged strategy that trounces the so-called risk of loss to be almost neglible. Information about his system can be found at his web site.   

 

 

 



Timothy

Casey Yew asked:


When a person is thinking about investing, and is considering learning a bit about the option market there are a few general things he should consider. The following are a few tips to help you get started.

Learn the Language

Option trading is like almost every other activity of human endeavor in that it has its own unique language. This is no different than bowling, baseball, hunting, or brain surgery. There is a tendency in people to develop their own terminology, and sometimes even slang, that they like to use to speak with others who share their interests. It serves the purpose of separating those in the know from the beginners. When you are new to anything, this can be daunting and confusing. Usually, a little research will sort things out. Often the terminology is merely a complex way of expressing a simple idea. Option trading is filled with such terms: calls, puts, margins, strike prices. It helps to be able to speak the lingo.

Study the Market

There has never been a better time to enter into investing. Information and knowledge are the tools of the trade, and we are living in the information age. There are a lot of facts out there, and you are connected to them on the internet. Take your time, and educate yourself about the market that you are interested in giving a try. Concentrate on facts and figures, and view advice with a bit of skepticism. It is helpful to remember the old adage: Those you can do, and those who can not teach. If someone knows a fail safe way to make money in Option Trading, you can bet he will be out making money, not trying to sell the idea to you.

Dip your Toes

While it is thought by some that the best way to learn to swim is to jump into the deep end of the pool, a lot of people who end up trying that method drown. There is a high amount of risk in any market investment, and the beginner can often be like a lamb going to play with a pack of wolves. On the other hand, you can not be learning option trading without doing a bit of option trading. One idea is to find a “virtual” option trading game, where you can practice and learn with phony option purchases and play money. This can be very helpful, but like combat training, things get a lot different fast when real bullets start flying around. When you are ready to actually take a stab at a real investment, start slow so that you don’t lose all of your investment capital while you are still learning.

Learn to be You

There should always come a time when the student is ready to surpass the teacher. The student does this by absorbing all the teacher has to teach, and then adding their own insight, and talent, and skill. You are going to have to see option trading as an art and not a science. You can learn technique, and you can learn methods. You can learn the language, and the tricks of the trade. You can study the success of others, and their failures. In the end, however, it is going to be you making the decisions. Approach the learning process as a quest to find your way of investing, not to learn to duplicate the ways of other investors. Ultimately, it will be your money, and your profit or loss.

The above is just some basic advice to get you started on the process of learning. Do not despair if option trading seems hard to learn. Remember this quote, “Of course it is hard. If it were easy anyone could do it. It is the hard that makes it great”.



Ralph

Wincent Loh asked:


Option as a strategic investment is fast becoming the choice of many. The benefits that option trading offers are many and we shall discuss the same here. Option trading having many benefits it is actually a wonder as to why it was not a sought after means for investment for so long.

1. Option trading is not as risky as it seems if traded wisely. In case of option you do not require as much finance as you would do for stocks. As far as hedge is concerned, option trading seems to be the most reliable of them all. In case of option trading you have an insurance throughout he day, all seven days a week and not until the close of the market.

2. Option is very cost effective. You could be in a similar position as you would have stocks but by putting in much less as investment but the catch is that the investor needs to be careful and select the right call option so as to be in the same position as he would be with stocks. This stock replacement strategy is very cost effective.

3. Option as a strategic investment offers to its investors a high return on its investments. The return investors make on the right selection in option trading is far greater than any stock investment. Option can get you about 60-70% and even more on your investments and in the same scenario your stocks may give you a return of only about 10-15%. But there is a flipside to this. When option give you such high rate of return it is only when you have made the right choice but a wrong selection on the other hand can get you back by the entire 100%. So the returns are good but only when you take calculated risks.

4. Option as a strategic investment provides the investor with multiple options so as to attain their aim. Option offers the investors various alternatives if planned and executed well. An example to quote here would be how a margin would have to be paid if short selling is to be done. At times the margin quoted by the brokers is so high that the investor finds it difficult to go ahead with his plans. Then there are those who do not allow short selling by the investor thus again the investor going back to square one as far as his investment plans are concerned. This puts the investor in the back seat as he is unable to execute his plans and here is where the option trading comes into play. You wouldn’t find any broker who says that the investor cannot purchase puts when the market seems to be falling. This would give the option trader an advantage and he would be able to reap the benefits later.

An option trader can invest in the market not only when it moves up or down, when the prices are almost steady, a trader can also use the time factor where the prices are not moving significantly as a profit making opportunity. Thus it is only the option trader who gets a share in the pie in every kind of market.



ARAWN

Jason Ng asked:


Have you ever lost all your money in Stock Options trading?

If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?

The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.

So, how do we avoid such a predicament?

Simply by applying the golden rule of stock options trading! That is:

Use Only Money You Could Afford To Lose!

Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.

For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!

In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!

So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!



Maria Long

Amar Mahallati asked:


When venturing into the options market, the best way to get the lay of the land is to be acquainted with at least some of the more elementary concepts. These will aid the new investor in successfully executing basic trading strategies.

Two basic terms, the call and the put, are the epicenter of the trading strategies. To buy a call confers the right, not the obligation, to buy at a price that is pre set. Conversely, puts give the buyer the right to sell at a pre set price. Options are both sold and bought, meaning that the seller grants the buyer the right and takes on an obligation to fulfill the other side of the trade.

The variations to this maneuver include:

Long Calls

The long call is the easiest to understand and is the most basic concept. MSFT (Microsoft) traded at $28 with June 31 options that were to expire on the third Friday of June. The strike price was $31, meaning that it was pre set so if exercised it had to be bought at that price.

Short (Naked) Calls

When the writer, the person selling the option, does not own the underlying stock and the option is exercised, then he or she is obligated to sell. Under those circumstances, that action is considered a naked call. Because the person is on the selling side of the contract, his position is considered to be short.

The short call status incurs the most profit by the amount of the premium if the market price of the underlying asset decreases. When the price exceeds the strike price by more than the premium, then the short position takes a loss.

Long Put

When a trader anticipates that the future market price of an asset, such as a stock, will fall before the expiration date is able to sell the stock at a fixed price. The buyer, put buyer, is not obligated to sell the stock, but he or she does have the right.

If the market price does drop below the strike price before the option expires and the decrease is more than the premium paid, then the seller profits. If the price increases or fails to drop enough to cover the premium then the trader will allow the contract to expire worthless.

Short Put

When a trader speculates that the future market price will rise, they can sell the right to sell an asset at the predetermined price.

If the asset’s market price increases, the short put position incurs a profit that is equal to the amount of the premium. This amount excludes any transaction costs and commissions. However, if the price drops below the strike price by more than the premium amount then the writer loses the money.

There are several trading strategies that are basic to the market. These strategies employ the characteristics of four basic trading positions. These strategies have one of several outcomes: pure profit plays, speculating on gaining a profit or creating a combination of speculation and hedging.

When positions move in opposite directions, it is called hedging. Hedging bears a profit less that sheer speculation, but they do compensate by offloading a certain degree of the risk.

Bull spreads and bear spreads are common strategies that can help the trader manipulate the market, depending on the market emotion. Bull spreads utilize a long call with a low strike price and combine it with a short call at a higher strike price and a short put with a higher strike price. On the other hand, bear spreads use a short call with a low strike price and a long call with a high strike price. Alternatively, the short put can be used with a low strike price and a long put can be used with a higher strike price.

There is a great deal of software on the market that can aid in these types of trades. Options trading software can offer users concrete demonstrations of the how these strategies work. They show how they behave under different assumptions regarding future prices, volume and other factors, combined with various expiration dates and strike prices to show how these different scenarios can result in a profit or a loss.



Amely Riskin

Thomas Eliot asked:


Are you thinking about becoming involved with trading the stock or options markets? Are you in need of a reliable and easy course to help guide you in your trading decisions? If you answered yes to the preceding two questions, then keep reading in order to learn more.

Picture yourself as having only 15 minutes a day to do your stock trading. How would you manage to do the research necessary and analyze the various stocks or options you were considering trading? This was the situation that Dr. Stephen Cooper found himself in several years ago when he used to worked 12 hour days as a chiropractor who was also interested in investing in the stock market. He needed to develop a system that would allow him accomplish his goals, and he found a way that helped him to invest in the market while only spending 15 minutes a day.

Today, several years later, Dr. Cooper has developed a system that is designed to help anyone, young or old, experienced or inexperienced, to become a successful market investor. He proudly boasts that: “You don’t need to be a seasoned stock investor to make money with online investing, and you don’t have to have a lot of money to start.” And yet, the trading system he teaches can help you make serious money in the stock market.

The biggest advantage of the system he offers to teach is an uncomplicated online investing system that can be completed in only 15 minutes a day. You can learn this amazing, easy-to-follow investing system without a lot of trouble or bother. His system lets you create wealth quickly, and does not require that you undertake a large amount of trades or do day trading.

With Dr. Cooper’s Stock and Option Trading System, you are literally in control of your own destiny without being left to figure things out for yourself. One of the bonuses that prospective students receive are the personal trade recommendation from Dr. Cooper himself. There are direct email alerts along with Watch List changes that are updated on a regular basis. You have access to a members trading area where you can pick the trading brains of your peers.

Another huge plus to this system is that it is run online. You can spend as much or as little time as you wish taking advantage of the trading education available to you. Using the online technology, you can take stock of your investments, review your trading activity, and initiate trades 24-hours-a-day, not just during daylight hours. With this system you are not limited by where you live. You can take advantage of impending movements in the markets worldwide.

To learn more about this trading system, you can read a further opinion at Review of the Stock and Option Trading System.



Anthony