Put and Call Option Secrets » Investment

Developing Forex Trading Skills

admin — Fri, 22 Jan 2010 02:39:47 +0000

At some point, if they last long enough, all traders discover that successful trading is not the inevitable result of a good trading strategy or system. If all we needed was a good system or indicator we would all be successful traders. Yet clearly we are not, far from it, there are very few traders making their living consistently from the markets.
Technical analysis is a vast and well researched subject. Many minds have poured their heart and soul into searching for the holy grail of trading: the system, strategy or indicator that will yield to them unlimited wealth and glory. Yet with all this depth of knowledge readily available, trading profits remain as elusive as ever. If we were to take a scientific approach to evaluating technical analysis we would have to conclude that it is of limited value.
System vendors though, will continue to exploit our desire to believe that there really is some secret knowledge that will enable us to transform into super traders as soon as we expose ourselves to their secrets. It is a very tempting fable to believe in, it offers an answer to our prayers and our problems, it engages our ego (how great to conquer the markets and escape the drudgery of work etc.) and it allows us, briefly, to relinquish the painful self-doubt that we are unconsciously fighting.
The system vendors flatter and deceive us in the same way that street sellers sell exclusive, stolen perfume, which is usually no more than bottled water. We are easily deceived when we are told exactly what we want to hear.
Let us pretend that a system vendor really has a system that works as they claim. Let us also assume that his cup truly does ‘runneth over’ and he sincerely wishes to share his knowledge as a way of repaying his good fortune; and finally let us assume that he charges a fee, not for his own gain, but to ensure that his clients really take him seriously. Assuming all this, does it make sense to make his knowledge available in a book or a seminar?
We all have discovered that trading is not easy and one of its biggest challenges is following our signals, be they based on an indicator or our intuition. It is so easy to doubt our signal when the moment to act arrives, we hesitate and the opportunity is gone. So having learnt our hero’s strategy we then have to become adept at implementing it, which brings with it a whole host of problems that only become apparent as we attempt to execute the system. Now the issues that get in the way of implementing a strategy are not issues that any system vendor can resolve in a book or a weekend.
In fact the system vendor would have it that all our previous problems with trading result from not having a good enough strategy, which of course is a problem he can easily solve for us. The basic premise of the system vendor is that all the psychological issues in trading, in fact all the problems we have in trading, are a consequence of not having a really good system or strategy. This I do not believe, it is like claiming that we could all play golf like Tiger Woods if we had a certain set of golf clubs, or that we could achieve the same level of success as Pete Sampras if we used the latest racket.
We all need golf clubs to play golf or a tennis racket to play tennis, no question; but they do not determine our success. Tiger Woods would still be a great golfer even if he was handicapped by playing with antiquated clubs, but no novice golfer is going to be transformed into Tiger Woods simply by buying the right equipment.
If the system vendor has perfected the perfect trading system and if he has developed the skill to successfully implement this system, surely the most effective method to share his good fortune would be to create a fund that we could all invest in. That way the vendor can ensure that we all receive the full potential of his system without any effort on our part, without us having to overcome the bigger challenge of implementing the system ourselves.
Presumably for every client who learns the system only a few manage to implement it successfully, with the fund option every client gets the full benefit of the system; so why not start a fund, a much better way to share the fruits of his good fortune. The other question that is frequently asked is why doesn’t the vendor display the full results of trading the system? Instead we get comments like ‘97points this morning, thanks a $ grand!’ from a satisfied punter. In order to evaluate the effectiveness of any system we need to be able to see the results of every trade, over a significant period of time, so we can compute the necessary statistics.
To develop these skills we need to get our feet dirty, plunge into the markets and have experiences. These experiences are all good; they are the feedback we need to gauge our current state of development.
Without feedback we have no means of progressing. When I first started to play tennis I did not go straight into a competitive game and try to win, I started by learning the basic skills of tennis, the forehand, the backhand and the serve. As a novice it was normal, expected even, for me to hit the ball repeatedly in the net or hit it sailing out; this just indicated that I needed to work on these shots. Imagine taking this approach to trading.
Lots of losing trades is to be expected for the novice trader, it is the first feedback, which reinforces the fact that the first skill of trading is to cut losses short. A novice tennis player needs to learn to control the ball so that it lands in the court; the novice trader needs to learn to control his losses. This is how we learn; it is a constant cycle of trade — feedback — adjust. So what are the practical steps for going about the business of developing trading skills?
As a novice it is helpful to trade a simple, logical system. This appears to contradict the stance I took against system vendors above, but what I am talking about here is a systematic way of having a view of the market. My objection to the system vendors is that they maintain that their system is all that is required to be successful, whereas in reality it is the ability to implement a system or strategy that determines success. As your trading skills evolve, your ability to read the market will evolve; but until then you will have no valuable opinion, so a simple, logical system will give you a reason to buy or sell.
In attempting to trade these systems two things will happen; firstly you will find out the issues you have that you need to resolve in order to progress as a trader; and secondly in the course of trading the system you will start to make observations and distinctions that will enable you to be more discerning about picking trades. The issues that you will come up against will be the feelings that arise that will prevent you from executing your system flawlessly. You will need to neutralise these feelings so that you are no longer a victim to them.
I believe that to have some sort of support while developing as a trader is vitally important. A trading coach, for want of a better phrase, will help you to navigate when you feel lost, and will give you an objective perspective when you are wallowing in doubt and uncertainty. As a novice floor trader I found the support of my backer essential in developing trading discipline. Support does not have to come from a professional coach, two traders could support each other, or a novice trader could seek out a mentor.

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.

Difference Between Paper Trading And Live Trading!

admin — Tue, 05 Jan 2010 02:43:23 +0000

If I want to become an investor as defined in the cashflow quadrant by Robert Kiyosaki, then I will need to learn from professional investors. Thus, I had signed up for a few seminars to learn. After attending a few seminars on option trading, stock trading and future trading, I realized that professional traders always have a trading system. And they always follow their trading systems. On top of that, I have learned that as a beginner, I should start off with paper trading.
What is the obvious difference between paper trading and live trading?
In paper trading, no money is involved. Transaction is done based on imaginary money. This means that I can afford to make mistakes in my trading practice using the trading system since no money is involved.
Some brokerage companies do provide an account that allows both paper trading and live trading. The advantage of such account is that it allows a realistic simulation of the live stock market. The share prices of all stocks are real but the transactions are false.
For example, I can setup my account with an imaginary amount of $10,000. Then, I will practice on how to filter and select the appropriate stock to invest based on the trading system. Next, I will decide at what price to buy the stock. Let say I intend to invest in a stock that is currently trading at $13 in the stock market. I will need to key in the buy order and wait for the share price to hit $12. If the share price hit $12, then my account will record that I have ‘bought’ the share.
Next I have to decide when to sell my shares based on the trading system. Let say I decide to sell at $15. I will key in my sell order and wait for the stock to really reach the price $15 in the live stock market before my sell order is considered to be successful.
After a period of practice, I will be able to learn from my mistakes and improve on my trading skills. Learning from mistakes is the key to success based on my understanding of the Rich Dad’s series by Robert Kiyosaki. After 3 to 6 months of practice, I will be able to make consistent profits. Then it is time for me to enter the real market.
This brings me the second main difference between paper trading and live trading, which is emotions. When I trade with real money, there is fear of losing money if the share price goes down. As a result, I will be reluctant to sell my shares if I am losing money. I may keep on holding to the shares even though the trading system tells me to sell. The share price may goes down further. In the end, I will end up losing more money.
When the share price goes up, greed will arise in me. Thus, I will end up not selling even though the trading system tells me to do so. The share price may reverse and goes down. Instead of making money, I will end up losing money. Poor management of emotions is the key to fail at stock investment.
The third main difference between papers trading and live trading is the risk of addiction. I realize that when I am trading real money in the live market, I always want to keep track of the share price. After keying the buy order, I will have the desire to keep checking every other minute whether I have successful bought the shares. If my buy order is successful executed, I will have the desire to keep checking whether the share price have gone up. If the share price goes up, I will feel excited and happy. If the share price goes down, I will feel depressed and sad. This is like an alcoholic addict who drinks to feel high. However, the next day, he will get hang over.
The next difference between papers trading and live trading is that it allow me to gain real experience. Real life experience is the critical component of success as learned from the Rich Dad’s series. I can learn all the theories about investment. I may even ‘paper trade’ investment. But if I do take actions to do the real things, I will never master the investment skills.
My purpose to share about paper trading and live trading is mainly to highlight that proper management of emotions is the key to success. If I can manage my fear and greed in investment, I will be in a better shape to win at investment. This is because I will be able to think better in a calm state.
* DISCLAIMER *
The author only provides the material and information as a layperson’s views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.
All the materials, information and procedure in this book are only the author’s personal opinion. You must consult your own professional advisor and other reputable sources on any matter that concerns you or others.
The author, publishers and distributors are not competent and do not profess to give legal, accounting, medical or any other type of professional advice. The reader must always seek those services from competent professionals who can review your own particular circumstances.
The author, publisher and distributors particularly disclaim any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.

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

Is Stock Option Trading A Profitable Investment Option?

admin — Fri, 11 Dec 2009 14:46:33 +0000

A lot of traders now favor option stock trading because of its many advantages. For one it can be highly profitable if used rightly, it offers the investor more flexibility and a larger option to diversify. This trading system offers more protection to the portfolio gives more control to the investor and offers a higher possibility to generate more returns on investment. They can be used under any market condition. They offer the investor the advantage of making returns on a change in stock price without actually owning the stock. Options stock trading can be used in combination with other option contracts and/or other financial tools to maximize returns.
Furthermore, a lot of trading is done on the floor of the stock exchange; one of such is referred to as stock option trade. Sometimes the trading could just be more of speculative activity. Speculative activity trading is done on stock exchanges through stock options trading. The term option in stock parlance means “a right”. There exists the right to sell as well as the right to buy. In a deal involving an option, the right to buy or sell a certain amount of securities, within a particular period at a given price can be bought off a dealer. If the purchased right was an option to buy securities it would be called a “call option”. If the right was the option to sell, it is called a “put option”. Instances where the two possible options are combined, to buy or sell a certain quantity of securities at a particular price up to a given future date, it is then referred to as “a double option”, or “a put and call option”
Speculative activity or stock option trade is carried out for anticipated profit. Here is how it works. If a speculator expects the price to go up, he buys a call option. This allows him in future when the price has arisen to buy at the old lesser price and sell at the higher prevailing price. When the reverse happens and a drop in price is anticipated he buys the put option.
When a speculator notices that his predicted or expected rise or fall in price did not occur he can chose not to exercise his right or stock trade option that he had purchased. The party that grants or sells the stock option trade to the speculator is paid a premium for granting it.
This premium is also called the option money. This is the fee that is earned by the trader who grants the speculator the stock option trade. When the speculator desires not to exercise his option he loses the option money or premium. But his loss is restricted to the option money alone. Stock option trade is useful for speculators who want to protect their capital and yet seize advantage of fluctuations in prices. He has the choice to decide whether to exercise his option or not.

Are Futures Riskier Than Options

admin — Thu, 10 Dec 2009 15:10:28 +0000

Let’s face it, derivative trading is risky. Period.
Derivatives such as futures and options are leverage instruments and by virtue of being leverage instruments, derivatives inherently carry more risk and exposure than pure and simple stock trading. Leverage instruments are risky because leverage allows you to do more with the same amount of money than you would normally be able to. Yes, leverage instruments such as futures and options have the potential to generate over 10 times more profit on the same move on the price of a stock than just buying the stock itself.
What most beginners to derivatives trading do not take into consideration is the fact that leverage is a double edged sword. Just as it could help you generate over 10 times more profits on the same move, it could also incur as much losses should the stock move against your favor. This is also why many beginners to futures or options trading lose their shirts so quickly and go broke.
So, why is futures and options trading still so popular then?
Very simply, most beginners with only a small fund and wants to build up a significant fund quickly could not depend on simple stock trading for a start. They need more leverage and they can afford to take more risk since the amount at stake is usually pretty small. With this in mind, the only question that remains is, which is safer for beginners? Futures or Options?
To determine which is riskier, we need to ascertain certain the qualities that constitutes “Risk”. For derivative instruments, the main qualities that constitute trading risk are: Leverage, Liability, Liquidity and Versatility (fulfillment obligation is usually not a concern in trading as traders rarely hold till expiration).
Liquidity in the stock futures and stock options market is definitely lower than the stocks themselves but is enough for the trading purpose of retail beginners and shall be excluded in this discussion.
Leverage
Leverage of futures and options is the multiplication effect on your money versus buying the underlying stock itself. We shall not go into detailed discussion on how leverage is being calculated for futures and options here. It suffices to know that the higher the leverage, the higher your potential profits and losses becomes. Leverage in futures is a lot higher than the leverage in stock options due to the much higher lot size and low margin requirement. This makes futures trading riskier than options trading in terms of potential losses due to leverage.
Find out how leverage is calculated in options trading at http://www.optiontradingpedia.com/options_leverage.htm .
Liability
Liability here means the maximum amount of loss you bear when things go wrong. Yes, we all make wrong investment decisions all the time and derivative trading is no exception. When you buy stock options, the maximum loss you can sustain is the amount of money you used in purchasing those stock options. When things go wrong, those stock options become worthless and you can lose no more than that. However, in futures trading, you are exposed to unlimited liability and will be made to top up your trading account with the daily loss amount in what is called a “Margin Call”. As long as your position continues to go south, you continue to top up your losses until you go broke or the stock gets to the bottom. Either way, you could have lost all your fortune in one go. That risk along with the fact that you have higher leverage in futures trading makes futures trading a lot riskier than options trading.
Versatility
Versatility here refers to the ability to profit in more than one direction. Logic says that if you can profit in more than one direction, risk is much lower than when you can only profit in one direction, right? Yes, stock options trading is highly versatile as there are options strategies that can be created to profit from 2 or more directions! Futures trading is basically single directional. You are either the short or the long. Never both, unless used in combination with the underlying stock, which increases capital requirement and defeats the purpose of leverage.
Get a full list of Options Strategies at http://www.optiontradingpedia.com/options_strategy_library.htm .
In conclusion, futures trading is riskier than options trading for the retail beginner to derivatives trading because of higher leverage, unlimited liability and lower versatility. This is also why options trading is slowly taking over as the derivative instrument of choice for the beginner derivatives trader. To learn all about options trading, please visit http://www.optiontradingpedia.com .

Why Simple Put Options Buying Fail in Volatile Markets

admin — Mon, 07 Dec 2009 14:43:41 +0000

The recent stock market crisis (2008) took the stock market down by more than 30% in less than a year. This has a lot of traders thinking that big money can be made simply by buying put options on stocks that will move down with the market, especially high beta ones. Nothing can be further from the truth. Most amateur options traders who did that either failed to make any money, make very little money or outright lose money even though the stock moved down a lot as predicted. Why is that so?
Volatile market conditions are especially bad for buying stock options due to 2 reasons. Firstly, the extreme volatility resulted in extremely high implied volatility which increases the extrinsic value of options dramatically, depressing its profitability. Secondly, extreme volatility leads to extreme speculation which encourages market makers to open up the bid ask spread to an unreasonably wide level in order to fill their own pockets.
Extrinsic value is the price one pays to the seller of stock options in order to justify the risk undertaken by the seller for giving such a right to the buyer. This price is arrived at in theory by options pricing models such as the Black-Scholes model. Extrinsic value directly affects the profitability of the options as the higher the extrinsic value of an option, the more the underlying stock needs to move in order to breakeven or profit. For example, if two options based on the same underlying stock, the same strike price and expiration month have different extrinsic values (of course this cannot be the case in reality), the option with the higher extrinsic value will make lesser money in profit than the option with the lower extrinsic value when the underlying stock moves by the same amount when held to expiration.
Extrinsic value is affected mainly by the level of implied volatility of the underlying stock. If the underlying stock is expected to make big moves, implied volatility goes up and the extrinsic values of its options go up as well. In times of extreme market volatility, extrinsic values go up dramatically across the board, depressing the profitability of options. In fact, one could end up losing more money than usual if the stock does not move according to expectations due to the higher extrinsic value paid. This is why a lot of amateur options traders who simply bought put options recently failed to make much money or any at all. This situation is made even worse by the wide bid ask spreads provided by the market makers.
Market makers are whom options traders really trade options with. When you buy an option, you are really buying directly from market makers who hold an inventory of those options and when you sell options, you are really selling back to these market makers who want to maintain an inventory of those options. Market makers buy and sell options in the exchange, ensuring the liquidity of all options contracts and profit primarily from the bid ask spread that they provide, buying at the bid and selling at the ask. They function exactly like used car dealers, buying at lower prices and selling at higher prices. Typically, the more actively traded the options are, the closer the bid ask spread tend to be due to competition between market makers, however, in times of extreme volatility where there are a lot more buying and selling on panic and more than enough business to go around for all market makers, they usually open up the bid ask spread in order to make even more profits. That is why we saw unusually wide bid ask spreads in this recent crisis. Wider bid ask spreads result in larger upfront losses which again depress the already depressed profitability of stock options due to the higher extrinsic values.
The higher extrinsic value and wider bid ask spread makes profiting from simple stock options buying extremely difficult and are the main reasons why amateur options traders fail to make money buying put options during the recent stock market crisis. Conversely, writing options are an extremely profitable way to trade options during a volatile market where extrinsic values are high. Naked writes and Credit Spreads are really the way to go in a volatile market condition and are what most beginner options traders do not know about. Selling options instead of buying them turns the table around and creates an extremely profitable position during times of high extrinsic value. Learn more about credit spreads at http://www.optiontradingpedia.com/free_debit_credit_spread.htm now.

Options Trading in Extremely Volatile Markets

admin — Fri, 04 Dec 2009 17:21:54 +0000

The recent stock market crisis (2008) not only rocked the financial system and the world economy but also the pockets of countless options traders all over the world. Options traders who used to profit in the years prior to this market crisis broke their bank as none of their options strategies seem to work in this market anymore. So what is it about extremely volatile markets and how should one profit through options trading under such conditions?
Extremely volatile market conditions not only produce unpredictable short term stock price swings but also open up the bid ask spread of individual stock options due to a lower liquidity and profiteering by market makers. This combined effect not only made it doubly hard for options traders to make a profit. Volatile options strategies, supposed to be meant for such conditions due to their ability to make a profit when the market moves up or down strongly and their ability to profit from an increase in volatility, also failed to produce any consistent profits due to the higher premium outlay and wide bid ask spreads, soaking up most of the profits. Unexpected rallies also crunch volatility to the extent of producing losses through decaying the premium of long legs at express speed. Short term (weekly, monthly) directional options strategies fared even worse as it not only became almost impossible to predict short term price swings but the high premium and bid ask spreads also took most, if not all, of the profits away even if the stock did move in the expected direction.
So what works in an extremely volatile market condition such as this one?
First of all, let’s look at all the different ways to trade options. There are 3 main options trading methodologies; Swing Trading, Position Trading and Day Trading.
Swing trading is a directional options trading methodology that aims to pick stocks that will move quickly and strongly within a short period of time in a predictable direction and then execute bullish or bearish options strategies in order to profit from these moves. As mentioned before, trying to profit from directional swing trading in an extremely volatile market is like swimming against the tide. Not only is directions hard to predict in the first place but the high options premium along with gapping bid ask spread all work against its favor.
Position trading is more complex than Swing Trading as it aims to profit mainly (although there are also position trading strategies that are directional in nature) from volatility or premium decay through putting together several different options and / or stocks in order to produce a hedged, market neutral position. Position trading has produced some pretty profitable results for me in this market crisis as volatility soared and options premiums are high. This puts the disadvantages of an extremely volatile market condition in the favor of the options trader. Such positions include dynamically hedged delta-neutral as well as delta-gamma-neutral positions. Both of these position trading strategies aim to neutralize market movement such that unexpected swings do not affect the position significantly while the position safely takes the high options premium on the short legs into your pockets.
Day trading is an extremely dynamic options trading method where options are bought and sold very quickly within one day in order to profit from the slightest intraday price swing or change in volatility. This strategy was a pretty hard one to profit from in low volatility market conditions as prices doesn’t change enough within a day to produce significant profits. However, day trading becomes extremely profitable in the hands of seasoned options trading veterans in extremely volatile market conditions such as this market crisis as the Dow itself has produced intraday trading ranges of up to 10%! Yes, this is the kind of trading range and price range that cannot be realized in normal market conditions. Day trading often takes the form of simply buying or shorting call or put options and then quickly covering them when profitable. Day trading also avoids the extreme overnight uncertainties that so often catch swing traders by surprise in this market crisis. Sudden overnight good news can often gap the Dow up by a significant amount and closing it over 10% higher. This can wipe out all your profits if you had been betting in the opposite direction overnight. Day trading, however, is extremely risky for beginners in options trading as the price movement is so fast and dynamic that when things happen, beginners may not know what to do and be able to do it quickly. This is therefore not recommended for beginners.
So, there you have, 2 ways to profit from this market crisis through options trading which I have used profitably. Options trading (http://www.optiontradingpedia.com) is definitely profitable under any market conditions as long as you use the right method for the prevailing conditions.

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.

Option Trading Strategies – a change from buy and hold

admin — Thu, 26 Nov 2009 02:56:02 +0000

A portfolio of stocks and shares is a standard investment strategy that exactly fits the bill in the search for a source of passive income, which is generated from the annual earnings payout from the shares. I am not a professional advisor, so this is just a personal opinion, but I do not think that a buy-and-hold portfolio is a safe strategy for your hard-earned cash right now.

If you are going to invest in the stock market, I believe you need a much more hands-on approach than buy-and-hold. Even so, a few hours portfolio management per week beats a full-time job. With a more active approach, investing in the stock market can be a wealth-building programme, not just a place to park your existing funds with a view to a slightly better return than the banks will produce.

There are many different approaches to managing your investments rather than buy-and-hold. One area worth looking at is options trading – when you buy options, you are not acquiring the stocks themselves, you are buying the right to make an agreed trade at some point in the future. This can be used when the stock values go up OR down, by buying the right kind of option. There are 2 basic kinds of options:

Call options – these give you the right, but not the obligation, to buy shares at an agreed price on or before an agreed expiry date. If the actual price of the shares rises above the price agreed in the option, then the holder of the option can make a profit by buying the shares at the option price, and immediately selling them at the higher market price. But there is no need to do this buy/sell transaction, since the option itself has an intrinsic value in this situation and can itself be traded.Put options – these give you the right, but not the obligation, to sell shares at an agreed price on or before an agreed expiry date. If the actual price of the shares falls below the price agreed in the option, then the holder of the option can make a profit by buying the shares at the market price and immediately selling them at the higher option price. Again, there is no need to do this buy/sell transaction, since the option itself has an intrinsic value in this situation and can itself be traded.

Because options values vary with the margin between the market price and the agreed option price, the option prices change by a much greater percentage than the prices of the shares themselves. It is not at all uncommon for options to change 50% in a week – 3 of my last 5 trades have gained over 50% in a week.

There’s a lot to learn about option trading, but for the small investor I recommend taking a look at this as an active investment strategy in preference to the passive buy-and-hold approach.