Wincent Loh asked:


An options trading rolling strategy is a strategy where you move your strike point to a new strike point during the month. Rolling basically means moving. In the world of options trading, this movement happens when you move positions from one strike point to another. That can either happen when you move points vertically (within the same month) or horizontally (to another month) or both.

You see, in order to maximize returns, investors should use the covered call strategy every month for a long time. That requires that the investor move, or roll, the strike position when the option expires. That is where the term “rolling” comes from.

Part of options trading rolling strategy also involves knowing when to avoid rolling, though. Occasionally an investor may decide not to roll the strike position. The purpose of that is to allow the capital to appreciate more. That is a rare scenario, however, because, if the call option is exercised when share becomes in the money, it could be called away.

As an option’s expiration approaches, there can be either one of two outcomes. Either the short option could be out-of-the-money or in-the-money. If the option is out-of the-money, it is worthless. The investor simply sells the next month’s call, after letting the option expire. If, on the other hand, the option ends up in-the-money, in order to keep the stock all the investor needs to do is sell the next month’s call after buying the short option back. Even though that sort of trade consists of two trades, buying and selling, it is considered one trade. It is also known as a spread. If you want to roll out your covered call or buy-write, you need to utilize such a spread. That way, you can buy back the short option and keep your stock.

Your second month option would be sold short. Thus, your covered call strategy would be re-initiated. The remaining positions are the short calls and long stock. You have to buy back the option that you are short at the beginning of the month. You would not have a choice for your front month option. However, you would have the choice to sell near term or with a farther expiration date for the next month option.

As you can see, rolling can be a bit complicated. However, you may find it well worth it, in the long run. The trick is to be careful to make the most informed decisions possible. Remember to never risk more than you can afford to lose either. After all, it is not an exact science.

So, now that you understand the options trading rolling strategy better, you may want to consider it. There is something to be said for using options trading rolling strategy to improve your earning potential, after all.



Bill Reinhard

James Thomas asked:


Beyond all the ‘hype’ what is it that makes option trading so good?

This is a question that I wish more people would ask, but the thing is not too many people know they even exist!

The main reason that I love option trading is that options provide the opportunity to turn a small or modest amount of money into a large amount of money quickly!

How is this possible you might ask?

Well before I get into the ‘how’ that let me show you exactly ‘what’ options are.

Options are simply ‘contracts’ that give the buyer the right or choice (but not the obligation) to buy or sell shares in a particular company, at an agreed price, on or before a set date.

Now the thing is, as an option trader I am not interested in buying or selling stocks, I am only interested in buying and selling the options on stocks.

I want to buy an option for one price and then onsell it to someone else for a higher price and make a profit before the option expires.

Now whether or not I am able to do this depends on two main things:

1) Whether the underlying stock (the stock that the option is concerned with) goes UP or DOWN in price.

and

2) The type of option that I have bought.

Now, there are 2 types of options, CALLS and PUTS.

Call options give us the right to BUY shares in the underlying stock.

PUT options give us the right to SELL shares in the underlying stock.

As I said before, we are not interested in buying or selling the underlying stock, only in making a profit by buying the options (on a stock) and then onselling those options to someone else for a profit.

However, the only way we can make a profit is if the option itself increases in value.

So What makes options go up or down in price?

CALL options increase in value when the underlying stock goes UP.

PUT options increase in value when the underlying stock goes DOWN.

This may sound confusing if you are new to option trading, but basically what we want to do is to buy CALL options on a stock when we think it is about to go UP in price or buy PUT options if we think the stock is about to go DOWN in price.

If we are right and the stock moves in our desired direction, UP for CALLS or DOWN for PUTS, we will make money.

The concept is really quite simple once you accept that it is possible to make money whether the underlying stock moves UP or DOWN.

Now here’s the thing that makes option trading so appealing.

Options only cost a fraction of what it would cost to buy the underlying stock itself and a small move in the price of the underlying stock, creates a much larger move in the price of the option by 10 times to sometimes 100 times!

Let me give you an example, let’s say that GE is trading at $31.00 per share. If we wanted to buy 1000 shares in GE today it would cost us $31,000.

However, the option to BUY GE (CALL options) for $30 at any time during the next 60 days is only $2.00 per share. If we bought enough options to give us control over 1000 shares in GE it would only cost us $1,500.

Now let’s say that GE goes up by $1.00 to $32.00 during the next 3 weeks.

If we had bought the shares in GE we would have have made a $1,000 profit (1000 shares x $1.00 per share) or 3%+ return and if we bought the options on GE we still would have only made $1,000 (1000 shares x $1 per share) however as we would have only invested $2,000 into the trade, this would be a return of 50%!

By trading the options instead of the stock it is possible to make far greater returns and at the same time risk only a fraction of the capital.

This is called LEVERAGE and this is the main advantage to option trading over other wealth creation strategies.

However, just as leverage can work for you it can just easily work against you.

This is why you need a solid trading system that stacks the odds of success in your favor on every trade and at the same time reduces your risk.



Jonatan Wolma

Sam Perdue asked:


Option trading remains a mystery to many new traders. There are elements to option trading that traders should know about to make trading easier. In this article, I give an example of how an options trader might use implied volatility in his trading. Then, I discuss implied volatility charts and how they are created.

There is a definite connection between time value and volatility. As an option moves further away from its strike price time value decreases. Since the option has less time value, it will also have lower implied volatility. In making this observation, we can see the link between the volatility and time value. Once we understand this relationship, we can use this to our advantage in our option trading. So, let’s look at an example of how this might be useful.

Let’s suppose that we have a calendar spread on XYZ stock. To create the spread, we sold the December 50 call for $2.00 and purchased the March 50 call for $4.50 when the stock was at $50. The net result is a debit of $2.50 to our account. Typically, traders like to place his type of trade when the volatility in the options sold is higher than the volatility of the options purchased. All things being equal, this lets them know that they are selling more time value than they are purchasing. Traders sometimes refer to this as volatility skew.

Now, let’s say that after we place our calendar spread the stock begins to move up. As it does, the intrinsic value of our options increase and the time value of our options decrease. So, let’s say that we have about two weeks left before the December 50 call options expire and the stock has moved up to $55. The December 50 call options are trading for $5.75. This means that the time value of this option has decreased by $1.25 while the intrinsic value has increased five dollars.

If we allow the December 50 call option to remain in the money, it is likely that we will be exercised at options expiration. Also, as the option’s time value continues to decrease, it also increases the likelihood that the option will be exercised. In order to prevent this from happening, the trader could purchase the December 50 call option initially sold while selling an option with more time value.

Suppose the trader purchases the December 50 call option for $5.75 and sells the February 55 call option for $5.70. The result is a net debit to the account of five cents. So, we collected $1.25 of time value on the December 50 calls and sold an additional $5.70 worth of time premium when we sold the February 55 call options. This means that we collected a total of $6.95 of time premium. As with the options example from last week, this was accomplished by covering the option after its time value and volatility had decreased due to market movement and selling an option that has more time value and higher volatility.

Implied Volatility charts

Novice traders sometimes look at implied volatility charts without really understanding how they are created. This usually comes to light as they begin to realize that volatility can be calculated for any option. And, the volatility value will likely be different for each option. So, if this is the case, where does the implied volatility value come from that is used to create these charts?

Typically, implied volatility charts are created by using options which are at the money and will expire within the next 30 days. So if we look at the last point on a implied volatility chart, the volatility value would be derived from the option that was at the money as of the close of the trading day.

For example, let’s suppose that we are looking at an volatility chart for XYZ Company. Today XYZ Company closed at $25. If we use and options pricing model on the $25 option, we can derive the volatility. If we do this every day, we can create a chart of daily implied volatility.

A good understanding of volatility is important to option trading. Seasoned options traders understand how to use implied volatility to consistently make money. Once you understand what it is and how to use in option trading, you can take steps to place the odds of making money in your favor.



Paul