Technorati Tags: How To Trade Options, option trading strategies

Technorati Tags: How To Trade Options, option trading strategies, Options Trading Strategies

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, …

Technorati Tags: option trading strategies

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. …

Technorati Tags: option trading 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: …

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