Archive for the 'Options Trading Strategies' Category
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. …