Have you ever suggested to your stockbroker that you were interested in trading options? More than likely he (your broker) tried to talk you out of investing in options. Quite possibly, he insisted that options were high risk and only professional traders should use options in their investments.
Well, let me let you in on a little secret. The reason why your broker doesn’t want you to trade options is because your broker does not know how to trade option properly. Understand, most stockbrokers are sales people, not investors. They offer what is hot in the market and usually push you towards managed money. The reason being is because your stockbroker gets paid to direct your capital into funds where portfolio managers manage stocks and bonds in anticipation of beating the market indices.
A true investor and some very well trained stockbrokers (hard to find these brokers, but there are some out there somewhere) will tell you that option trading is a very lucrative investment and less risky than what your broker is suggesting. Option trading strategies can increase your return on your overall portfolio by leveraging and insuring the stocks in your portfolio.
Option trading strategies, range from creating income into your portfolio on a monthly basis, insuring any downside in a particular stock you may be holding in your portfolio and a way to leverage both the upside of the market and the downside, all at the same time.
Now, if you are like me and want to see your portfolio increase in value overtime, while having the opportunity for income, (which everyone reading this is probably saying no $#!t) then you need to learn all the option trading strategies that are available to you.
To give you an example of a great option trading strategy that you can implement right now is the selling of covered calls. This simple option trading strategy will allow you to take an underperforming stock in your portfolio and create a monthly income. How this option trading strategy works is as follows:
Step 1. You own a stock in your portfolio that is either stagnant in your portfolio (meaning not moving up or down), or the stock has dropped way below your purchase price.
Step 2. You sell a call option on this stock. Basically, for every 100 shares of the stock you own, you can sell 1 call option related to that stock. (Example is you own 500 shares of ABC stock, you can sell 5 ABC call option contract). This scenario is selling a covered call.
Step 3. You collect a premium from the sell of the call option. (These premiums vary depending on the volatility of the stock and the amount of time left on the option contract.
Step 4. Now you sit back and see what the market will do for you. For example, the stock may move down in value and the call option will expire worthless, meaning you keep the premium and sell new call options next month, or the stock stays stagnant and does not move during the month. Again you would keep the premium and write another call option against your stock. The last scenario is the stock starts to increase in value and you have to sell the stock for the strike price of the call option. Typically, if the stock you have has a high volatility, you probably would not use this option trading strategy. But, it is your decision.
Now, here are a few items I left out of the above scenario. You can sell your call options in the money, out of the money or at the money. We will discuss the terminology of these positions in a later article. But for now, I hope you see the value of option trading strategies in your stock portfolio.
Please come back soon to learn more about different option trading strategies to increase your overall return in your portfolio. You can also subscribe to this page and get future updates sent directly to your email box. Just click the rss feed at the right.
The Riskiest Option Trading Strategy Known To Man.
Today, I wanted to discuss the riskiest Option Trading Strategy known to man. I am going to go through the strategy and then I am going to give you the names of two other strategies that you will want to stay away from because each one of them is using the risky trade within the strategy. So, let’s get started.
The Option Trading Strategy with the highest risk to an investor is known as selling naked calls or short a call. How this strategy works is as follows:
1. You find a stock you think will not have much upside nor volatility, aka SPECULATING. This should be your first indication that this strategy should not be used.
2. You sell a call naked (this means you do not own the stock, but, you are obligating yourself to selling this specific stock sometime in the future at a predetermined price.)
3. You receive a premium (meaning someone is paying you to have the right to buy the underlying stock, that you do not presently own, from you sometime in the future.)
4. Now, this is where this strategy can get UGLY!! READ BELOW
Selling naked calls (short a call) is gambling. You receive a premium from an investor that gives him the right to buy either from the market or from you, whomever is cheaper. Consider the example below.
You sell one (1) naked call on ABC stock at a strike price of $20. The buyer of your naked call pays you $3. (Alright, you just made $3 per contract, or $300.00)*
The current market price of the stock is $15.
Sounds good so far huh? You have $300 and the stock would have to move from $15 to above $23 ($20 strike price plus the $3 premium) before the person holding the call option would come to you and have you buy the stock at the market price and sell it to him for $20. Well, just to let you know, because there is no ceiling on how high the price of the stock can climb, your risk is UNLIMITED!!
Let say you wake up one morning three weeks into the future and find out the stock that was trading at $15 back when you sold the naked call just spiked up $50 per share. Well, guess what, the person that bought the call from you is doing? He is outside banging down your door to get you to sell him the stock at $20, so he can sell it in the market at $65. What an ugly predicament you are in now. You have to buy the stock at $65 and turn around and relinquish it at $20 leaving you with a loss of $42. (Your cost of $65 minus what you sold it for $20 equals $45. But remember, you were already paid $3, so your loss is $43 per share or $4300.00) OUCH!!
Now granted, this is an extreme example, but it is better to just stay away from selling naked calls so you don’t end up on the wrong side of a run away stock while you were sleeping. Get my drift.
Well, hopefully you understand the risk involved in selling naked calls now, here are two other option trading strategies to avoid like the plague:
short straddle: short a call and short a put
short combination: short a call and short a put (combination will have different strike prices, i.e. sell a 20 call and sell a 30 put)
* One (1) contract equals 100 shares of stock, therefore if you receive $3 per contract, you will receive as a premium $300.00.
To Your Successful Trading,
p.s. Here are some additional articles you may be interested in
- Stock Option Trading Millionaire Principles – Jason Ng explains some critical elements that will guide you to consistent profitability in options trading. stocks options option trading Stock trading options trading
- Options Warrants Futures Derivatives Headquarters – Articles about option trading strategies, option pricing, Black Scholes, Spread betting and … or just give a thumbs up? Be the first to submit a blurb! …
- Option Trading Explained – in layman terms – Explaining Options Trading In Layman Terms. Possibly the only writing in existence that tells you both the good and bad effects of option trading. options option …
Over the last few weeks we discussed either buying or selling calls or buying or selling puts in our option trading strategies. We determined, that if the stock we are interested in is a good company, meaning, that it has strong fundamentals like good management, good product, increasing revenues or increasing earnings, we would purchase a call option in anticipation of the stock value increasing. On the flip side, if we noticed a company that was showing a poor performance or if we determined that the overall market is bearish on the stock (that is the market thinks the value of the company is overpriced), then we would buy a put option in anticipation of the stock decreasing in value.
But, what if we are uncertain about the direction of the stock? For instance, what if the company showed good earnings, but the market was bearish on the stock of the company. What do we do? Well, I was explaining to a close friend of mine the other day that when we are uncertain about a stock but anticipate some volatility (volatility is large swings in price, either upward or downward), we can either disregard the stock and move on to more certain investment strategies or we can take advantage of the volatility in the stock. But, how exactly would we do this, you ask? Great question and below we are going to walk you through how we would use this option trading strategy.
So, we have decided to pursue a company that has a lot of volatility, but are uncertain about the direction of the stock, so here is what we would do to take advantage of a great opportunity. We are going to purchase a call and a put. That’s right! we are going to purchase a call based on the fact that under the above scenario, the company has good fundamentals (earnings, revenues, management, product, etc), so we buy the call in anticipation of the stock increasing. But wait, didn’t we say that we are uncertain about the movement of the stock. Absolutely! So in addition to buying a call, we are also going to buy a put. Holy cow batman, we are hedging our position on this stock! That is exactly correct. We are buying a put in addition to buying the call, because, we recognize that the company has good fundamentals, but the market (the investors buying or selling the stock) are showing signs of fear in the future fundamentals of the company (this is called speculating, because investors can never really know whether or not the future of the company is in peril until it is too late). By buying a put option with our call option, our option trading strategy now will have the opportunity to make a return on the stock as long as the stock has the volatility that we are anticipating.
So what are the costs? Typically, we will pay a small premium for each option we buy. For instance we will pay one price for the call option and we will pay another price for our put option. The great thing about investing in this option trading strategy is we are only risking our premiums. However, if the stock does have the volatility we anticipate, we can close out one of our option positions as the stock moves favorably towards the other option position. This will limit our loss, but give us unlimited gains.
The downside of this strategy is if the stock has no volatility and stays in a low volatile trading range for the life of our option trading contracts. If this happens, we will lose our premiums. But, in my opinion, it is better to take a small premium loss versus buying into a stock (meaning investing a higher amount of capital) that is not going to move at all or buying the stock and it plummets and takes your capital with it.
this strategy is called a Straddle. It is highly recommended for stocks with high volatility but with the uncertainty of the stock’s direction.
Here’s a couple related articles that might be of interest:
- Options Trading Strategies You Can Use to Profit – Options Trading Strategies You Can Use to Profit. Caterina Christakos is an article writer and reviewer. Read her latest reviews here: http://espressocoffeemakersale.com/commercial-espresso-machines/. Over 50% of individual traders fail …
- Option Trading Research Options Trading Options Trading Strategies … – Internet Marketing Articles by Moe Tamani the SEO Services Consultant.Main feature of day trading lies in its daily evaluations and prediction for the moves of the market, the other day At the time this options position was purchased, …
I had to fire my stockbroker today. Wait till you find out why…
The other day my stockbroker made a comment that was so hysterically outrageous that I had to fire him. He called me up and offered to me what he thought would be some perfect option trading strategies for my portfolio.
Initially, I thought he was joking. But, after fifteen minutes on the phone with him, listening to his insistence that what he was offering was so apparently beneficial to me, I had to make a very harsh decision.
So what was this apparent deal killer strategy he was offering, you ask. Well, my stockbroker insisted that based on what he believed was a sure winner for bringing income into my account was for me to… sell naked calls.
Let me explain this option trading strategy and the risk you are going to inherit by using this strategy. Selling naked calls is a strategy where you are obligated to sell an underlying stock sometime in the future. For that obligation the buyer will pay you a small premium that you will receive into your account immediately.
Sounds good so far, huh? Well imagine this, let’s say you decide to obligate yourself to sell a specific underlying stock that you do not own and you take the small premium. Then, some amazing news comes out on the company stock and the stock value skyrockets. You now must go into the open market and buy this stock (you better have the money to buy it too) and then you turn around and give it away at a price way below what you bought it for because the buyer of your call wants the stock you just bought, so he can sell it back into the market and make a huge profit with your money.
Do you see the uncertainty of this strategy? The uncertainty is you will not know what price you will have to buy the underlying stock for until you have to buy it from the market. That is way too risky for anyone’s portfolio.
So, if you decide to sell calls, I would suggest that you own the stock in your portfolio already, just in case the buyer of the calls requests your stock if and when the stock increases in value.
Here are some additional articles for you to read:
- How Option Trading Profit In Any Market Conditions | #1 Tade Show … – These are only very few of the many more option trading strategies that you can use to your specific portfolio needs. To learn more about what option trading and stock options are for free, please visit http://www.1tradeshowdisplay.com/80/how-option-trading-profit-in-any-market-conditions-2/
- The Truth About Most Option Trading Seminars – Most of these option trading seminars simply teach people what option trading can do and how to do some of the common option trading strategies which anyone can learn completely for FREE on option trading sites like http://www.tradesoptions.com/option-trading/the-truth-about-most-option-trading-seminars
- Option Trading Strategies – Options Trading Strategies taught at our SMF Pro Options Trading School are completely different than any options trading education or options trading course offered today.
- Hot Trading Strategies For A Cold Market Stock and Options Trading … – Go beyond the basics, and learn about Advanced Option Trading Strategies. Learn about Call and Put Spreads, Option Straddles, and Option Strangles with Option Maestro’s Advanced Option Trading Strategies E-Book. …
Here’s an article that recommends some stock options:
Here are a couple of options that might be the perfect thing for your portfolio.
Posted via email from alanmanns’s posterous
You pick up the phone and call your stockbroker to see how your portfolio is doing. He quickly tells you about a great stock that is showing some significant improvement in the market and he suggests you buy some of this amazing company that is trading around its 52 week low. He continues by stating how spectacular the profile of the company is. “Oh, you are not going to believe how strong the balance sheet is of this company” and “This Company is sitting on a huge amount of capital that will allow them to expand by acquiring other companies in their sector.”
Well, if this stock is ripe for the taking, why risk a large amount of money purchasing the stock. You see, there are many strategies you could be using as opposed to buying stock and letting it sit in your portfolio until you make a 10% or 15% return. Why not use option trading strategies to increase your cash on cash return?
One fundamental option trading strategy that can be used based on your stockbroker’s analysis of a great stock is purchasing calls. Purchasing calls is a way to really increase your cash on cash return. For example, you can buy ABC stock at a price of $30.00 in anticipation of making a 15% return over the next couple of quarters. Sure, it is possible for ABC stock, which is near its 52 week low, has a strong balance sheet and is sitting on a large amount of capital to increase from $30.00 to $34.50 ( $30 x 1.15 = $34.50), but why risk $30,000.00 on purchasing 1000 shares at $30.00 for a return of $4500, when you can buy 10 call option (for every 1 option contract, you will control 100 shares of stock) and control 1000 shares of ABC for a buy-in of between $1000.00 to $5000.00.
Now consider this, for every point ABC stock moves up, your call options will increase dollar for dollar. So if you purchased 10 calls options at $5.00 each and ABC stock moves from $30 to $31, your option will move from $5 to $6.
So let’s compare the return on a one point upward move in ABC stock:
- Purchase 1000 shares of ABC stock at $30: Your risk is $30,000.00
- Purchase 10 ABC call options at $5: Your risk is $5000.00
- ABC stock moves from $30 to $31: Your increase in cash for the stock purchase is $1000 and your % return on your stock purchase is 3%.
- Now compare the purchase of 10 ABC call options:
- ABC stock moves from $30 to $31: Your increase in cash for the 10 call option purchase is $1000 and your % return on your 10 call option purchase is 20%
As you can see, your cash on cash return is extremely higher by purchasing an option over purchasing the stock.
Before I end this article on the value of option trading strategies and the value of purchasing call option versus purchasing stock, let me be very clear… anytime you buy options, there is a time value or an expiration date on the call option contract or any option for that matter, whether you are buying or selling options. So understand, an option will expire worthless, so always give your self ample time to earn a return on the purchase of your call option.
Further, in regards to the information scenario above, we only discussed the upside and the return when the stock increases in value. You should also be aware that for every point movement downward, your call option contract will lose point for point with the stock, so make sure your decision to purchase call options is prudent with the understanding that the most you can lose in your trade is the price you pay for the call options.
Lastly, this strategy is best used for a volatile stock that has an obvious trading range. Our example above was based on a hypothetical company that was trading near its 52 week low.
Here’s a few links of interest:
- Stock Replacement Strategy – Introduction – Over on TheStreet.com, Jim Cramer and his partner James Altucher have created a couple of video segments regarding options and a strategy Cramer calls stock replacement. I’ve searched the internet for what stock replacement is and how …
- the best five option trading strategies – these are (in my opinion) the absolute best options trading strategies that minimise risk and give very respectable profits: selling credit spreads – with almost no work, and about 30 minutes a week, it is possible to grow your …
- Trading: Options Trading Strategies For Consistent Approach to … – Options Trading Strategies For Consistent Approach to Leveraged Trading. Options abound methods for the options trader. Options are very flexible trading instruments and are suitable for a variety of viable strategies. …
I can’t believe my stockbroker told me to do this…
My phone rang this morning and it was my stockbroker. He started to regurgitate everything I heard on the news the previous night. He was telling me how he believes that the market is overbought and that more than likely we are going to see a sell off in equities in the coming months. My stockbroker continued by saying how the financial markets are still seeing stress and more than likely we are going to see additional banks shuttering in the near future.
Now, I really don’t care that he is summarizing what he and I both heard the night before. What really irks me was what he suggested I do after he regurgitated the financial news. He suggested that I sell my equities and go into cash and wait out the market. I almost fired him for that comment. However, he and I are very close and I know he means well. Anyway, I had to back him up and explain that I would prefer to use the option trading strategies that are available to me.
He continued to express his position with what he was advising. I told him that there was no way I was selling any of my stock positions based on his fear of what the market may do in the future.
After much debate, I explained to my stockbroker that I was going to use an insurance policy to secure any downward movement in the market over the next 3 months.
How this option trading strategy works:
Anytime you are concerned about any downward movement in the market or an individual stock, you should purchase put options.
Let’s say you have a position in a great stock, but there is pressure on the upside, which in turn may drive owners into taking money off the table (sell their position and go into cash, kind of like what my stockbroker suggested). What you should consider is buying a put option for every one hundred shares of the underlying stock you own. This option trading strategy is like buying an insurance policy.
Purchasing put options allow the owner of the contract (the buyer) to actually put the stock to the seller of that contract at the strike price (or the predetermined price you are willing to put the stock to the seller of the put contract).
For example: Let’s say you own 1000 shares of ABC stock at $50.00 and there is news coming out about the company’s revenues and earnings. Now you are feeling a little unsure about the strength of the company, but think in the long term with the current management team and the superior product, you see the stock increasing in the future.
But, why risk a chance of bad numbers coming out of the company and dropping the value of the stock or why risk good numbers coming out and the stock increases and gets away because you sold your position too early. Why not purchase, in the case of this scenario, ten (10) put option contracts at $50.00. And let’s say those contracts cost you $3 per contract or $3000.00.
What this means is if the stock drops in value, you can put the stock to another investor (the one that sold the put option) at $50 and salvage most of your money.
The most you will lose is $3000.00 whether you sell the stock or keep the stock and let the option expire worthless.
The benefit of this option trading strategy is that the stock can drop to 0 and you will only lose the $3000.00 you spend to insure your position. But, if the stock increases to $53 you will be back at your breakeven point.
Not too bad of a risk position to secure your investment in your stock. Just imagine if you would have listened to my stockbroker and sold out your position and the next morning the stock opens up $5 higher.
This stock option strategy is great for insuring your stock position when you are not willing to sell or not wanting to sell.
Sure, there is a cost to buying your put options, but would you buy a home and not pay for home owner insurance? Or would you buy a car and drive around with no auto insurance? These are just some great reason and analogies when deciding next time whether or not to sell your position in a good or great company.
Here are some possible links of interest:
- InvestorGeeks » Blog Archive » Phil Town & INVESTools – I’ve become very interested recently in fellow investment blogger Phil Town’s site, and so I’ve been reading it from start to finish. After reading much of his site, I’ve come to enjoy his style of writing and investing. …
- Forex Trading Strategies – currency options – … out because right now, there’s a 50/50 split of bearish and bullish traders for the pound. So what do you do in these bearish/bullish instances? Well, there are a couple options trading strategies you can use to play both sides… …
- Options Trading Strategies – Book Review – Guy Cohen, The Bible of … – Options Trading Strategies – Book Review – Guy Cohen, The Bible of Options Strategies. Filed under: Wealth Building — Tags: Core Concepts, Option Strategies, Risk Reward — admin @ 8:02 pm. Clinton Lee asked: …