Archive for the ‘option trading strategies’ Category

Factors To Consider When Selling A Covered Call

Posted by admin on October 11th, 2010

Trying to sell a covered call is certainly one of the best strategies because it brings money at the start and certainly will be a great way to provide consistent cash flow from your investment.

Once you sell a covered call you are giving someone else the best to purchase your stock from you at a set price as time goes on. However, you do get money up front for making this deal. If you do sell a covered call there are some facets that you should search for.

1. The Fundamentals

You need to buy the stock to sell a covered and that you do not want to buy one that will go to $0 next week. So what you may buy, ensure it is a thing that you feel comfortable keeping for at the least a time. It’s not fun making a 4% return on the call and watching the stock fall 30% so fundamentals are critical.

2. Good Technicals

Technical analysis also plays a significant role in the price action of a stock. There are plenty of ultimately strong stocks that have fallen to new lows before. If there weren’t there would be no such thing as buying good stocks at a discount. But merely to assist in preventing you from owning the stock although it gets “discounted” the technicals also needs to play a factor.

3. High Option Premiums

Of course many of us are here to create money, so be sure that the option premiums are pretty high. If you are only getting 1% for the month it may not be worth the risk. There are plenty of stocks where you could sell the call on for a 3% or more monthly return so be a little picky.

 

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How Index Options Trading Can Generate Low Risk Income

Posted by admin on August 27th, 2010

 

Index option trading is a subject that even these familiar with stock market jargon usually know little about. But it’s a means of trading options that is just about risk free, where all you might be risking is the premium you pay for the option, which is often a small fraction of the potential profit you stand to make.

The unique technique of getting cash on the stock market was to buy shares with the intention to sell them later at a profit.

Then options came along. Instead of actually purchasing stock, or shares, you can simply purchase the option to purchase. You didn’t turn into a shareholder so that you could not attend and vote at company meetings, and weren’t entitled to dividends, however as your foremost concern was to easily profit from a rise in the stock price, and as you had been most likely doing the same thing with many firms, you in all probability weren’t concerned about this.

For example, in the event you believe the stock of XYZ Inc, present price $12.00, is probably going to rise in the near future, then you might buy an option to purchase, say, 1,000 shares at $12.00 each in, say, three months’ time. The premium, or cost, of the option is perhaps 10 cents a share, whole $one hundred (1,000 x $0.10).

Cheaper than buying 1,000 shares at $12 (whole cost $12,000), eh?

As well as, your risk is much less, as a result of your maximum loss, if the price doesn’t rise, is your premium of $100. When you purchased the shares your theoretical risk could be $10,000, although admittedly only if the company was to go bankrupt and the shares turn out to be worthless. In spite of this, choices are a wonderful various to shares, and you’ll have an interest in lots of more shares in your cash, which brings us to the following point.

If, as you anticipated, the share price does indeed rise, then you can make a large profit. In our example, if the share price rose simply modestly to $14 from $12 within the three months time period, not at all an unlikely occasion in the life of a company, you then would be capable of sell your option for $2,000, i.e. you’d in effect buy the shares for $12 each, whole $12,000, and sell them for $14 each for a total price of $14,000. The revenue is due to this fact $2,000, less the $100 premium, giving a net revenue of $1,900.

If it is as straightforward as that, then why would anybody sell an option to you? For the same motive that individuals sell shares – because they is likely to be of the view that the shares will in all probability go down in value.

To date, so good. However the point does index options trading come into it? The trouble with the example I’ve just described is that individual shares might be unstable and it can be very troublesome to foretell future value actions until you might be very conversant in what is going on in that company. However you possibly can simply do this with an index of various companies in a particular category.

For instance, you might be keeping close watch of what is going on in the biotech sector. Discover a suitable index of the businesses in that sector, keep an eye on it, and when you think about a move upwards in price is due then buy the index option. Or sell it if you happen to suppose the value is about to go down. This has the advantage that any individual share volatility will likely averaged out and you will be thereby protected.

Of all of the stock trading instruments it’s possible you’ll find, this should be one of the best. Should you maintain your self well-informed in a couple of sectors as I’ve defined, one thing that is not too difficult to do, then you will be profitable far as a rule, and given the risk/reward ratio explained above you must be capable of make regular profits with minimal risk.

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The Most Essential Indicator In Options Trading – Volatility

Posted by admin on August 6th, 2010

 

The concept of options volatility is likely one of the most little understood and under utilised in options trading. But knowing about it could possibly make all of the distinction to the profitability or in any other case, of your trading decisions. It should also be very influential in the type of trades that you just resolve to put on.

What is Volatility?

Volatility, as the name implies, is a measure of the range in which a security price is expected to move throughout a given time frame. Sometimes stock costs appear to hover within a tight range for a while, by which case you’d say that the brief time period volatility is low. However then a worth breakout comes and a robust directional motion occurs, at which time you would say that volatility has increased. The trick is to determine whether or not there’s any correlation between the value volatility of the underlying monetary instrument over a given interval, often called the “Historic Volatility” (HV) and the volatility that is implied in its associated possibility prices. Where a disparity happens, it often presents trading opportunities.

Implied Volatility

Essentially, earlier than we place an option trade we need to decide whether or not the option contract we’re looking at is over-priced or low-priced – and the way we do that is by analyzing what is known as the “Implied Volatility” in the option price. If we decide that the option goes for a bargain because the Implied Volatility (IV) is low, then it presents an important trading opportunity. However, if the option is considered expensive we might probably keep away from going long and look at option buying and selling strategies corresponding to spreads involving “sell to open” positions.

In contrast to futures and CFDs, options prices are reasonably complicated affairs. You’ll have heard of the Black-Scholes or the American Binomial option pricing models. These are mathematical formulation which consider the current market value of the underlying stock in relation to a related option strike (sometimes known as ‘train’)value, plus the number of days to option expiry, in an effort to calculate a theoretical worth for the option contract. If the present bid-ask worth of the option is above the theoretical price then we’d say its Implied Volatility is high.

Conversely, if the price is under the theoretical price then the IV is low. Implied Volatility thus turns into two issues:

1. A premium or low cost above or below the theoretical truthful value of the option.

2. An indicator of anticipated future price volatility of the underlying stock, often decided by the market maker.

 

Historical Volatility

The other issue that must be borne in thoughts with a purpose to give the IV some meaning, is the Historical Volatility of the security itself. Each the HV of the security and the IV of the option are expressed as a percentage and should be in contrast before getting into a trade. Historical Volatility is principally a stock’s price movement either side of a median over a predetermined variety of historic trading days.

For example you’re taking a look at a stock in an upward pattern and wish to take a call possibility position following a pullback. You’d have a choice of “in the money” (ITM), “at the money” (ATM) or “out of the money” (OTM) strike prices. As you evaluate the decision option costs for each strike price, it’s possible you’ll discover that the OTM options are over-priced compared to the ATM prices. This being the case, you would not want to be buying the OTM options, although they might appear a little cheaper. It is best to either ‘purchase to open’ the ATM options or even take out a Bull Call Unfold as a result of the OTM offered choices would give you a better credit and make your overall position cheaper, thus providing you with an advantage.

Easy methods to Use Volatility

So why is Implied Volatility so essential for the options trader? One motive is, because as a rule, the worth of an option will always revert to its truthful value over its remaining life. Which means, in case you ‘buy to open’ an option when its IV is too high, then even when the worth of the underlying security goes as you anticipated, the option price itself might not improve in value. In fact, it isn’t uncommon for such a setup to lead to beneficial stock price movement however loss on the option trade, as a result of the option has retreated back to its truthful value.

So, for example, in the event you have been to purchase a 30 day option that was 20% overpriced – it could depreciate 20% over the next 30 days – probably extra – depending on actions in volatility of the underlying.

But the reverse can be true. For those who buy an option at a discount because its IV is low, you might even make a profit if the underlying worth movement is barely unfavorable. And if the security price movement is favorable, your profit could be spectacular.

Here are two simple rules to remember when assessing whether an option is a good buy.

1. The 20 day and 50 day HV of the security are each lower than its ninety day Historical Value. The perfect long option trade would be the position the 20 day is lower than the 50, which is less than the 90. This isn’t essential but it surely means that the security volatility in the quick time period is more likely to trend towards the long term volatility.

2. Compare the 20 day HV of the security with the Implied Volatility within the present price of the option. If option IV is lower than the security HV, it’s a good buy.

 

Conclusion

Volatility is one key issue that distinguishes options from other derivatives. Although, like other derivatives, options costs are derived from an underlying market equivalent to stocks, currencies or commodities, the supply and demand for these devices comes from a standalone market. As such, they’re topic to the laws of supply and demand and which means prices will reflect that. Implied Volatility in options prices is the magic number that indicates this. Figuring out how to use it to your advantage may very well be probably the most important areas of your trading education.

 

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Bearish Options Trading Methods

Posted by admin on July 22nd, 2010

 

There are 6 Widespread Bearish Option Strategies applied by traders: Long Put, Protected Short Sale, Covered Put Sale, Short Call, Bear Put Spread, and Bear Call Spread.

1) Long Put:

This technique is carried out by merely purchasing a put option on a stock that an investor feels will decline in value. The Long Put is a favorite strategy due to its simplicity and is applied by investors who need a leveraged and restricted risk technique to take part in an anticipated decline in a shares price.

This technique can be successful depending on the following three factors:

 

· Selecting a stock that can decline in value

· Selecting an expiration month with a extended period sufficient for the stock worth decline to take place.

· Selecting a strike price that may maximize the revenue earned when the stock value decreases.

The right way to choose an Expiration Month

Purchase a near-term period Put Option: The benefit is Leverage with fewer dollars that are being risked. nonetheless, the option will have fast time decay.

Purchase a long-term period Put Option: The benefit is getting more time for the stock to decline in value; nevertheless, there’s extra money that is being put at risk since it’s essential to pay a higher premium for Options with longer durations to expiration.

The right way to select a Strike Price

Purchase out of the money put options: This offers lower value and extra leverage; nonetheless, a larger move in the stock price will likely be required to exercise.

Purchase in the money put options: This offers a greater probability of creating a revenue but extra dollars might be put at risk since you need to pay a higher premium.

 

2) The Method of Protected Short Sale:

This strategy is carried out by buying a call option on a stock while shorting the stock. If shares price rises above the strike worth of the call option the investor will exercise the right to buy the stock. In essence, the call acts as insurance towards an increase within the value of the stock. Further, this technique is sometimes called a “synthetic put” as it has an identical risk/reward payoff as purchasing a put option.

 

The reasons to use it

This strategy is used when an investor is bearish on an underlying stock however involved about near term worth risk. Often this technique is used when an investor has profited from a lower in the value of a stock and wants to lock in their profit.

The way to choose a Strike Price

Normally, the investor will choose an out of the money option. The closer the call options strike price to the current market price of the stock the higher the level of protection in opposition to an increase in price, however the higher safety comes at a higher cost.

3) Covered Put Sale:

This technique is applied by short selling a stock and writing (buying) an equal number of put options on that stock. Writing the put options obligates the investor to buy the stock from the option purchaser if the stock price decreases beneath the strike value and the option purchaser decides to exercise the option. Basically, the covered put writer is foregoing the right to take part in the depreciation of the stock below the strike price in trade for receiving the put option premium.

The reasons to use it

The Covered Put Sale is used by buyers for two reasons:

a. The investor feels there may be limited downside potential for the stock and because of this is keen to forego decreases in the stock price beneath the options strike value in trade for receiving the options premium.

b. The investor needs some restricted upside protection from shorting the stock which comes from receiving the put premium. The web price of short selling the stock is lowered by the put premium quantity received.

The way to choose the Strike Price

The extra bearish the investor is the additional out of the money the put ought to be. By writing a deep out of the cash put choice the investor is ready to participate in a larger lower in the stock’s value; nevertheless, an additional out of the money put option will provide a smaller quantity of possibility premium.

4) Call Writing:

This technique is carried out by merely selling call options on a stock. The investor implementing this strategy can be expecting the underlying stock chosen to stay at or lower beneath the strike price. Basically, the call writer will profit when the stock price stays at or below the strike value as the call will expire worthless while the investor retains the premium.

The reasons it is used

Call option writing is applied by traders to generate additional income.

The way to choose the Strike Price

Selecting a strike value will rely upon the traders market forecast:

a. If the investor is bearish, writing call options at the money (ATM) or in the money(ITM) could be finest as there might be extra option premium provided for writing the decision options.

b. If the investor is neutral to barely bearish, writing an out of the money call(OTM) option would be best as it’s much less risky. These will comprise less option premium for writing the options but it is much less risky as a result of the stock value will have to go considerably higher so that the option can be exercisable.

5) Bear Put Spread:

This technique is used when an investor is reasonably bearish on a stock (the bearish equal of the Bull Call Spread). The Bear Call Spread is carried out by purchasing a put option while concurrently writing a put option with a lower strike price. The options shall be equivalent except for the strike value (use same expiration, similar stock).

 The reasons to use it

Bear Put Spreads are used for the following reasons:

a. An investor feels a stock will decline slightly and is prepared to forgo any depreciation in the stock below the strike price of the written put in exchange for the premium received for writing the lower strike price put.

b. An investor feels some restricted upside safety from purchasing the higher strike price put option. This safety comes from the premium gained by writing the lower strike value put, which lowers the net cost of buying the higher strike price put option.

The way to choose the Strike Price

The strike price used will depend on how bearish an investor is. The larger the bearishness of an investors forecast, the further out of the money and further aside the strike price should be. When an investor is much less bearish the strike price used must be closer to the current market value of the stock and the strike prices needs to be nearer together.

6) Bear Call Spread:

This technique is applied by writing a call option whereas simultaneously purchasing a call option with a lower strike price. The options used will be equivalent aside from the strike price (use identical expiration, identical stock.

The reasons to use it

Bear Name Spreads are used for the following reasons:

a. An investor feels there is some limited downside for a stock however shouldn’t be as assured as an outright call writer and because of this buys the upper strike price call to cap upside risk.

b. An investor wants further income.

The way to choose the Strike Price

The strike prices used will rely on how bearish an investor is. The better the bearishness of an traders forecast, the deeper in the money and additional apart the strike price ought to be. When an investor is much less bearish, the strike costs used needs to be nearer to the present market value of the inventory and the strikes must be nearer together.

 

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Trading Options – How To Use Straddle

Posted by admin on July 9th, 2010

 

The straddle technique is an possibility strategy that’s based mostly on buying both a call and put of a stock. Notice that there are various forms of straddles, but we will only be overlaying the essential straddle strategy. To provoke a Straddle, we’d purchase a Call and Put of a stock with the same expiration date and strike price. For example, we might provoke a Straddle for firm ABC by buying a June $20 Call in addition to a June $20 Put.

Now why would we wish to purchase each a Name and a Put? Calls are for whenever you anticipate the stock to go up, and Puts are for while you expect the inventory to go down, proper?

In a perfect world, we wish to be able to clearly predict the path of a stock. Nonetheless, in the real world, it’s fairly difficult. Alternatively, it’s relatively simpler to predict whether a stock price will move (with out figuring out whether the move is up or down). One methodology of predicting volatility is through the use of the Technical Indicator referred to as Bollinger Bands.

For example, you recognize that ABC’s annual report is popping out this week, however do not know whether they will exceed expectations or not. You might assume that the stock worth shall be quite unstable, however since you don’t know the information within the annual report, you would not have a clue which direction the stock will move. In cases like this, a Straddle technique can be good to adopt.

If the value of the stock shoots up, your call shall be deep In-The-Money, and your Put will probably be worthless. If the price plummets, your Put might be deep In-The-Money, and your call will be worthless. This is safer than  for both only a Call or only a Put. If you simply bought a one-sided option, and the value goes the unfavorable direction, you are looking at presumably shedding your whole premium investment. In the case of Straddles, you will be safe both approach, though you might be spending extra initially since you have to pay the premiums of both the Call and the Put.

Let’s take a look at a numerical example:

For inventory XYZ, let’s imagine the share price is now sitting at $63. There may be news that a authorized swimsuit against XYZ will conclude tomorrow. Irrespective of the results of the go well with, you already know that there will likely be volatility. In the event that they win, the worth will jump. In the event that they lose, the price will plummet.

So we decide to provoke a Straddle technique on the XYZ stock. We determine to buy a $sixty five Call and a $65 Put on XYZ, $65 being the closest strike price to the present inventory worth of $63. The premium for the Call (which is $2 Out-Of-The-Cash) is $0.seventy five, and the premium for the Put (which is $2 In-The-Cash) is $3.00. So our complete preliminary investment is the sum of each premiums, which is $3.75.

Quick forward 2 days. XYZ won the legal battle! Investors are more assured of the stock and the price jumps to $72. The $65 Call is now $7 In-The-Money and its premium is now $8.00. The $65 Put is now Method-Out-Of-The-Cash and its premium is now $0.25. If we close out each positions and sell each options, we’d money in $8.00 + $0.25 = $8.25. That is a revenue of $4.50 on our initial $3.75 investment!

Of course, we may have just bought a fundamental Name option and earned a larger profit. But we didn’t know which direction the inventory value would go. If XYZ lost the authorized battle, the price may have dropped $10, making our Name nugatory and causing us to lose our entire investment. A Straddle strategy is extra conservative and can profit whether the stock goes up or down.

If Straddles are so good, why doesn’t everybody use them for every funding?

It fails when the stock value doesn’t move. If the value of the stock hovers across the initial price, both the Name and the Put won’t be that much In-The-Money. Furthermore, the nearer it is to the expiration date, the cheaper premiums are. Options premiums have a Time Worth related to them. So an choice expiring this month could have a less expensive premium than an choice with the same strike price expiring next year.

So in the case where the stock worth does not move, the premiums of both the Call and Put will slowly decay, and you might find yourself losing a big proportion of our investment. The bottom line is: for a Straddle strategy to be worthwhile, there needs to be volatility, and a marked movement in the stock price.

A extra advanced investor can tweak Straddles to create many variations. They will buy totally different amounts of Calls and Puts with completely different Strike Prices or Expiration Dates, modifying the Straddles to suit their particular personal strategies and risk tolerance.

 

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How One Can Profit With Options And Delta Neutral

Posted by admin on July 2nd, 2010

 

One of the vital thrilling things about buying and selling options is the opportunities they supply the watchful dealer to develop trades with revenue potential no matter what the market direction is. A number of strategies have been developed to offer such opportunities, some tough to master and a few very simple.

These market neutral trading strategies all depend essentially on the delta of an options contract. There’s numerous math we may cover to get a strong grasp on this measurement, however for our functions here is what you must know to efficiently use it in trading:

Delta is a measurement indicating how much the price of the option will move as a ratio of the underlying’s value movement. An ‘on the money’ (that means the worth of the underlying stock could be very close to the option’s strike price) contract may have a delta of approximately 0.50. In other words, if the stock strikes $1.00 up or down, the option will about $0.50.

Notice that since options contracts manage a fair lot (a hundred shares) of stock, the delta will also be checked out as a p.c of match between the stock and the option contract. For example, owning a name possibility with a delta of.63 ought to make or lose sixty three% as a lot cash as proudly owning one hundred shares of the stock would. Another way of looking at it: that very same call option with a delta of .sixty three will make or lose as much money as proudly owning sixty three shares of the stock.

How about put options? While call options will have a positive delta (which means the decision will transfer up when the stock strikes up and down when the value of the stock moves down), put options could have a destructive delta (meaning the put will move in the OPPOSITE route of its underlying). As a result of market neutral buying and selling strategies work by balancing positive and negative deltas, these methods are often referred to as ‘delta neutral’ trading strategies.

One last thing you should be aware of about delta: this measurement isn’t static. As the value of the underlying stock moves closer to or farther from the strike value of the option, the delta will rise and fall. “in the money’ contracts will move with a higher delta, and ‘out of the money’ contracts with a lower delta. This is very important, and as we’ll see beneath, making the most of this fact is how we can earn profit whether or not the market goes up or down.

With this information in hand, we will create a simple delta neutral buying and selling system which has a theoretically unlimited profit potential, whereas maintaining potential loss strictly controlled. We do that by balancing the structured delta of a stock buy towards the damaging delta of a put option (or options).

Calculating the delta for an options contract is a bit complicated, but don’t worry. Every options broker will provide this quantity, together with other figures collectively generally known as the greeks, within their quote system. (If yours does not, get a new broker!). With that knowledge, observe these steps to create a delta neutral trade:

establish the stock you want to place a delta neutral trade with

discover the closest option strike value for a contract with an expiration at least three months from now (you possibly can theoretically use any strike value for this technique, but persist with at-the-money strikes for now)

find the delta worth from the options quote display screen for the put contract you are going to buy (put delta is definitely listed as a detrimental quantity)

purchase the put contract

purchase sufficient stock to offset the put’s adverse delta

You aren’t restricted to a one put option with this; simply ensure you buy sufficient inventory to offset no matter unfavourable delta you’ve got taken on with the put purchase. Example: on the time of this writing, the QQQQ ETF is buying and selling just a bit over $45. The delta of the forty five put (three months out) is -.45. I might buy a single put and steadiness the delta by purchasing 45 shares of the Qs. If I wished a larger position, I might buy two positions and 90 shares of Qs, or three positions and 135 shares of the Qs; as long as the ration of 45 shares of stock to 1 put contract is established, you possibly can size it appropriately to your portfolio.

It is a very protected position. As the stock moves up or down, the put contract will move about the same amount in the opposite direction. The place is hedged in order that small market strikes is not going to enormously impact its whole value.

That is where the profit begins: bear in mind the point made earlier about delta not being mounted? As an option turns into more in-the-money, it is delta will get larger (or more unfavorable, in the case of a put contract). If the inventory moves the opposite way and the option turns into extra out-of-the-money, the delta moves closer to zero. For readability, let’s take a look at two basic scenarios.

Stock strikes UP: the put’s unfavourable delta moves closer to zero. On this situation, the loss in value of the put contract slows resulting in a net profit for the overall position.

Stock moves DOWN: the put’s negative delta turns into more negative, while the stock portion of the portfolio declines in worth, the put’s value is increasing at an accelerating rate. This results in a net profit in portfolio.

 

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Evaluating Options Trading Using Delta

Posted by admin on June 25th, 2010

 

Any time trading options for stock (or futures for commodities including forex), one of the key risk analysis resources available is Delta. This sole way of measuring can have an important affect how well you have done relating to risk and return.

Evaluating Prospective Returns and Measuring Risk

In brief, Delta tells us two things. The very first is how much, at that given price, every $1 upward move will impact the cost of the actual option contact. For example, if the option in question has a Delta of 0.33, then when the underlying asset increases by $1.00, the price of the option should rise $0.33. This allows us to determine the return value of an alternative. The lower the Delta, the lower our return will be. The aim is to find options that are trading at as high a delta as feasible, although this generally means considering deep in-the-money options as opposed to less costly, out-of-the-money options.

The second crucial piece of info Delta shows us any time trading options is what amount of the gains/losses we control. For example, at a Delta of 0.33, we control 33 units of the underlying asset. How this helps us is to work out how we can hedge our risk. If we own two options with a delta of 0.33, we might be able to offset our risk by purchasing or owning the quantity of the underlying asset. In this instance, if we wrote 2 naked Call options Stock XYZ, to cancel out the risk of having to produce the asset, we should own 66 shares of XYZ.

Considerations That Impact Delta

Of course, as the amount of the asset persists to move in a given direction, the Delta will alter (we can measure how much of an impact this will have through Gamma). Also, as time passes the time premium of the alternative will begin to erode (and thereby affect Theta, another measurement). This means that, the Delta of an alternative is never at standstill.

Using Delta when trading options is typically the starting position for anyone who is looking at an options position in an asset. To reiterate, the lower the delta, the low the possibility return/risk. The higher the delta, the higher the price. Lots of people trading options can survive simply by understanding how Delta works, although there are other “Greeks” that prove invaluable in this arena.

Summary – Optimal Delta-Based Trades

For investors trading alternatives on the buy side the only way to enjoy a higher Delta and thereby control a higher percentage of the gains, is to purchase deep in-the-money options. There are still benefits to this. For example, where a stock is trading at $100, having control of 0.998 (virtually 1) of the returns/losses might mean buying the $70 options. As opposed to having to think of the full $100, you will develop $30 plus a small premium.

 

With regard to investors on the writing side, selling higher delta options will almost certainly lead to the position being filled at expiry. If your naked on a deal, this becomes problematic. If your covered, the position will liquidate and you will liquidate at less than the market price. Ideally, the alternative premium would compensate for this, but this is not forever the situation.

 

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Comparing Out-Of-THE-Money With In-THE-Money Options

Posted by admin on June 18th, 2010

 

Option trading is a great way to improve your potential returns in the stock exchange. But even with options there is room for risky trades and less risky trades.

If you want to be a more conservative option buyer you can always buy in the money stock options. If you feel like tackling some more risk with somewhat higher possible reward out of the money options can be a good option.

So let us check each of them separately. An in the money stock options is an option that has some intrinsic value in it. As an example, we come across a stock trading at $42 and are expecting it to go up to $50.

 

The $35 call would give us the authority to purchase the stock at $35 on or before a given date. If we were to buy the $35 call it may be considered an in the cash option as it already has $7 of intrinsic value. Unless this stock drops very far in the short term for it to be below our strike price of $35 we wouldn’t lose our entire investment.

Also if the stock goes up at all the option will be profitable, as long as things like time value and volatility do not work against you. And if it increases far enough the option will be profitable despite those other reasons.

Out of the money options are a little different. They have a little higher risk, but also give you a higher possible reward. Let’s take the same stock trading at $42; we still are expecting it to come up to around the $50 level.

This period we purchase the $45 see it. Because our call has a strike price above the price of the stock it has no intrinsic value. Instead the stock needs to surface with us to make any profit.

If the stock closes below $45 by expiration we would most likely lose 100% of our investment, making it very risky. Nonetheless if the stock does what we’re expecting it to do the position would be much more profitable than either buying the stock, or buying an in the cash option.

So which strategy is for you? It depends how risky you would like to be, or even if you would like to get into option trading. Options can be very profitable, but you need to consider all factors before jumping in.

 

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Trading Out-Of-The-Money Options

Posted by admin on June 11th, 2010

 

Here is an options trading plan based on out-of-the money. Trading out-of-the-money options is a good way to grow your portfolio with less cost involved. The trade can last from a few days to a month or two.

Entry signal

Determine the direction of the trend. Is it trending up or is it trending down?

Buy calls if trending up, or buy puts if trending down.

Best time to go in is after a 1-2 day pull back.

A good time to enter is just prior to market close. (If stock is in upper movement at close, it very likely to carry on overnight.)

 Exit Signal

On entry I always set my limit to $1.10. (.10 is to cover commissions.) After I am profitable by 50 cents, if profitable and the 30 minute charts or MACD look like they could be starting a pullback, I might consider exiting.

For stops I love to use a $1.00 below entry price. Although, I will adjust this for the stock. Higher dollar stocks with high volatility I will heighten the stop and lower dollar stocks with lower volatility I will decrease the stop.

Which options to choose

Expiration–I used to sell with at least 30 days till expiration. I now trade current month + 1. Other words, if your in the month of June, the earliest month I would take for expiration would be July.

Delta– I want to see a delta between 40 and 48 cents. Anything more than 48 and you will miss the jump between out-of-the-money and at-the-money. Below .40 works but you will most likely have to wait longer for your profits. (Remember for every $1 movement of the stock, your alternative will only move approximately the quantity of the delta.)

Price–I want my ask price to be under $10.00. Sometimes will go as high as $12.50 per option. Actually prefer options under $5.00. Yes, they’re there.

Open Interest–I look for an option that has the highest open interest for the schedule that I am looking at. Has to be over 100.

You can begin off small and watch your bank account grow bit-by-bit. A $50 profit done over and over grows quite rapidly and may be down with as little as a $500 investment.

 

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Options Trading Using the Q’s

Posted by admin on June 4th, 2010

My friend has been trading options online buying the Qs (QQQQ) for sometime and here’s his trade plan. Trading the Qs is a long way to grow your portfolio without a large expense of capital and may be traded as a day trade (1 day) or swing trade (2-5 days). You can make longer trades but you need to be cautious thanks to market volatility.

 

Entry

 

Establish the direction of the trend. Is it up or is it down?

Buy calls if trending up, or buy puts if trending down.

Best time to enter is after a 1-2 day pull back.

Try to purchase at least 20 contracts. (10 or less will work against, but your return is much less.)

If the Nasdaq has had a big pull back after initial entry, he will add to his position. Delay until the momentum has returned to the original trend direction before adding any more. You don’t want to be caught in a market reversal.

 

Exit

 

On entry he always sets his limit to 50 cents. After he is profitable by 15 cents, if the market is not moving or is pulling back, he will consider exiting.

he will use a stop of 50% of entry price. Try to get out much sooner though, observe the charts. They will normally let you know.

 

Which Option

Expiration–he used to sell with at least 20 days till expiration. He now trades current month + 1. Other words, if your in the month of June, the earliest month he would take for expiration would be July. Delta– he must see a delta between 70 and 95 cents. Anything above 95 and you are just throwing money away. Under .70 and the Qs have to make a bigger movement before your limit is reached. You can likewise lower the limit or choose a longer duration.

Price–he is looking for the ask price to be under $5.00.

Open Interest–he searches for an option that has the highest open interest under 5.00.

 

He has been buying options online trading the Qs and it has been one of his biggest money makers. He started off buying much smaller positions until the account grew big enough to support the larger trades. Extra time I discovered the above used to work best for me. One word of caution, if a trade starts going against you, GET OUT OF IT. Last year he didn’t, and took a big hit. Even with the hit he took last year (lost his discipline) he still trade the Qs on a daily basis and expect to continue.

 

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