Put and Call Option Secrets » Finance

Day Trading – 5 Strategies To Help You Become A Successful Trader

admin — Sat, 23 Jan 2010 15:05:17 +0000

The day trade involves the practice of trading financial products like stocks, options shares, futures and currency. The transaction during the day ends the same day before the markets close.
Day trade can help make you high profits. We know people have succeeded in the day, and some even claim million dollar profits in a year.
However, the day trade, like other types of transactions on the market,comes with its risks. The fact remains – each day can really make some money, but we must also remember that the day can also make you suffer serious financial losses.
The day trading is considered very risky type of operation. We know that many people do go bankrupt because of the day trade.
Day exchange is recommended for people at the same time, experience and adequate funding. You must realize that almost every trader suffers losses during the first month of practice of the day. Many of them didn’t wait to recover their loss, they just gave up trading completely.
So keep in mind that every great player must have suffered a few losses when they started out
If you want to do day trading, you can minimize the risks and increase the opportunity to be able to enjoy it. To be a better trader try ans work with some of the following suggested strategies:
Six kinds of strategies are used for day traders make a profit:
1. Trends Following – Traders use this strategy of buying stocks on the rise or short-sell if it is declining. It is based on the idea that the trend will continue.
2. Range Trading – Traders use the strategy of buying stocks at low prices and selling when they rise. It is assumed that once a stock peaks, it will start going down and will do so for a while.
3. News Strategy – Trading with a news strategy is the most basic and common strategy. Traders buy a stock that was in the news as rising, and they see following bad news.
4. Scalping – This is the strategy where traders liquidated and established a good position quickly. This normally happens in a matter of seconds or minutes.
5. Short Stocks Strategy – This strategy assumes that a purchased stock is about to rise. Another strategy of shorting stocks is that traders borrow stocks from market brokers and sand resell in the hope that prices will come down and then buy again.
Day trading is a complex issue. You need some of these qualities to succeed at it:
First, it is a mentally challenging operation. You need to be able to keep your focus for long periods of time.
And then you need to be good with your money. Do not go overboard in the hope of making your millions quickly.
Do not expect to start making money immediately. You will probably lose out on the first month. Thats why you need to have a good amount of money to last you through this time.

Long and Short Option Strangle

admin — Tue, 12 Jan 2010 03:22:01 +0000

Stock trading is nevertheless one of the most profitable markets today. This is no doubt because investors, even beginners, can make money out of it. But of course, knowledge of how the market works is the key to succeed in this market. Profitable traders employ powerful strategies like option strangle. Almost always, the simplest strategy is the most effective. One of the most effective strategy is the option strangle. There are two types of strangle strategies – the long strangle or also known as the buy strangle and the short strangle. Depending on whether you buy or sell options should you use these option strangle strategies.

Long option strangle is a neutral strategy in options trading. It involves simultaneous buying of a slightly out-of-the-money put or call of the same underlying stock and expiration date. Long options strangle has unlimited profit. This means that it has limited risk strategy which is taken once the option trader thinks that the underlying stock has significant volatility in the near term. Long option strangle strategies are debit spreads because net debit is taken to the enter the trade. When it comes to long gains, long option strangle strategy is viable especially if the underlying stock price makes a very strong move either upwards or downwards at expiration.

When it comes to risk, long option strangle can hit maximum loss when the underlying stock price on expiration date is trading between the strikes prices of the options that are bought. In this case, both options expire valueless and the trader losses the whole initial debit taken when entering the trade. In short option strangle, the trader either write or sell a Call and Put Option. This means that the trader is short on the options. Here, both the Call and Put have the same expiry date and lies on the same stock or index. Short option strangle is basically the option strategy wherein you sell Call and Put instead of buying them.

Short option strangle works effectively at stable markets where equities are fairly priced. For a trader, it is a big no-no to enter a position in short strangle just before announcement of the quarterly results or the key financial data. In short option strangle, the loss that can happen is unlimited. Therefore, it is recommended to buy two deep out of the money Call and Put so as to limit your losses. Short option strangle is a limited profit yet has unlimited risk. It is a credit spread because the net credit is taken to enter the trade.

Maximum profit for the short option strangle happens when the underlying stock price on expiration date is trading between the strike prices and sold options. At this price, the option strangle doesn’t have a value and the options trader must keep the whole initial credit as profit. Huge losses in short option strangle can only occur when the underlying stock price makes a powerful move either upwards or downwards at expiration of the option contract.

Forex Brotherhood Trading To Your Success

admin — Sun, 03 Jan 2010 14:35:03 +0000

If you do not know what you are doing you could be at great risk of losing your investment, because bad forex trades are common even among those who call themselves experts.
So how can anyone make money with forex trading? Well, in my experience with the forex trade market, you have basically three ways of successfully approaching the forex trading business:
1) Get your hands a good forex trading course, and dedicate a reasonable amount of time learning how to correctly execute winning forex trades. This approach is definitely a desirable one, because knowledge is always the most precious asset you can have.
But the thing is that this road will take some time to deliver results, due to the fact that you need to put your newly acquired forex trade abilities to the test and then dedicate considerable time during the day to catch the best forex trade opportunities.
2) Get yourself a recognized forex trading software with the ability to provide you with signals for you to enter and exit the market at the precise moment. This approach will likely put you on many profitable forex trades, but you will have to be attentive at the signals during the day so you can enter and exit the market at the right moment.
If you pick a reliable software, your forex trades will make you money right from the start, because in this scenario you will not have to become an expert forex trader to make profitable trades.
3) Invest in a good automated trading software designed to perform forex trades automatically. To me, this is the best suited option for a beginner, because it will make a very respectable profit out of your investment, and it will keep you away from loss 90% of the time.
This will allow you to enter the forex trade market on solid profits, giving you time to gradually master all the basics of forex trading so you can enhance your overall performance everyday. The best thing about this option is that you have to do nothing, but merely monitor the results every now and then, so you can actually make money on autopilot.
Even though I did not start my forex trades with an automated forex trading system, I would definitely advise anyone new to the market to start with this option. And for someone like me, already into forex trading for some time.
To your forex success. Sure to see you on the top someday.

Trading the Infamous Iron Condor

admin — Sat, 02 Jan 2010 14:25:04 +0000

Placing iron condor spreads on the broad market indexes is a relatively conservative, non-directional trading strategy that may be used for consistent income generation. This strategy profits as long as the index trades within the channel formed by the two spread positions. It is best used during sideways or slowly trending markets.Condor SpreadsA condor spread is a debit spread, established by placing a bear call spread at or above resistance and placing a bull call spread at or below support. The condor may also be established using puts with a bear put spread above and a bull put spread below. The iron condor is a variation on this trade by using a bear call spread above and a bull put spread below the price of the underlying stock or index. The iron condor is a credit spread and achieves maximum profitability if the price of the underlying closes between the short options (the strike prices we sold) of the two spreads at expiration. In that case, all options expire worthless and you achieve the maximum profit, i.e., the credits originally collected. The profitability of the iron condor is assisted by the fact that the broker only requires margin for one of the credit spreads, effectively doubling the return on investment.Condor spreads are effective when the underlying is expected to trade within the channel defined by the spreads during the life of the options. The closer one places the spreads to the current price of the underlying, the higher the returns; however, this comes with a higher risk of the price of the underlying stock or index entering one of the spreads and causing a loss on that spread.Trading the stock indexes with condors is effective for several reasons: 1) the indexes generally move slower than most individual stocks, 2) the indexes are less affected by an individual stock’s bad news, 3) the premiums of the index options are generally much higher than individual stock options, 4) index options trade in high volume because large institutional investors use these options to hedge their portfolios; this results in high liquidity, and 5) 60% of the gains with broad index options are taxed at long term capital gains rates, regardless of the length of time in the trade. Money ManagementMoney management refers to the rules used for determining the amount of capital devoted to a trade and spreading risk among strike prices and time. Determine the total dollar value you wish to devote to this strategy. For this example, we will assume we have a $100,000 account we will exclusively trade using the iron condor strategy. Take 40% of the total portfolio ($40,000) and divide by $1000 to get 40. This is the total number of contracts you will trade in this strategy each month (40 contracts total in the bear call spreads and 40 contracts total in the bull put spreads). This approach lessens your exposure during any particular month and leaves you room in the account to put on next month’s positions before last month’s positions have expired. This also reserves an additional 20% of capital as a safety margin and for possible use in trade adjustments. IMPORTANT: when learning this or any options trading strategy, start very small with one or two contracts and gradually increase your size as your experience and confidence grow.Money management also includes the concept of limiting your losses. Playing iron condors on the indexes as outlined in this paper are conservative, high probability trades. However, the potential loss is quite large, even though the loss has a low probability of occurrence. Therefore, one loss may wipe out several months of profits. Stop loss and adjustment rules and the discipline to strictly follow them are critical to the success of trading iron condors. Those stop loss and adjustment systems are taught in detail in the Advanced Options Trading Strategies course offered by Parkwood Capital, LLC.Timing (Days to Expiration)You can establish your condor position sometime in the range of 40 to 50 days until expiration. The precise time is not critical. The trade-offs are as follows: the earlier I put on my spread positions, the more time premium is present in the options and therefore I can receive the minimum credit I am willing to accept farther out from the current levels of the index; therefore, more safety margin is achieved. However, the more time I use in the spread, the more time that exists for the market to move against me; thus, I am incurring more risk. As time decay reduces the option premiums, I must move my spreads in closer to achieve a reasonable credit, reducing my safety margin and increasing my risk. It is also possible to trade the iron condor starting at about 30 days to expiration, but the system rules and adjustments must be adjusted accordingly.Determining Optimal Entry PointsSome traders place the call spreads when the index is hitting resistance and appears to be turning down, and place the put spreads when the index is hitting support and appears to be turning back upward. This will maximize the size of your credits. However, if the index continues to move in that direction, your position could be in trouble quickly and you will not have the compensating spread position helping to hedge your position. For this reason, I generally establish both the call spreads and put spreads on the same day.Choosing the StrikesWe can apply basic statistics to our deciding which strike prices are “far enough” out to be safe. The classic “bell shaped curve” we have seen in various contexts is the mathematical function known as a normal or Gaussian distribution. If we assume that future moves of the index price will be random and similar in frequency and absolute size to previous fluctuations up and down, then we can calculate the probability of the index price being at a particular price on a particular date in the future. I calculate the standard deviation for the index, based upon its level of implied volatility and the time left to expiration. The call spreads are placed just outside one standard deviation above the index price and the put spreads are placed just below one standard deviation below the index price. This results in an iron condor position with a probability of success of approximately 80-85%. The details of this methodology are taught in the Equity and Index Options course offered by Parkwood Capital, LLC.Entering the Order and Getting FilledNow that we have determined the strike prices for our spread, we need to calculate the credit we are going to ask for in our order. Compute the natural price for the credit spread, the natural debit spread price, and the midpoint of the spread (most online brokers calculate this for you).Enter your order at a credit limit at the midpoint and wait to see if the order is filled. After a few minutes, adjust the credit downward by $0.05. Repeat until both spread orders are filled. But do not drop below the lower quartile of the bid/ask spread.Never place an order for less than $0.60 to $0.70 in credit; trading commissions become too large a factor for smaller credits. My spread credits normally range from $0.60 to $1.05 per spread or about $1.20 to $2.10 per iron condor.Stop Losses and AdjustmentsThe topics of setting stop losses and the variety of adjustment methodologies available are beyond the scope of this paper. An effective, but simple, risk management technique is to monitor the debit spread necessary to close your condor spreads, and when that debit is double the original credit received for that spread, close that side of the condor. This technique will close out positions more frequently, but it will result in very small losses or near breakeven results in the “bad” months when the index moves against you.Index Option SettlementIndex options are cash settled options; there is no underlying instrument like stock shares to be called away or put to you. You simply lose or gain the dollar value at expiration, e.g., you hold 10 contracts of the $1400 call and the SPX settlement price is $1405; your account will be credited with $5,000 ((1405 – 1400) x 100 x 10). If you were short the $1400 calls, your account would be debited $5,000.Most index options are somewhat unusual in that they cease trading for the month at market close (4:15 pm ET) on the Thursday before expiration, but the settlement price is not that closing price on Thursday or the opening price Friday morning. Therefore, all final adjustments to positions must be done on Thursday before the close. On Friday morning, the settlement price will be computed based upon the opening prices of each of the stocks that make up that index. Since each stock may not trade immediately at the open, the settlement value may not be available until later that Friday morning. Since the settlement price may vary several dollars up or down from Thursday’s close, one must be cautious about going into settlement with any spread positions remaining open.Expected ReturnsIf you are placing your spreads for credits of $0.70 or more, then the returns for that iron condor will be about 15% for the month (remember that margin is only charged for one half of the iron condor). If we are using roughly half of our capital for an iron condor each month, then you can expect to average returns of about 6% to 8% per month. Of course, you may have to defensively close one of the spreads a few times per year and that will reduce the annualized return of this strategy. SummaryThe iron condor trading strategy is a relatively conservative, non-directional options strategy that may be used for consistent income. However, this strategy is typical of low return strategies with high probabilities of success. The probability of a loss is small, but one large loss will wipe out several months of profits. Thus, the key to success for trading iron condors is solid risk management rules for entry and exit, stop losses, and adjustments. When deployed conservatively as outlined herein, this strategy should reasonably be expected to return 5% or more per month.

Introduction To Options Trading, Part 1

admin — Fri, 01 Jan 2010 14:41:58 +0000

The study of options can expand your perceptions about the range of possibilities. Most people are familiar with two forms of investment: equity and debt. There is a third method, however, and that third method is far more interesting than the other two. Its attributes are unlike any that most people understand-and these differences can be viewed as a troubling set of problems, or as a promising set of opportunities.
Let’s begin with a brief review, laying the groundwork about the two basic ways to invest. An equity investment is the purchase of ownership in a company. The best-known example of this is the purchase of stock in publicly listed companies, whose shares are sold through the stock exchanges. Each share of stock represents a portion of the total capital, or ownership, in the company.
When you buy 100 shares of stock, you are in complete control over that investment. You decide how long to hold the shares and when to sell. Stocks provide you with tangible value, because they represent part ownership in the company. Owning stock entitles you to dividends if they are declared, and gives you the right to vote in elections offered to stockholders. (Some special nonvoting stock lacks this right.) If the stock rises in value, you will gain a profit. If you wish, you can keep the stock for many years, even for your whole life. Stocks, because they have tangible value, can be traded over public exchanges, or they can be used as collateral to borrow money.
Example
Equity for Cash: You purchase 100 shares at $27 per share, and place $2,700 plus trading fees into your account. You receive notice that the purchase has been completed. This is an equity investment, and you are a stockholder in the corporation.
The second broadly understood form is a debt investment, also called a debt instrument. This is a loan made by the investor to the company, government, or government agency, which promises to repay the loan plus interest, as a contractual obligation. The best-known form of debt instrument is the bond. Corporations, cities and states, the federal government, agencies, and subdivisions finance their operations and projects through bond issues, and investors in bonds are lenders, not stockholders. When you own a bond, you also own a tangible value, not in stock but in a contractual right with the lender. The bond issuer promises to pay you interest and to repay the amount loaned by a specific date. Like stocks, bonds can be used as collateral to borrow money. They also rise and fall in value based on the interest rate a bond pays compared to current rates in today’s market. In the event an issuer goes broke, bondholders are usually repaid before stockholders as part of their contract, so bonds have that advantage over stocks.
Example
Lending Your Money: You purchase a bond currently valued at $9,700 from the U.S. government. Although you invest your funds in the same manner as a stockholder, you have become a bondholder; this does not provide any equity interest to you. You are a lender and you own a debt instrument.
The third form of investing is less well known. Equity and debt contain a tangible value that we can grasp and visualize. Part ownership in a company or the contractual right for repayment are basic features of equity and debt investments. Not only are these tangible, but they have a specific lifespan as well. Stock ownership lasts as long as you continue to own the stock and cannot be canceled unless the company goes broke; a bond has a contractual repayment schedule and ending date. The third form of investing does not contain these features; it disappears-expires-within a short period of time. You might hesitate at the idea of investing money in a product that evaporates and men ceases to have any value. In fact, there is no tangible value at all.
So we’re talking about investing money in something with no tangible value, that will absolutely be worthless within a few months. To make this even more perplexing, imagine that the value of this intangible is certain to decline just because time passes by. To confuse the point even further, imagine that these attributes can be an advantage or a disadvantage, depending on how you decide to use these products.
These are some of the features of options. Taken alone (and out of context), these attributes certainly do not make this market seem very appealing. These attributes-lack of tangible value, worthlessness in the short term, and decline in value itself-make options seem far too risky for most people. But there are good reasons for you. Not all methods of investing in options are as risky as they might seem; some are quite conservative, because the features just mentioned can work to your advantage. In whatever way you might use options, the many strategies that can be applied make options one of the more interesting avenues for investors. The more you study options, the more you realize that they are flexible; they can be used in numerous situations and to create numerous opportunities; and, most intriguing of all, they can be either exceptionally risky or downright conservative.
Tip
Option strategies range from high-risk to extremely conservative. The risk features on one end of the spectrum work to your advantage on the other. Options provide you with a rich variety of choices.

Trading Options For Dummies (For Dummies (Business & Personal Finance)) (Paperback)

admin — Wed, 30 Dec 2009 22:42:55 +0000

Thinking of trading options, but not sure where to start? Trading Options For Dummies starts you from the beginning with clear, step-by-step advice on how to use top option strategies to reduce your risk while boosting your income and enlarging your retirement portfolio with index, equity, and ETF options. This plain-English guide explains the common types of options and helps you choose the right ones for your investing needs. You find out how to weigh option costs and benefits, combine options to reduce risk, and build a strategy that allows you to gain no matter what the market may bring. You’ll learn the basics of market and sector analysis and what to look for when trying out a new option strategy. You’ll also find what you need to know about options contract specifications and mechanics. Discover how to: Understand option contracts and orders Determine and manage your risk Guard your assets using options Trade options on securities (more…)

Stock Option Trading – New Options Clearing Corporation Rule

admin — Sun, 27 Dec 2009 14:24:40 +0000

A few years ago on a Monday morning, I checked my brokerage account and to my surprise it showed that I had purchased 1,000 shares of AMD for a total cost of $15,000. The payment for this purchase was taken out of my brokerage money market account.
Why surprised you may ask. I had not put an order for this purchase nor did I really intend to buy AMD. I get to this in a little bit.
Had I wanted to sell the stock on that day, I would have received around $14,500, a loss of $500 in just a few hours. In the end it worked out and I sold that particular stock a few months later for a handsome profit.
But on that day I had a paper loss of $500 and if I didn’t have enough money to pay for the purchase, the $500 loss would have been the least of my worries.
So, how did I end up with a stock that I did not necessarily want or order?
Automatic exercise threshold for equity options is the reason.
Today, I received the following message from two of my brokerage firms that reminded me of that day.
“Beginning October 2006, the Options Clearing Corporation (OCC) will implement a change to reduce the automatic exercise threshold for equity options. The current threshold of $0.25 will be set at $0.05 for expiring options that are automatically exercised by the OCC. The threshold for index options will remain at $0.01.”
Who cares about a measly $0.20? You can’t even buy a stick of gum with that.
For options traders this could mean a huge potential loss, margin calls and a whole lot of trouble.
Let’s go over a few simple reminders about options trading. Options are contracts that allow a person to buy or sell securities, for example stocks, at a predetermined price called option exercise price and on/or before a predetermined date in the future called option expiration date.
Options represent a reserved right but not an obligation. In other words, the holder of this right, that is to say the buyer, can exercise this right or not.
For example if you own a Microsoft January 25 Call Option, it gives you the right to buy Microsoft for $25.00 on or before third Friday in January. It is obvious that you would not exercise your option if Microsoft is at $20.00. In that case, if you really like Microsoft, you just go to open market and buy it for $20.00.
However, if Microsoft soars to $40, then you want to exercise your right (option) and buy the stock at $25 and turn around and sell it at $40 or keep it for further potential increase.
To exercise your options you need enough money to pay for buying the stock. Each option contract represents 100 shares of stocks, so 10 contracts represent 1000 shares of stocks. In our Microsoft example, for you to exercise 10 options contracts at the price of $25.00 requires $25,000 to be in your account.
If you don’t have that money, well, you may face margin calls and some other not so pleasant consequence. This is where the new change can cause some serious damage.
Options are a right and not an obligation except that you have to deal with automatic exercise threshold. This is the threshold the Options Clearing Corporation (OCC) uses to determine if they should exercise your right on your behalf.
In the letter I received from my brokerage firm, they informed me that if the price of the stock is only a nickel ($.05) above the exercise price, that would mean they will automatically buy the stock for me according to this new rule.
So what can options traders do not to deal with unwanted stocks?
First, they can and should watch the stock price and be proactive in the process especially on the option expiration date. Option trading is not by any stretch of imagination a passive approach. They can also call their brokerage firm and find out what other alternatives are available to them.
Seasoned options traders know what they should do and the aim of this article is to bring some facts to the attention of those who are just getting started.
In investing and in life I remember what Robert Grant said, “Men and women everywhere must exercise deliberate selection to live wisely.”
* DISCLAIMER: Vishy Dadsetan, http:/www.MyPersonalFinance.com or My Favorite Shop, Inc. do not endorse any product or company. This article does not provide investment, legal, insurance, or other professional services. If investment or other expert assistance is required, the services of a competent professional should be sought. Although Vishy Dadsetan has made every effort to ensure the accuracy and completeness of the information contained in this site, it assumes no responsibility for errors, omissions, inaccuracies, or inconsistencies.
© Vishy Dadsetan

The Benefits and Risks of Selling a Lease Option on Your Home

admin — Fri, 11 Dec 2009 02:42:47 +0000

Stock Option Trading Millionaire Principles

admin — Sat, 28 Nov 2009 15:31:38 +0000

INTRODUCTION
Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs.
I have seen paupers become millionaires overnight…
And
I have seen millionaires become paupers overnight…
One story told to me by my mentor is still etched in my mind:
“Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock market’s direction. When they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He said, ‘One said BULLISH and the other said BEARISH!’”
The point of this illustration is that it was the trader who was wrong. In today’s stock and option market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategy and in the mental attitude and discipline one uses in implementing that strategy.
I share here the basic stock and option trading principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you are doing right and what you may be doing wrong.
You may have read ideas similar to these before. I and others use them because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your stock and options trading.
PRINCIPLE 1
SIMPLICITY IS MASTERY
When you feel that the stock and options trading method that you are following is too complex even for simple understanding, it is probably not the best.
In all aspects of successful stock and options trading, the simplest approaches often emerge victorious. In the heat of a trade, it is easy for our brains to become emotionally overloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.
PRINCIPLE 2
NOBODY IS OBJECTIVE ENOUGH
If you feel that you have absolute control over your emotions and can be objective in the heat of a stock or options trade, you are either a dangerous species or you are an inexperienced trader.
No trader can be absolutely objective, especially when market action is unusual or wildly erratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors, the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as many critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.
PRINCIPLE 3
HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES
This is the most important principle.
Most stock and options traders do the opposite…
They hold on to their losses way too long and watch their equity sink and sink and sink, or they get out of their gains too soon only to see the price go up and up and up. Over time, their gains never cover their losses.
This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have been undisciplined, you will see its truth.
PRINCIPLE 4
BE AFRAID TO LOSE MONEY
Are you like most beginners who can’t wait to jump right into the stock and options market with your money hoping to trade as soon as possible?
On this point, I have found that most unprincipled traders are more afraid of missing out on “the next big trade” than they are afraid of losing money! The key here is STICK TO YOUR STRATEGY! Take stock and options trades when your strategy signals to do so and avoid taking trades when the conditions are not met. Exit trades when your strategy says to do so and leave them alone when the exit conditions are not in place.
The point here is to be afraid to throw away your money because you traded needlessly and without following your stock and options strategy.
PRINCIPLE 5
YOUR NEXT TRADE COULD BE A LOSING TRADE
Do you absolutely believe that your next stock or options trade is going to be such a big winner that you break your own money management rules and put in everything you have? Do you remember what usually happens after that? It isn’t pretty, is it?
No matter how confident you may be when entering a trade, the stock and options market has a way of doing the unexpected. Therefore, always stick to your portfolio management system. Do not compound your anticipated wins because you may end up compounding your very real losses.
PRINCIPLE 6
GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY
You know by now how different paper trading and real stock and options trading is, don’t you?
In the very same way, after you get used to trading real money consistently, you find it extremely different when you increase your capital by ten fold, don’t you?
What, then, is the difference? The difference is in the emotional burden that comes with the possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after some successes.
After a while, most traders realize their maximum capacity in both dollars and emotion. Are you comfortable trading up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.
PRINCIPLE 7
YOU ARE A NOVICE AT EVERY TRADE
Ever felt like an expert after a few wins and then lose a lot on the next stock or options trade?
Overconfidence and the false sense of invincibility based on past wins is a recipe for disaster. All professionals respect their next trade and go through all the proper steps of their stock or options strategy before entry. Treat every trade as the first trade you have ever made in your life. Never deviate from your stock or options strategy. Never.
PRINCIPLE 8
YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE
Ever followed a successful stock or options strategy only to fail badly?
You are the one who determines whether a strategy succeeds or fails. Your personality and your discipline make or break the strategy that you use not vice versa. Like Robert Kiyosaki says, “The investor is the asset or the liability, not the investment.”
Understanding yourself first will lead to eventual success.
PRINCIPLE 9
CONSISTENCY
Have you ever changed your mind about how to implement a strategy? When you make changes day after day, you end up catching nothing but the wind.
Stock market fluctuations have more variables than can be mathematically formulated. By following a proven strategy, we are assured that someone successful has stacked the odds in our favour. When you review both winning and losing trades, determine whether the entry, management, and exit met every criteria in the strategy and whether you have followed it precisely before changing anything.
In conclusion…
I hope these simple guidelines that have led my ship out of the harshest of seas and into the best harvests of my life will guide you too. Good Luck.

How to Trade Call Options

admin — Thu, 26 Nov 2009 18:00:01 +0000

The majority of casual investors buy and sell stocks. If they are bearish on a stock, some will even short-sell stock. But relatively few investors fully understand and take advantage of trading options.

With stocks, you own a small piece of a company. However, with options, you purchase the right to buy or sell underlying stock. There are two basic types of options – calls and puts. When you purchase a call option, you buy the right to purchase a stock at a specific price before a specific date. When purchasing put options, you buy the right to sell a stock at a specific price before a specific date. Like stocks, you can both buy and sell options.

Traders consider buying call options when they are bullish on an underlying stock. As the stock rises, call options, in general, also rise. There are, though, some important differences between buying an underlying stock and its call options. First, options are cheaper than buying the underlying stock. If you a share of XYZ is $100, it may cost you the same to control 1000 shares with options.

Options are cheaper because they have a strike price and an expiration date. The strike price of a call option is the price at which you have the right to purchase the stock. If the price of an underlying stock is above the strike price, the call option is considered “in-the-money.” If the price of the stock is below the strike price, the call option is “out-of-the-money” while it is “at-the-money” if the stock is the same price as the strike price. Call options that are in-the-money have inherent value. For example, let’s say the price of stock XYZ increased to $105. You, however, own a call option with a strike price of $100. You thus have the option to buy XYZ at $100 while selling it for $105. This in-the-money call option thus as an inherent value of $5. Call options that are at-the-money do not have any inherent value. For instance, it would not be worth it to exercise a call option with a strike price of $15 because you cannot sell it for a profit. Call options that are out-of-the-money actually have a negative inherent value since the stock would have to rise just to get to the strike price. The farther the stock price is from the strike price, the lower the inherent value.

The expiration date is the time until which you have to exercise your option. Because options expire, they have a time value. As the expiration draws nearer, the time value of call options decrease because there is less time for the underlying stock to increase in value. A call option that expires in a year will therefore have much greater time value than a call option that expires in a week. The price of options are roughly calculated by:

Option price = inherent value + time value

There are several exit strategies with call options. If you do nothing and let an option expire, call options that are at-the-money or out-of-the-money will become worthless – they will have no inherent or time value. However, if a call option is in-the-money at expiration, you can exercise your option for a profit. Many option trading companies will automatically exercise options that are in-the-money at expiration for you.

Most option traders, however, have no intention of ever owning the underlying stock. Traders often sell their options well before expiration. Call options, in general, increase in value with the underlying stock. Thus, if a stock rises, you can usually sell a corresponding call option at a profit.

This can be beneficial because it leverages your capital. Let’s say you have $1000 to invest. If a share of XYZ costs $100, you can buy 10 shares. However, a call option of XYZ, with a strike price of $100, costs only $10. You can thus alternatively purchase 100 call options of XYZ. If shares of XYZ go to $105 at expiration, owning the stock would give you a profit of $50. Owning the options, however, would give you a profit of roughly $500. The risk in call options, however, is that this increase in price needs to occur before the expiration date.

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