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

Sam Perdue asked:


There is quite a difference between buying stocks outright and purchasing stock options. When you purchase an option, you are betting on the direction of the market. However, option trading has very different characteristics than purchasing shares and there is a lot of terminology and tricks of the trade that a new trader should learn in order to successfully trade options.

There are two types of options - calls and puts. Purchasing a call option means that you have the right (however, not the obligation) to purchase the stock at the strike price at any time before your option expires. When you purchase put option, you have the right (however, again not the obligation) to sell the stock at the strike price any time before the expiry date of the option. A call option is purchased when you expect the price of the stock to inflate, a put option when you expect the price to deflate.

The main difference between buying stocks compared to options is that when you purchase a stock, you own a piece of the company whereas when you purchase a stock option, you simply have a contract that allows you to buy and sell the stock at a specific price before the option expires. There are always two sides for every option transaction - a buyer and a seller so for each option, either call or put that you purchase, there is someone selling it.

Stock option trading can be compared to betting on the racetrack where you are betting against other people. Buying stocks is compared to gambling in the casino, where you bet against the house. Trading options is a ‘zero-sum game’, which means that the option buyers gain equals the sellers loss and vice versa - they are mirror images of each other so there is no positive or negative cost involved.

Stock option trading can be a very lucrative game and many traders use options as part of their larger strategy based on a selection of stocks. It’s important that if you want to begin stock option trading that you understand the ins and outs of the market, the stocks and stock option trading before leaping in head first. There’s a lot to do with option trading and you can be quite successful if you take the time to learn these skills as well as research the company and stock history of the stock and company that you are looking to purchase stock option in.



Loran Hugs

Abhishek Agarwal asked:


Thanks to the ever rising popularity of the trade market, it is but inevitable that info on the core concepts of options trades and good ways of engaging the industry are widely available in different types of media.

Apart from the net, options trade samples and simulators are also now available in videos and DVD. It is generally believed that these products are made for the people who are constantly on the move and would want to check out the options and learn trading strategies while on the road or while traveling, using their laptop.

Here are the most popular options trading videos you can get on DVD:

1. A Complete Course in Option Trading Fundamentals , by Joseph Fray

This video discusses options trading insights by a professor of the Options Industry Council, Joseph Frey. It offers a complete overview of the options in the commercial sector, from the most basic of the most sophisticated.

Topics include options market behavior trends, and how they are different from stocks, and how market volatility affects the movement of options . Notables in his analysis are his three reasons why the options traders may fold, four major options trading strategies, and how the time affects the profits of options trading and then his popular fifty % rule for pricing options quarters.

2. Picking The Best Stocks And Strategies For Every Option Trade, A Complete Course ON Option Trading Fundamentals, by James Bittman

Apart from the generalized concepts that surround options trading, this author also examines straddling technique, interpretation of complex bull and bear spread, and even the possibility of directional programs that he taught his classes in recent years.

It explains how the rates of options are arrived at, the causes of price trends, when you may employ the use of a particular strategy, and even gives case studies to help you get a greater understanding of financial tactics used by investors all over the world.

3. The Volatility Primer: Insider Methods For Option Trading , by Larry McMillan

In this video tutorial, McMillan addresses in a large part on how the volatility of the market influences underlying securities, and some options on how you can significantly boost business results based on such knowledge.

It is essentially a crash course about the fluctuating trend in the markets and also how you can deal with it to make the most out of whatever investment you may have madet. This video has already bagged the coveted Traders’ Hall of fame award.

You could get many other courses of negotiating options and advice available on video. A quick search on Google will bring hundreds of videos to your screen , and all you would have to do is sift through them to find the ones that suit your immediate needs.



Ruth

Timothy Stevens asked:


When you start trading in the Foreign Exchange market, you will notice that the prices for either buying or selling a currency pair always come in a pair of price quotes. One is called the ‘Bid’ (or Sell) and the other is called the ‘Ask’ (or Buy). You will notice the same in any other investment/trading products (e.g. equities, commodities, etc.). The price that you buy a currency pair is reflected in the Ask price while the price that you sell a currency pair is reflected in the Bid price.

The Ask price or selling price of a currency pair is always the higher one in a price quote. While the Bid price or buying price is the price at which you buy the currency pair. What this means is that you will always buy at the higher price and sell at the lower price of a price quote.

You will notice that between the Bid and Ask price there is a difference and this difference is what we call the “Spread”. The spread is the cost of the trade or transaction. Usually this is the only cost for the trader as most forex brokers nowadays (due to competition on the internet) do not levy any additional commissions unlike when you are trading on other investment markets like equities, etc.

At the beginning it may seem confusing for a beginner as when we purchase something only 1 price is given to us. However, beginners just have to remember that you will always have to buy at the higher price of the 2 prices while selling a currency pair you would have to remember that it is the lower of the 2 prices. It doesn’t make sense for the broker to sell you at a lower price and then buy back from you at a higher price.

To be continue… on Forex Options Trading - How To Read FOREX Price Quotes (Part 2 of 3)



Juan

Chris Viscaya asked:


Okay, now that you’ve found a good stock option trading System you are ready to rumble. You’re ready to start ‘cleaning house’ and making huge returns sending you and yours into a rapid luxurious retirement in little under a year.

Your excitement is understood. And guess what? It’s actually possible because it has been done.

We are assuming that you’ve obtained a really good stock option trading system, a method that uses excellent high probability entries, well placed stop losses and a trailing stop method of maximizing profits Now it is time to talk about the ‘good stuff’, the secrets of money management in options trading, where the real profits are created.

Options trading money management is the heart and soul of making your account grow while preventing unwelcome disasters. Trade with intelligent money management and increase your confidence.

Okay, so let’s say your stock options trading system is actually making you profits. You feel that the system can be trusted and now you are anxious to ‘up the ante’ and start making bigger returns. So what do you do next?

Well first of all, keep trading but just keep your position sizes small, for now. It’s now time to do a little tweaking with your money management of your position sizes. Doing this right could possibly make you hundreds of thousands up through millions of dollars, literally. Doing options trading money management wrong can cause you a lot of misery, pain, and suffering and wipe out your account quickly!

In essence, you want to keep your position sizes (the total amount you have invested into an options trade position) even sized and never more than 10% of your options trading portfolio (on a small account and down to 1% to 2% options position sizes on very large accounts). With options, even if you kept your ‘bet’ size the same, say 20 contracts for each and every trade, you could make a great living off just one stock even if you never increase your position size. But if you wanted to taste a little of that compounded, ‘parabolic’ growth increase your options position size by 20% to 30% max every time you double your account (never increase it to 100%!).

In case you’re reading this and do not have a profitable Stock Option Trading System or stock there are excellent systems available through doing a little reasearch. You can try and figure a system out on your own or you can short cut success by obtaining some one else’s system or service and emulate what they are doing.

Here are some basic trading system approaches that can net out consistent profits: Trade trends. Trade pivot points. Trade swings in the direction of the trend. And that pretty much covers it for successful moneymaking, directional options trading that’s worth your time.

If your profits are bigger than your losses then you have a winning trading system. You don’t necessarily have to win more than you lose. Yes you can actually make money by losing more than you win if your winners are big enough and your losers are small enough.

The issue when trading options is that when you lose you can easily take a 25 to 50% ‘haircut’ or more of your position just by simply stopping out through stock price action. This also goes to show that you will want a system that doesn’t lose too often when trading options - remember that. Plus you’ll want your winners to be able to be really big so trend and pivot point systems can perform the best.

This brings up the issue of making a fortune in options trading without losing your shirt.

There is nothing worse than making a fortune in options trading then quickly giving that fortune back. If you’ve ever done that you can understand why people jumped off bridges and have tall buildings in 1929 during the great stock market crash. It’s a most miserable feeling because you get so high and excited, and happy from your gains and then if you lose that if worse than never having had obtained it in the first place. So promise yourself now that you’ll never put your self in that position and that you’ll aggressively guard your profits at all times.

So that said let’s figure out how to grow a trading account rapidly without losing it.



JARED

James Thomas asked:


You may or may not have heard of credit spread option trading but they can be used to profit in bullish, neutral or bearish conditions.

They are a cashflow generating strategy that involves both the buying and selling of either calls or puts of different strike prices but same expiration date to establish an overall ‘credit’ i.e. spendable cash.

It is a great option trading strategy for taking advantage of the ‘time decay’ that option selling provides, but with limited risk.

The amount of potential profit of course is limited to the credit received when the trade is first made.

Let me give you an example of this powerful, yet underutilized option trading strategy.

Let’s say that the QQQQ (The Nasdaq 100 tracking unit) is trading at $30.50 and we believe that it will continue to go up in price.

To create a vertical credit spread using puts (selling puts is profitable if the market rises), we could do the following:

1) Sell the $30 put (expiring this month).

and

2) Buy the $29 put (expiring this month).

TIP:

In my experience, it’s always best to sell short-term, ‘Out-of-the-money’ option premium for 3 main reasons:

1) Out of the money options have lower deltas, meaning the stock has to move further before the value of our sold option increases (remember we want it to decrease).

2) Selling ‘current month’ options (30 days or less to expiry) is when time decay is at it’s most rapid and the value of our sold option is eroding away with each day.

3) Contrary to buying options, if the stock does moves very little or not at all, we win!

Let’s say we received $0.90 cents per contract for selling the $30 puts and we paid $0.40 cents per contract by buying the $29 puts.

This transaction gives us an overall credit of $0.50 cents per contract ($0.90-$0.40).

If we sold 20 contracts of the $30 Put and bought 20 contracts of the $29 Put, this would give us a total credit of $1,000 (2000 shares x $0.50 cents).

So basically, if QQQQ expires at any price above $30 we will make our maximum profit, which is the initial credit we received ($0.50 cents).

On the other hand if QQQQ expires at any price below our breakeven point of $28.50, we will be facing a loss.

Let’s look at all the possibilities.

Once we have entered the trade the QQQQ can either:

1)Go up a little bit.

2)Go up a lot.

3)Go sideways.

4)Go down a little bit.

5)Go down a lot.

The beauty of this style of trading is that we will win in four out of five of these situations, and in many instances we can even win in all five!

Let me demonstrate how.

The QQQQ is trading at 30.50, if it moves up a little bit to say $30.80, our sold option ($30 Put) will expire worthless and we will keep all of the premium.

If the QQQQ moves up a lot to say $32, the same will occur and we will get to keep the premium.

If the QQQQ moves sideways and stays around $30.50, again the ($30 Put) will expire worthless and we will get to keep the premium.

If the QQQQ goes down a little bit to say $30.15, the same will occur and we will keep the premium.

OK, so far so good!

The only way we can LOSE in this trade is if the QQQQ goes down a lot to below $29.50 (which is the higher strike price minus the premium).

If it were the end of the month of expiry and the QQQQ was trading below $30 (our sold option strike price) we would be exercised and our total loss would be the difference between the sold option strike price and the current stock price less the total credit we received.

Our maximum loss will be realized at any price at or below our bought option strike price.

$30 - $29 = $1, less the premium of $0.50 cents = a maximum loss of $0.50 cents per contract or $1000 (20 contracts - 200 shares x $0.50 cents)

However, before it gets to this point, we would intervene. If the QQQQ is falling strongly then we were obviously wrong in our initial analysis.

Before we entered the trade though, we decided that if the QQQQ fell through support at $30 (which it does) we would move to plan B.

At this point we can do a little ‘magic’.

With the click of a mouse through our online broker, we can instantly jump from the bullish camp to the bearish camp!

We do this by buying back the options that we sold which in this case is the $30 puts, and this removes all of our obligation.

At this point though, we have taken a loss BUT, we are still long the $29 puts which would have already increased in value.

If the QQQQ wants to go down, then we are going to let it and just ride the $29 puts as far as they will go.

The more the QQQQ falls in price, the more our option will increase in value.

If it falls far enough, which in this case it does, (falling to $28.50) then we will not only make all our money back, we will start to move into a profitable position.

With credit spreads, we give ourselves the flexibility to change our position mid stream, and the chance to not only recoup some of our losses (if we get it wrong), but to possibly move from a loss into a PROFIT!

And this is just the plan B if things go wrong. Plan A, on it’s own, has statistically, a very high probability of success.

If on the other hand we had the view that the QQQQ would go down, we would simply construct a vertical spread with Out-of-the-money Calls.

We would sell the $31 Call and buy the $32 Call for an overall credit and should the QQQQ close below $31 by the end of the month, the spread would expire worthless and we would simply keep the premium.



Cory

James Thomas asked:


I make a living out of trading options…and a pretty good one at that!

For a long time I couldn’t say those words as I struggled just to hold on to my capital, let alone make it grow.

Though there were several reasons why I struggled (including being grossly undercapitalized and at the same time placing too much of my trading bank on individual trades) the main reason for my struggle I believe was a lack of focus.

By ‘lack of focus’ I mean that I was constantly jumping around trying to implement too many different option trading strategies from basic call and put buying, to putting on multi leg spread tades, believing that the more complex the strategy, the greater my chance of success.

I had become a ‘Jack Of All Trades & A Master Of None’ and the only people that were making money from my option trading were my brokers.

One day a friend of mine (a very successful futures trader) said to me, “You don’t need to know everything about trading the markets to make money and be a success. You just need to ‘focus’ and become an expert in one or at most a few different trading strategies and know exactly when and how to use them. The rest is just practice!”

Those words rang loudly in my ears and from that point onwards I narrowed my focus.

I decided that I would go back to the very basics of option trading and only buy calls and puts with the intention of becoming very good at picking the short-term direction of stocks.

Today, almost 2 years later and after going through a steep and often expensive learning curve, buying calls and/or puts is what brings in the largest portion of my current monthly income.

I also use a couple different spread trading strategies when the market moves sideways, but my main ‘focus’ is on picking the short-term direction of a small number of stocks that I have gotten to know VERY well (through backtesting), and then buying the appropriate option based on risk vs reward and my short-term outlook.

The success I’m enjoying today (19 profitable months out of the last 24) is due to becoming proficient at reading stock charts and developing an option trading system that I am comfortable with and performs well and by applying my trading rules consistently.

Ultimately you only need to know a few different strategies to be able to trade any stock up, down, or sideways.

The options themselves are simply the ‘tools’ to make money from your ‘opinions’ and in my experience the tools that are the easiest to use, have also been the most profitable.



Jeffrey

Dan Beatty asked:


A credit spread is a type of vertical spread. It is a trading strategy in which you are buying an option, call or put, at a certain strike price, and simultaneously selling the same type of option at a different strike price of the same month. The sold strike price must have a higher value thus creating a credit at the time the trade is placed. As time goes on the options premium will depreciate, and as long as the price of the stock does not go past the sold strike price at the end of expiration, you keep the full credit. There are two main ways to trade credit spreads - either a low capital risk trade or a high probability trade.

The low capital risk trade consists of making a trade using in the money (ITM) options or at the money (ATM) options to compose the credit spread. For example a stock trading at $55. You are bearish on this stock feeling that it will fall below $50 and stay there. You create a credit spread using calls called a Bear Call Spread. You would sell an ITM $50 call for $5.75 and then buy an ATM $55 call for $2.00 creating a credit for $3.75. The max value of the spread, the difference between strikes, is $5 (55-50), which makes your max risk is $1.25 (5-3.75). This is the low capital risk your are making $3.75 while risking $1.25 which makes for a 300% rate of return. So a high rate of return a low capital risk, what could be wrong with this trade? The probability of success. The stock needs to be below $50 and stay below $50 at the expiration of the options in order to be a successful trade. You need to be correct in your assessment of the direction of the trade.

The high probability trade consists of making a trade using out of the money (OTM) options to compose the credit. Using the same example of a stock trading at $55 that you are bearish, feeling it will fall and stay below $50, we create a different type of credit spread. To create the credit spread, you would sell an OTM $65 Call for $1.10 and buy an OTM $70 Call for $.50 creating a credit of $.60. The max value is still $5 which makes your risk $4.40, much higher than the previous example. This makes for a high capital risk making only $0.60 while risking $4.40 which makes for a 13% rate of return. The difference however is in the probability of the trade being successful. The stock will need to close below $60 at expiration of the options and since it already is below $60 and you feel the stock is weak and will be going lower. The probability of it gaining 10 points or 18% is unlikely in comparison to the previous low capital risk trade in which the stock is at 55 and has to fall 5 points and stay below $50 for the trade to be successful, which makes this credit spread a high probability of success.

Low capital risk but also a low probability of success for the beginner or a higher capital risk with a high probability of success makes for the two choices for the credit spread trader. The choice depends on the traders personality a more involved trader one that really likes to pay close attention to his trade and can make adjustments when necessary may prefer the low capital risk trade. The trader trading part time or is more conservative in their trades one that likes to place a trade and then just monitor it once daily would be more likely to choose the high probability trade. Which type of trader are you?



Joshua

Asoka Selvarajah asked:


Options Trading has a reputation for being extremely risky, but this reputation is in large part undeserved. True, option trades are extremely risky - even dangerous if you have no idea what you are doing. However, that is true of all forms of offline or online trading, and trading in options is no exception.

While options trading has this reputation among laymen, it is often considered to be a form of risk limitation with professional traders. After all, in what other form of investment can you guarantee the maximum loss you can suffer right at the point where you enter the trade?

Options are contracts that give the purchaser the right to buy or sell an underlying security, such as a stock, a bond or a commodity, at a fixed price and for a fixed time period only. You can find options on underlying securities such as stocks, mutual funds, bonds, commodities, and more.

Option trading gives you the chance to exploit a whole range of market opportunities that are unavailable with conventional online stock or forex trading. For example, one class of option trade allows you as the buyer to make money if you expect the market to move strongly in one direction or the other, but you are not sure in which. If you are the seller of position, by contrast, you are betting that the market either goes nowhere directionally and/or the volatility declines.

Trading in options can actually lower your risk. For example, whenever you buy an underlying stock, there is always the extremely small, but non-zero, risk that the company can go bust and the stock price can first be suspended and then go to zero. That means that your potential loss is the point difference between the price you entered the stock trade and zero, multiplied by the number of shares you own! If you had done the corresponding option trade by contrast, i.e. buying call options on the stock, your loss would be simply the price you paid for the options.

Where options are very risky is where untrained traders go “naked short”, as it is called. In one common example, they sell put options on a stock index future and collect the option premium as payment. This gives the buyer the right to sell the stock index future back to the put option seller at a fixed price, called the strike price. This is fine as long as the underlying index continues to rally and the strike price is basically never reached. However, in one famous example, one hapless option punter, who had been happily selling put options on the FTSE index futures for years and collecting the cash, got badly caught when the entire stock market crashed in 1987, and the option buyers exercised their right to sell their positions at prices much higher than the current market!

However, such foolishness apart, option trading can be an extremely profitable way to trade in stocks, forex, bonds, currencies or whatever. When used properly, they can actually limit your risk drastically. Option trading can allow you to create positions and exploit market opportunities not otherwise available. Best of all, if you combine options with the underlying instrument, you get to create a whole range of interesting risk profiles.

The key to success in option trading is, as with anything else in life, to study the subject hard before trying to trade and, if possible, begin by paper trading the market. Once you are satisfied that you know what you are doing and have a valid option trading methodology, then you can begin risking real money. Even then, you only trade very small to start with and with money that you can afford to lose. Once you know what you are doing, and your account size show some nice profits, then you can afford to trade progressively larger size for progressively larger profit.



Nathan