Archive for the ‘option trading strategies’ Category

Trading Options – Premium Selling Plans

Posted by admin on May 29th, 2010

So many trader prefer options plans that involve being a net seller of premium. This approach allows them to spend less time managing the trade, more room to be wrong on the direction of the underlying, and best of all, they don’t need a large account to sell. In this written article, I wish to speak about a a couple of my favorite premium selling strategies and give some brief points on how to sell them with a nominal amount  of time investment.

Overview of options spreads

Before jumping into a discussion of the tactics, let me give a brief overview of options spreads. The basic idea of a spread is to purchase one option and sell another against it. This usually has the advantage of making a defined risk position but delivers the almost limitless profit potential of simply buying an option outright. Variations on spreads include vertical spreads where I purchase one option strike in a given month for a particular underlying and sell another alternative in the same month and same underlying. Calendar spreads involve buying an options strike in 30 days for a given underlying and selling an option of the identical strike price and same underlying but in a different month.

How do premium selling plans work 

My favorite strategy is the short vertical spread, where I sell an alternative close to the current trading price of the underlying and purchase a strike price farther away from the actual price than the strike I sold. This trade is put on for a credit and the risk is bound to the dollar difference between my short and long strike prices minus the credit I received. The maximum amount of profit in this trade is the credit I receive from selling the spread. I will get to keep this credit on expiration if the short strike expires out of the cash by $.01 or more.

Why is this my favorite strategy? Let me use an example to illustrate. For example that SPY, currently trading at $108, has been in a bullish trend recently and my near term (20-40 day) forecast is for SPY to go up more or move sideways. A vertical spread trade I may put on is to trade a put option on SPY at $104 for a month with 20-40 days left until expiration and purchase a put option at $102. This is a $2 wide spread and can be put on for $.50, which signifies my risk in the trade is $1.50. For one contract, it will definitely cost me $200 in margin and my max risk is $150.

Once the trade is on, what are the possibilities? SPY can move up strongly and within a week I could close the trade for $.10 debit locking in $.40 gain and an ROI of 26%. However, SPY could also go sideways for the following month or even pull back a few dollars. In all of those cases my trade still makes money. Why is that? Because I have sold an out of the money option that is 100% time premium with no intrinsic value. In a case like that, time is my friend. While it’s true I also own a long put option that is in addition wasting away, it’s value was firstly less so if both expire worthless, I finish up with a net credit.

Making a trading plan

It’s not enough to simply know about the strategy. To be prosperous in the long run, I have to have some consistent rules I follow that dictate when to get into a trade, when to get out and how much risk to assume on each trade. These rules together are a key section of an alternative trading plan. I have one for this strategy, which I’ll briefly outline.

I trade both bullish and bearish short verticals. For this discussion, I’ll talk just about the bullish trade and leave the bearish as a workout for the reader.

Outlook: Trade this strategy on an underlying (usually an ETF) with an established bullish trend (higher highs & higher lows)

Market Entry Points: Look to penetrate a trade on options with 20-40 days remaining until expiration and I try to sell a few strikes out of the money on the short strike. I also prefer $2 wide spreads as the margin requirement and risk are easily managed

Market Exit Points: I have at least one ideal profit target and one ‘worst case’ scenario known as exits. An easy one for me is what I call the 20%/100% rule. I will exit when regrettably you can only use 20% of the initial credit left in the trade. I will also exit if the cost to shut has grown by 100%. To Illustrate, if I put on the trade for $.50, then my ideal exit would be to shut for $.10 (20% rule), while my ‘worst case’ exit would be $1.00 (100% rule).

This is obviously a very easy trading plan that needs some more definition but provides a reduced maintenance approach to option trading. With numerous options trading platforms, I am in a position to enter my exit rules as a ‘one-cancels-other’ order where both orders are entered and when one triggers to fill, the other is cancelled. That’s it – no muss, no fuss.

More strategies

Another strategy I like when I’m more neutral is what is called an iron condor. That’s when I sell both a short call vertical and a short put vertical on the same underlying for the same month. Usually with a $2 wide spread, I’ll have at least $4 between the short put and the short call. So on the SPY position I mentioned, that can be a $114/112 call spread and a $104/102 put spread.

The benefit of this strategy is that it is able to receive twice the premium with the same amount of risk. Consider it. On expiration, is it feasible for SPY to both be above $110 AND below $104? No. So, most brokerages will only hold margin on one side for this type of trade.

Another strategy I like is a calendar spread. I may purchase a $104 put several months out on the SPY and then sell a $104 put out 20-40 days until expiration. This is in reality a debit spread but is still considered a premium selling strategy. It’s a little longer term strategy but can pay very well.

These are my bread and butter trades. I am in a position to trade them regardless of what the market is doing and they keep on do well for me.

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Follow These Steps To Successful Covered Calls

Posted by admin on May 1st, 2010

Covered Calls are a conservative income strategy and as such, provide limited protection against a price slide in the underlying share price.

To locate a covered call, simply follow these rules:

1. Search for either a range trading securities market or a bullish trending market where you expect a steady rise in the price of the underlying stock.

2. Study the options linked to the stock to make sure there is enough liquidity.

3. Evaluate premiums and strike prices for call options no greater than 45 days to expiration date.

4. Check implied volatility on these options to ascertain whether they’re overpriced or undervalued. As you are going to trade option contracts, the best result will be expensive options.

5. Examine a chart of the underlying stock for the past year to make a decision where the stock presently is in relation to its overall price cycle.

6. Choose an option strike price which is above the actual market price to trade against the shares you will obtain and then calculate the maximum potential profit. This will be the credit you get from selling the short call options, plus the difference between the current market price of the stock at the time you enter the trade and the strike price of the call options.

7. Decide which trade to place, recalling this:

Almost unlimited Risk if the underlying stock price fall

Limited Reward being the most prospective revenue you have calculated

Breakeven, being the level to which the underlying stock can drop before you start to lose money. This will be the premium from the short call deducted from the current price of the stock when you enter the trade.

8. Build a risk graph of the most promising looking alternative. Note the almost limitless risk underneath the breakeven.

9. Make a remark of the trade setup and causes of it in your trading journal before you execute it. This’ll help lessen the possibility of mistakes, in addition to provide a admonition of how you were pondering right at that moment.

10. Want an exit plan before you enter the trade. Step in the plan involves being prepared to sell the stock at the strike price of the alternatives you will sell, if the calls are assigned.

You may conceive to exit at 50 percent maximum potential profit if the underlying stock rises – or opt to wait until a great profit is realized. If the stock falls but remains above the break-even you have estimated, there is still some profit so you will have to know beforehand what your overall objectives are and whether or not to stay in.

If the underlying stock falls under the breakeven, you may decide to keep the stock and let the call options expire worthless. The credit you have received will become a partial hedge against the losses on the stock. Reckoning on how great the fall is, you could then sell more call options for the the following month out and this may bring you back to an overall breakeven. If your objective is not cashflow but lasting investment then you could be happy to wait until the stock rebounds while you get dividend income.

Whatever your primary objective in doing this is, you ought to have a plan before you enter the trade and set your exit rules in accordance with it.

11. Execute the trade with your broker. Do it as a “limit order” so as to lower the overall cost of the trade.

12. Watch the underlying market closely from here on. Be ready to make a choice whether to trade the stock once it reaches the breakeven point, or adjust the position back to a delta neutral one to increase profit potential.

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Short-Term Options Trading Strategies

Posted by admin on April 3rd, 2010

The’re many traders who however regard options to be long term trading markets, but options can even be traded short term. It is essential to see that trading options short terms is not drastically distinctive from trading any other market but there are a couple of options specifics that need to be considered. In short term trading, the aptitude to steer the short term market is a key component for continued success. As an equity trader one has to learn to sell with the short trend of the markets to reduce market risk. 

An alternative trading is a strategy that does not depend on the market direction; as a matter of fact it does well in volatile markets. With options trading there are two methods through which you can enter a long trade and short terms trade. While a long fundamental trade can be exercised either by buying a call or by selling a put, a short underlying trade can be entered either by purchasing a put or by selling a call. 

In short term options trading computing risk /reward is yet one other serious aspect that trader need to be alert to. Working out the risk/reward can be defined as the amount trader would risk if he/she were wrong and the amount of money trader would make if he or she were right. If we don’t figure out this number, the prospects are more where we might find the stock that may go in favor but the OPTION goes against. 

If we assess long and short term options trading, then both have their own individual advantages. However, buying short term options can be very beneficial as it gives additional control. In general that nobody can specifically make prediction very evidently when it concerns stock trading. It’s really challenging to predict what will occur to a stock 3 months down the road. Though often times it is simpler to predict which way the stock will be heading in exactly a few weeks in preference to a few months. Therefore, selling short term options allow capture more premiums over a longer time frame.

Apart from this, it even performs well and delivers a superb means for novice traders to sell. This is because when the amount movement is so fast and dynamic that when things happen, beginners may not know what to do and be able to do it speedily. Furthermore, it is an enormously lively options trading method where options are purchased and sold very rapidly in order to gain benefit from the least intraday price swing or change in volatility. 

These days undoubtedly short term options trading has gained its world-wide popularity. It is now extremely well known money-making method in the possession of options trading veterans and new comers in the current quite volatile market conditions.


The’re many traders who however regard options to be chronic trading markets, but options can even be traded short term. It is essential to see that trading options short terms is not drastically distinctive from trading any other market but there are a couple of options specifics that need to be considered. In temporary trading, the aptitude to steer the short term market is a key component for continued success. As an equity dealer one has to learn to sell with the short trend of the markets to reduce market risk. 
An alternative trading is a strategy that does not depend on the market direction; as a matter of fact it does well in volatile markets. With options trading there are two methods through which you can enter a long trade and short terms trade. While a long fundamental trade can be exercised either by buying a call or by selling a put, a short underlying trade can be entered either by purchasing a put or by selling a call. 
In temporary options trading computing risk /reward is yet one other serious point that trader need to well alert to. Working out the risk reward can be defined as the amount trader would risk if he/she were wrong and the amount of money trader would make if he or she were right. If we don’t figure out this number, the prospects are more where we might find the stock that may go in favor but the alternative goes against. 
If we assess chronic and short term options trading, then both have their own individual advantages. However, buying temporary options can be very beneficial as it gives with additional control. It very general that nobody can specifically make prediction very evidently when it concerns stock trading. It’s really challenging to predict what will occur to a stock 3 months down the road. Though often times it is simpler to predict which way the stock will be heading in exactly a few weeks in preference to a few months. Therefore, selling short term options allow capture more premiums over a longer time frame.
Apart from this, it even functions well and delivers a superb means for novice traders to sell. This is because when the amount movement is so fast and dynamic that when things happen, beginners may not know what to do and be able to do it speedily. Furthermore, it is an enormously lively options trading method where options are purchased and sold very rapidly in order to gain benefit from the least intraday price swing or change in volatility. 
These days undoubtedly short term alternative trading has gained its world-wide popularity. It is now extremely money-making method in the possession of options trading veterans and new comers in ongoing quite volatile market conditions.

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Options Trading Strategies

Posted by admin on March 12th, 2010

Options trading tactics, span from generating income into your stock portfolio on a regular monthly basis, guaranteeing any downside in a particular stock you may well be holding in your portfolio and a method to leverage both the upside of the market and the down-side, all simultaneously.

Now, if you’re like me and need to monitor your portfolio increase in value overtime, whereas having the prospect for revenue, (which everybody reading this is likely saying no) then you need to understand all the option trading strategies that are possible for you.
To provide you with an example of a good option trading strategy that you can implement at this moment is the selling of covered calls. This simple option trading strategy will permit you to take an underperforming stock in your portfolio and establish a per month income. How this option trading strategy works is as follows:
Step 1. You possess a stock in your portfolio that is either flat and tend to neither increase nor decrease in your portfolio, or the stock has slipped way under the price you paid for it.
Step 2. You sell a call option on this stock. Basically, for every 100 shares of the stock you possess, you can sell 1 call option linked with that stock. (Example is you possess 400 shares of XYZ stock, you can sell 4XYZ call option contract). This scenario is selling a covered call.
Step 3. You recoup a premium coming from the sale of the call option. (These premiums fluctuate depending on the volatility of the stock and the period of time left on the option contract.
Step 4. Now you sit by and see just what exactly the marketplace will accomplish for you. For example, the stock may decline in value and the call option will run out worthless, meaning you keep the premium and sell new call options the following month, or the stock stays flat 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 rise in value and you have to sell the stock for the strike price of the call option. Usually, if the stock you have has a high volatility, you probably wouldn’t utilize this option trading strategy. But, it is your own preference.
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Options trading tactics, span from generating income into your stock portfolio on a regular monthly basis, guaranteeing any downside in a particular stock you may well be holding in your portfolio and a method to leverage both the upside of the market and the down-side, all simultaneously.Now, if you’re like me and need to monitor your portfolio increase in value overtime, whereas having the prospect for revenue, (which everybody reading this is likely saying no) then you need to understand all the option trading strategies that are possible for you.To provide you with an example of a good option trading strategy that you can implement at this moment is the selling of covered calls. This simple option trading strategy will permit you to take an underperforming stock in your portfolio and establish a per month income. How this option trading strategy works is as follows:Step 1. You possess a stock in your portfolio that is either flat and tend to neither increase nor decrease in your portfolio, or the stock has slipped way under the price you paid for it.Step 2. You sell a call option on this stock. Basically, for every 100 shares of the stock you possess, you can sell 1 call option linked with that stock. (Example is you possess 400 shares of XYZ stock, you can sell 4XYZ call option contract). This scenario is selling a covered call.Step 3. You recoup a premium coming from the sale of the call option. (These premiums fluctuate depending on the volatility of the stock and the period of time left on the option contract.Step 4. Now you sit by and see just what exactly the marketplace will accomplish for you. For example, the stock may decline in value and the call option will run out worthless, meaning you keep the premium and sell new call options the following month, or the stock stays flat 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 rise in value and you have to sell the stock for the strike price of the call option. Usually, if the stock you have has a high volatility, you probably wouldn’t utilize this option trading strategy. But, it is your own preference.Now, if you’re like me and need to monitor your portfolio increase in value overtime, whereas having the prospect for revenue, (which everybody reading this is likely saying no) then you need to understand all the option trading strategies that are possible for you.To provide you with an example of a good option trading strategy that you can implement at this moment is the selling of covered calls. This simple option trading strategy will permit you to take an underperforming stock in your portfolio and establish a per month income. How this option trading strategy works is as follows:Step 1. You possess a stock in your portfolio that is either flat and tend to neither increase nor decrease in your portfolio, or the stock has slipped way under the price you paid for it.Step 2. You sell a call option on this stock. Basically, for every 100 shares of the stock you possess, you can sell 1 call option linked with that stock. (Example is you possess 400 shares of XYZ stock, you can sell 4XYZ call option contract). This scenario is selling a covered call.Step 3. You recoup a premium coming from the sale of the call option. (These premiums fluctuate depending on the volatility of the stock and the period of time left on the option contract.Step 4. Now you sit by and see just what exactly the marketplace will accomplish for you. For example, the stock may decline in value and the call option will run out worthless, meaning you keep the premium and sell new call options the following month, or the stock stays flat 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 rise in value and you have to sell the stock for the strike price of the call option. Usually, if the stock you have has a high volatility, you probably wouldn’t utilize this option trading strategy. But, it is your own preference..

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Understanding Trading Options – Covered Calls

Posted by admin on March 2nd, 2010

The way to Trade Options – Covered Calls 
Covered calls will most certainly be a conservative option trade that normally has improved performance than standard stock trading schemes in virtually all of markets. This is because because covered calls lengthen profits from speculators while collecting a premium on the trade and holding onto the stock for dividends. Since you have multiple sources of profit in the trade, you have the opportunity to earn an income when the stock increases, down or sideways. 
For those who don’t already know, writing a covered call involves buying 100 shares of stock and then selling the call alternative on those 100 shares 1 or 2 strikes out of the money in the front month. This lowers your initial investment in order to own the stock and provides you with multiple sources of profit. 
Covered calls are an options trade best set up on equities that’re mild to moderately bullish in nature. A covered call outperforms standard stock trading strategies only when the market is mildly bullish or neutral. When the market rallies, writing covered calls will dramatically cut into your profit margins since you will get exercised against and be pressured to sell your shares at a lesser than possible profit. 
He’re some of the matters I search for in writing a covered call: 
1. 3-5% ROI from the premium. Presuming the stock doesn’t alter in price throughout the trade, you should certainly have earned 3-5% of the value of the stock on the money accumulated in the premium. Aim elevated and you risk a lot. Aim too low and you’re just about making any money. 
If your profit margin is too high, it’s an indication that there is a fantastic deal of speculation and volatility related to this particular stock. You don’t want to be buying a covered call on a stock that has a 6-10% ROI from the premium each month. This is because since you risk things like catastrophic gapping from abrupt news announcements or dramatic bullish breakouts that cut into your profit margins upon being exercised. Avoid this and play it safe with a smaller monthly ROI. 
2. A standard should be trading above its 200 day exponential moving average for at any rate a calendar month. More often than not the 200 day EMA is the benchmark of whether an asset for an options trade is in an uptrend or a downtrend. Anticipate this as your primary technical indicator when determining a regular to write covered calls on. 
3. A stock should have a Price to Earnings Ratios (P/E) in the range of 15 to 25. The price to earnings ratio steps a company’s earnings versus the value of each share of stock in the firm. It’s an indicator of how valued a business is, the lower the number, the better the wages per share and the more profitable and growth oriented a business is. The higher the number, worse the net profit are per share and the more overvalued a company is. Businesses with P/E Ratios above 30 are usually the result of group speculation with little earnings to show for it. 
You should expect a company to be moderately to well valued to position a covered visit it, so don’t look for the undervalued businesses prepared to explode or the overvalued firms getting ready to crash. Try to stick somewhere in the middle. 
4. A stock should have a relative strength index(RSI) between 45 and 70. Relative strength is the measurement of the overall amount of upswings in price action versus the overall amount of downswings averaged out over a period of time. When the typical number rises above 70, the position is viewed overbought and values under 30 are thought oversold. 
I advise staying in the middle 45 and 70 to make sure you are addressing a stock that has a confident frame of mind, but isn’t going to explode off the chart any time soon. This will help make certain your options trade isn’t getting cut out of profits by being exercised and is still performing well without losing equity in the market. 
 The way to Trade Options – Covered Calls 
Covered calls will most certainly be a conservative option trade that normally has improved performance than standard stock trading schemes in virtually all of markets. This is because because covered calls lengthen profits from speculators while collecting a premium on the trade and holding onto the stock for dividends. Since you have multiple sources of profit in the trade, you have the opportunity to earn an income when the stock increases, down or sideways. 
For those who don’t already know, writing a covered call involves buying 100 shares of stock and then selling the call alternative on those 100 shares 1 or 2 strikes out of the money in the front month. This lowers your initial investment in order to own the stock and provides you with multiple sources of profit. 
Covered calls are an options trade best set up on equities that’re mild to moderately bullish in nature. A covered call outperforms standard stock trading strategies only when the market is mildly bullish or neutral. When the market rallies, writing covered calls will dramatically cut into your profit margins since you will get exercised against and be pressured to sell your shares at a lesser than possible profit. 
He’re some of the matters I search for in writing a covered call: 
1. 3-5% ROI from the premium. Presuming the stock doesn’t alter in price throughout the trade, you should certainly have earned 3-5% of the value of the stock on the money accumulated in the premium. Aim elevated and you risk a lot. Aim too low and you’re just about making any money. 
If your profit margin is too high, it’s an indication that there is a fantastic deal of speculation and volatility related to this particular stock. You don’t want to be buying a covered call on a stock that has a 6-10% ROI from the premium each month. This is because since you risk things like catastrophic gapping from abrupt news announcements or dramatic bullish breakouts that cut into your profit margins upon being exercised. Avoid this and play it safe with a smaller monthly ROI. 
2. A standard should be trading above its 200 day exponential moving average for at any rate a calendar month. More often than not the 200 day EMA is the benchmark of whether an asset for an options trade is in an uptrend or a downtrend. Anticipate this as your primary technical indicator when determining a regular to write covered calls on. 
3. A stock should have a Price to Earnings Ratios (P/E) in the range of 15 to 25. The price to earnings ratio steps a company’s earnings versus the value of each share of stock in the firm. It’s an indicator of how valued a business is, the lower the number, the better the wages per share and the more profitable and growth oriented a business is. The higher the number, worse the net profit are per share and the more overvalued a company is. Businesses with P/E Ratios above 30 are usually the result of group speculation with little earnings to show for it. 
You should expect a company to be moderately to well valued to position a covered visit it, so don’t look for the undervalued businesses prepared to explode or the overvalued firms getting ready to crash. Try to stick somewhere in the middle. 
4. A stock should have a relative strength index(RSI) between 45 and 70. Relative strength is the measurement of the overall amount of upswings in price action versus the overall amount of downswings averaged out over a period of time. When the typical number rises above 70, the position is viewed overbought and values under 30 are thought oversold. 
I advise staying in the middle 45 and 70 to make sure you are addressing a stock that has a confident frame of mind, but isn’t going to explode off the chart any time soon. This will help make certain your options trade isn’t getting cut out of profits by being exercised and is still performing well without losing equity in the market. 
 
Covered calls are most certainly a conservative option trade that normally has improved performance than standard stock trading tactics in virtually all of markets. This is because covered calls increase profits from speculators while collecting a premium on the trade and holding onto the stock for dividends. Since you have multiple sources of profit in the trade, you have the opportunity to earn an income when the stock increases, down or sideways. 
For those who don’t already know, writing a covered call involves buying 100 shares of stock and then selling the call option on those 100 shares 1 or 2 strikes out of the money in the coming month. This lowers your initial investment in order to own the stock and provides you with multiple sources of profit. 
Covered calls are an options trade best set up on equities that’re mild to moderately bullish in nature. A covered call performs better than standard stock trading strategies only when the market is mildly bullish or neutral. When the market rallies, writing covered calls will dramatically cut into your profit margins since you will get exercised against and be pressured to sell your shares at a lesser than possible profit. 
He’re some of the matters I search for in writing a covered call: 
1. 3-5% ROI from the premium. Presuming the stock doesn’t alter in price throughout the trade, you should certainly have earned 3-5% of the value of the stock on the money accumulated in the premium. Aim elevated and you risk a lot. Aim too low and you’re just about making any money. 
If your profit margin is too high, it’s an indication that there is a fantastic deal of speculation and volatility related to this particular stock. You don’t want to be buying a covered call on a stock that has a 6-10% ROI from the premium each month. This is because since you risk things like catastrophic gapping from abrupt news announcements or dramatic bullish breakouts that cut into your profit margins upon being exercised. Avoid this and play it safe with a smaller monthly ROI. 
2. A stock share should be trading above its 200 day exponential moving average for at any rate a calendar month. More often than not the 200 day EMA is the benchmark of whether an asset for an options trade is in an uptrend or a downtrend. Anticipate this as your primary technical indicator when determining a stock share to write covered calls on. 
3. A stock share should have a Price to Earnings Ratios (P/E) in the range of 15 to 25. The price to earnings ratio offers valuation of a company’s earnings versus the value of each share of stock in the firm. It’s an indicator of how valued a business is, the lower the number, the better the net profits per share and the more profitable and growth oriented a business is. The higher the number, worse the net profit are per share and the more overvalued a company is. Businesses with P/E Ratios above 30 are usually the result of market speculation with little earnings to show for it. 
You should expect a company to be moderately to well valued to position a covered call on it, so don’t look for the undervalued businesses prepared to explode or the overvalued firms getting ready to crash. Try to stick somewhere in the middle. 
4. A stock share should have a relative strength index(RSI) between 45 and 70. Relative strength is the measurement of the overall amount of upswings in price action versus the overall amount of downswings averaged out over a period of time. When the typical number rises above 70, the position is viewed overbought and values under 30 are thought to be oversold. 
I advise staying in the middle 45 and 70 to make sure you are managing a stock share that has a positive potential in price increase, but isn’t going to explode off the chart any time soon. This will help make certain your options trade isn’t getting cut out of profits by being exercised and is still performing well without losing equity in the market. 
 
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Understanding Trading Options – Binary Option

Posted by admin on February 24th, 2010

 

We’re all accustomed to the basic concepts of trade – a trader researches the market and buys an asset at a specified price, with the hope that its price will rise and he will sell the asset at the new price and benefit from the difference. 
When it comes to binary options, this process is different. Yes, the trader, also known as the buyer, will be on researching the market and he will be able to predict the direction of the market, but how he can profit from that outcome differs from the convential trading. 
The following distinctions are explained clearly: 
Conventional trade: there are many of possible outcomes, none of which are recognized at the time of the acquisition of assets. 
Trading binary options: there is just 3 possible consequences – or the asset expires in-the-money, out-of-the-money or in-the-money. The 3 results are fully known to buy the option and consequently all possible risks can be taken into account. 
Customary trade: the gain or loss hinges on the magnitude of the price surge / fall in assets, as an example 200 shares, if they get to $ 10 each, the quantity of gain or loss is perfectly addicted to the volume of the asset price rises or falls 
Binary Options Trading: it is barely the direction of movement is essential and not the degree of it. Therefore, if a buyer puts a $ 2,000 option on an underlying asset with a 71% rate of change, who knows from the outset that if the alternative expires in-the-money, then receive $ 3420 and if ends outside the-money, then receive a 15% down payment of $ 300. 
The reason for this is all the consequences of a binary alternative trading are known right from the start of the contract. This cuts down on risk factor and also limits the knowledge that a sale should be before it buys an alternative. 
regular trade: the trader possesses the asset itself 
 
Trade binary options : a buyer is only trading on the performance of an asset trade 
traditional Trade: merchant will have a detailed skills of the marketplace and the asset being traded 
Trade binary options: a purchaser requires only a sense of direction in which the asset can move in as it is barely trading on the functioning of an asset, as opposed to the magnitude of price change 
conventional trade: the resource can be offered when ever it agrees with the trader trade 

We’re all accustomed to the basic concepts of trade – a trader researches the market and buys an asset at a specified price, with the hope that its price will rise and he will sell the asset at the new price and benefit from the difference. 

 

When it comes to binary options, this process is different. Yes, the trader, also known as the buyer, will be on researching the market and he will be able to predict the direction of the market, but how he can profit from that outcome differs from the convential trading. 

 

The following distinctions are explained clearly: 

Conventional trade: there are many of possible outcomes, none of which are recognized at the time of the acquisition of assets. 

Trading binary options: there is just 3 possible consequences – or the asset expires in-the-money, out-of-the-money or in-the-money. The 3 results are fully known to buy the option and consequently all possible risks can be taken into account. 

Customary trade: the gain or loss hinges on the magnitude of the price surge / fall in assets, as an example 200 shares, if they get to $ 10 each, the quantity of gain or loss is perfectly addicted to the volume of the asset price rises or falls 

Binary Options Trading: it is barely the direction of movement is essential and not the degree of it. Therefore, if a buyer puts a $ 2,000 option on an underlying asset with a 71% rate of change, who knows from the outset that if the alternative expires in-the-money, then receive $ 3420 and if ends outside the-money, then receive a 15% down payment of $ 300. 

The reason for this is all the consequences of a binary alternative trading are known right from the start of the contract. This cuts down on risk factor and also limits the knowledge that a sale should be before it buys an alternative. 

Regular trade: the trader possesses the asset itself 

Trade binary options : a buyer is only trading on the performance of an asset trade 

Traditional Trade: merchant will have a detailed skills of the marketplace and the asset being traded 

Trade binary options: a purchaser requires only a sense of direction in which the asset can move in as it is barely trading on the functioning of an asset, as opposed to the magnitude of price change 

Conventional trade: the resource can be offered when ever it agrees with the trader trade.binary selection: time purchase contract, the buyer can decide between different maturities – end of the hour, day, week or month. As soon as the expiration period has been selected and the option is purchased, this cannot be altered or denied. 

Binary options trading is a very exceptional uniquecommitment and translates into an exciting new offer for those who want to manage their investment risks.

 

 

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Understanding Trading Options – Bull-Put

Posted by admin on February 20th, 2010

What is a Bull Put Spread?

A Bull-Put Spread is a trade similar to a Covered Call but in place of owning the stock you possess the option to buy the stock. It is a bullish credit spread.

When Is a Good Time To Use It?

A Bull-Put spread can be traded in preference to a Covered Call (uses less capital), when the trend of the stock is bullish but you are not positive, when the stock is trading sideways, when you like to invest limited funds and when you do not mind ending with the stock. (If the stock price drops under the strike price of the put, you have access to the stock put to you.)

When Is Not A Good Time To Use It?

Dont want to be assigned the stock. Another thing you have to view is your commissions, you might have four trades involved and they could] [consume your profits.

How Is The Profit Generated?

As time value (volatility) is taken away from the option price, the option drops in value. When entering the trade, you were presented with a credit for the trade. When closing the trade, the remaining credit (time value), if any, will be subtracted from the original credit and you will receive what is left.

What Are The Steps To Trade A Bull-Put Spread?

Bull-Put trades is an out-of-the-money trade. Sell 1 put option 1-2 strikes underneath the current price and buy 1 put alternative at the next lower strike price. If the options are in $2.50 increments you can buy the put 2 strike prices underneath the put sold.

Steps -- Broken Down

Stock is at 33.87

Sell the Oct $30 for $2.00 per share
Buy the Oct $27.50 for 1.00 per share - Whole credit is $1.00 per share - Maximum profit is $1.00 per share - Maximum loss is $1.50 per share
$30 - $27.50 + Full Credit(1.00) = $1.50 - Maximum Rate of return = 66.7%
$1.00 / $1.50 = 66.7%

Closing Out Your Trade
In the above example, if the stock stays above $30 per share, do not do anything and just let it expire. You ought to check with your broker, some brokers will close the trade for you when the trade drops below.25. (A lot of times, if the stock movement is doubtful, I will close out early if the remaining value of the put sold is close to.05.)

Again using the above example, if the stock drops below $30, buy back the alternative sold, and sell option bought. If stock is dropping you may wish to hang on the option bought and recover a lot off the loss from the sold alternative.

Monitor Closely

If stock declines significantly you can wind up with a huge loss if you have purchased a large number of contracts with a broad spread. Following is an instance of what happened to me.

I was taking a trip and had a Bull Put Spread on PD (Phelps Dodge) at 90/85. I wasn't aware that the stock had dropped $7.00 during day and it was expiration Friday. I stopped at a McDonalds and fired up my laptop and discovered that I had been place the stock. I quick sold the stock and took an overall loss of $3991.89 including commissions. If I had had a stop order on the put option at $90, I would have cut my losses greater than a half. (Lesson learned.)

Things to be aware of

When purchasing a Bull Put Spread, the broker will deduct the maximum of possible loss from your account. When the trade is closed out, you will get that all back plus any credits applied.

You can obtain the most money from stocks that have a higher Implied Volatility, but on the other hand you need to monitor closely.

Bull-Put vs Bull-Call

The strategies are the same for both. With the Bull-Call you are trading calls as opposed to puts. The charges typically finish up being about a similar. It actually boils down to what you are most familiar with.

One advantage of a Bull Call Spread is that if the stock is in a strong upward run, you can purchase back the sold option, and potentially make more money from the option bought.

In recent times when trading options online I have traded Bull-Put spreads often and have made money about 95% of the time. The losses hurt but you won't ever lose more than the gap between the strike sold and the strike bought minus the credit you received from the alternative sold. A good time to buy is 1 to 2 weeks in front of the expiration. Of course this is a prime strategy to put on with strong stocks when they are moving sideways or in an upward trend.

There have been many articles written on how to trade Bull-Put Spreads when trading options online. I have read most of them and educated a little more from each of them. The next is a presentation that I gave to our users group some time back. It assumes that you are aware of a minute about options. 
What is a Bull Put Spread? 
A Bull-Put Spread is a trade similar to a Covered Call but in place of owning the stock you possess the option to buy the stock. It is a bullish credit spread. 
When Is a Good Time To Use It? 
A Bull-Put spread can be traded in preference to a Covered Call (uses less capital), when the trend of the stock is bullish but you are not positive, when the stock is trading sideways, when you like to invest limited funds and when you do not mind ending with the stock. (If the stock price drops under the strike price of the put, you have access to the stock put to you.) 
When Is Not A Good Time To Use It? 
 Dont want to be assigned the stock. Another thing you have to view is your commissions, you might have four trades involved and they could] [consume your profits. 
How Is The Profit Generated? 
As time value (volatility) is taken away from the option price, the option drops in value. When entering the trade, you were presented with a credit for the trade. When closing the trade, the remaining credit (time value), if any, will be subtracted from the original credit and you will receive what is left. 
What Are The Steps To Trade A Bull-Put Spread? 
Bull-Put trades is an out-of-the-money trade. Sell 1 put option 1-2 strikes underneath the current price and buy 1 put alternative at the next lower strike price. If the options are in $2.50 increments you can buy the put 2 strike prices underneath the put sold. 
Steps — Broken Down 
Stock is at 33.87 
Sell the Oct $30 for $2.00 per share 
Buy the Oct $27.50 for 1.00 per share - Whole credit is $1.00 per share - Maximum profit is $1.00 per share – Maximum loss is $1.50 per share 
$30 – $27.50 + Full Credit(1.00) = $1.50 - Maximum Rate of return = 66.7% 
$1.00 / $1.50 = 66.7% 
Closing Out Your Trade 
In the above example, if the stock stays above $30 per share, do not do anything and just let it expire. You ought to check with your broker, some brokers will close the trade for you when the trade drops below.25. (A lot of times, if the stock movement is doubtful, I will close out early if the remaining value of the put sold is close to.05.) 
Again using the above example, if the stock drops below $30, buy back the alternative sold, and sell option bought. If stock is dropping you may wish to hang on the option bought and recover a lot off the loss from the sold alternative.
Monitor Closely 
If stock declines significantly you can wind up with a huge loss if you have purchased a large number of contracts with a broad spread. Following is an instance of what happened to me. 
I was taking a trip and had a Bull Put Spread on PD (Phelps Dodge) at 90/85. I wasn’t aware that the stock had dropped $7.00 during day and it was expiration Friday. I stopped at a McDonalds and fired up my laptop and discovered that I had been place the stock. I quick sold the stock and took an overall loss of $3991.89 including commissions. If I had had a stop order on the put option at $90, I would have cut my losses greater than a half. (Lesson learned.) 
Things to be aware of 
When purchasing a Bull Put Spread, the broker will deduct the maximum of possible loss from your account. When the trade is closed out, you will get that all back plus any credits applied. 
You can obtain the most money from stocks that have a higher Implied Volatility, but on the other hand you need to monitor closely. 
Bull-Put vs Bull-Call 
The strategies are the same for both. With the Bull-Call you are trading calls as opposed to puts. The charges typically finish up being about a similar. It actually boils down to what you are most familiar with. 
One advantage of a Bull Call Spread is that if the stock is in a strong upward run, you can purchase back the sold option, and potentially make more money from the option bought. 
In recent times when trading options online I have traded Bull-Put spreads often and have made money about 95% of the time. The losses hurt but you won’t ever lose more than the gap between the strike sold and the strike bought minus the credit you received from the alternative sold. A good time to buy is 1 to 2 weeks in front of the expiration. Of course this is a prime strategy to put on with strong stocks when they are moving sideways or in an upward trend.

 

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Trading Options – Delta

Posted by admin on February 16th, 2010

When trading options for stock (or futures for commodities including forex), one of the key risk analysis tools available is Delta. This single measurement may have an imperative affect your functioning relating to risk and return. 

 

Estimating Possible Returns and Measuring Risk 

 

Briefly, Delta tells us two things. The foremost is how much, at that given price, every $1 upward move will impact the cost of the actual alternative contact. For example, if the option in question has a Delta of 0.33, then when the underlying asset increases by $1.00, the cost of the option should rise $0.33. This allows us to make up one’s mind the return value of an alternative. The lower the Delta, the reduced our return will be. The aim is to learn options that are trading at as high a delta as possible, although this typically means thinking about deep in-the-money options instead of at a lower cost, out-of-the-money options. 

 

The second critical piece of details Delta shows us when trading options is what amount of the gains/losses we manage. For example, at a Delta of 0.33, we manage 33 units of the underlying asset. How this facilitates us is to work out precisely how we can easily hedge our risk. If we own two options with a delta of 0.33, we could offset our risk by purchasing or owning the volume of the underlying asset. in this instance, if we wrote 2 naked Call options Stock XYZ, to canceled out the risk of needing to produce the asset, we ought to own 66 shares of XYZ. 

 

Considerations That Impact Delta

 

Needless to say, as the price of the asset continues to move in a presented with direction, the Delta will change (we can measure how much of an impression this will have through Gamma). Also, as time passes the time premium of the option will begin to erode (and thus have a bearing on Theta, another measurement). This means that, the Delta of an option is never stagnant. 

 

Using Delta when trading options is usually the starting point for anyone who’s looking at an options position in an asset. To reiterate, the lower the delta, the reduced the potential return/risk. The higher the delta, the higher the cost. 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 savor a higher Delta and in so doing control a higher percentage of the gains, is to buy deep in-the-money options. The’re still benefits to this. As an example, where a regular 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 tiny premium. 

 

For investors on the writing side, selling higher delta options will nearly surely run to the placement being filled at expiry. If you are naked on a deal, this becomes problematic. If you’re covered, the situation will liquidate and you will liquidate at less than the market price. Ideally, the alternative premium would compensate for this, but this is not always the case.

Using Delta When Trading Options
When trading options for stock (or futures for commodities including forex), one of the key risk analysis tools available is Delta. This single measurement may have an imperative affect your functioning relating to risk and return. 
Estimating Possible Returns and Measuring Risk 
Briefly, Delta tells us two things. The foremost is how much, at that given price, every $1 upward move will impact the cost of the actual alternative contact. For example, if the option in question has a Delta of 0.33, then when the underlying asset increases by $1.00, the cost of the option should rise $0.33. This allows us to make up one’s mind the return value of an alternative. The lower the Delta, the reduced our return will be. The aim is to learn options that are trading at as high a delta as possible, although this typically means thinking about deep in-the-money options instead of at a lower cost, out-of-the-money options. 
The second critical piece of details Delta shows us when trading options is what amount of the gains/losses we manage. For example, at a Delta of 0.33, we manage 33 units of the underlying asset. How this facilitates us is to work out precisely how we can easily hedge our risk. If we own two options with a delta of 0.33, we could offset our risk by purchasing or owning the volume of the underlying asset. in this instance, if we wrote 2 naked Call options Stock XYZ, to canceled out the risk of needing to produce the asset, we ought to own 66 shares of XYZ. 
Considerations That Impact Delta
Needless to say, as the price of the asset continues to move in a presented with direction, the Delta will change (we can measure how much of an impression this will have through Gamma). Also, as time passes the time premium of the option will begin to erode (and thus have a bearing on Theta, another measurement). This means that, the Delta of an option is never stagnant. 
Using Delta when trading options is usually the starting point for anyone who’s looking at an options position in an asset. To reiterate, the lower the delta, the reduced the potential return/risk. The higher the delta, the higher the cost. 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 savor a higher Delta and in so doing control a higher percentage of the gains, is to buy deep in-the-money options. The’re still benefits to this. As an example, where a regular 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 tiny premium. 
For investors on the writing side, selling higher delta options will nearly surely run to the placement being filled at expiry. If you are naked on a deal, this becomes problematic. If you’re covered, the situation will liquidate and you will liquidate at less than the market price. Ideally, the alternative premium would compensate for this, but this is not always the case.

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A Cheap Strategy to Play Microsoft

Posted by admin on November 16th, 2009

Bill Gates is super rich but his once high-flying software company has been in the doldrums since mid-2002 after falling from the $35 level. The problem with Microsoft (MSFT) has been its failure to grow both its revenues and earnings at the superlative rates the company once enjoyed.

Any company the size of Microsoft, with a market-cap of $242 billion, will find growth an issue because of its size. But this is not to say the stock is dead. Far from it, Microsoft remains a viable long-term software company and is cash rich with $34 billion or $3.28 per share in cash. This gives the stock plenty of financial flexibility to develop or buy growth technologies. Microsoft just announced it would spend $1.1 billion in R&D at its MSN Internet unit in the FY07. And according to the Wall Street Journal, Microsoft is exploring the possibility of taking a stake in Internet media company Yahoo (YHOO) to take on Internet advertising behemoth Google (GOOG).

But with an estimated five-year earnings growth rate of a pitiful 12%, the company has its work cut out for it. Trading at 16.30x its estimated FY07 EPS of $1.44, the stock is not expensive but appears to be priced not as a growth stock.

Its PEG on the surface of 1.51 is not cheap, but if you discount in the cash of $3.28 per share, the estimated PEG falls to around 1,0, a decent valuation. Also, if Microsoft can improve on its estimated 12% growth rate, the PEG would decline further.

The fact is Microsoft at the current price deserves a look. If you want to play the stock but don’t want to shell out the $2,347 for a 100-share block, you may want to take a look at the long-term options, also known as LEAPS. For instance, the in-the-money January 2008 $22.50 Microsoft Call LEAPS not set to expire until January 18, 2008 currently costs $380 a contract (100 shares).  

This means you risk a total of $380 for the chance to participate in the potential upside of 100 shares of Microsoft over the next 20 months. The breakeven price is $26.30. If Microsoft breaks $26.30, you would begin to make money on your LEAPS. Conversely, if Microsoft fails to do anything, your maximum risk is $380 on the initial option play.

Warning: The aforementioned example is for illustrative purposes only and not to be construed as an actual option strategy. Due to the higher risk inherent in options, I recommend you speak with an investment professional before deciding to employ any strategy involving options.

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Option Trading Strategy matching Your Trading Style

Posted by admin on November 1st, 2009

The thrill of options trading is that allows for a diversity of tactics to be corresponding with distinctive stock trading plans. Each strategy has a different success and risk tolerance level, and by means of a variety of strategies can add zest to a portfolio very nicely! In this article, four different stock trading strategies, will be demonstrated and how they can be coordinated with corresponding options trading strategies which you can apply to your portfolio. The main idea is to first concentrate on an underlying stock trading strategy, and then add significant leverage and power to the trade by using options.

The most significant issue when taking into account each of these strategies is the theory of TIME DECAY. The value of any option dwindles over time, until the day the option expires. This concept can be the major rival of any option trade, reducing its profits, or it can be the key to successful and profitable option trading.

Firstly, which Strategy?

There are generally four different strategies employed by stock traders, each of which has implications when applied to options:

(i) Position Trading

Traders buy a stock and hold it for long periods of time, based on good fundamentals of the company. They will often wait for a stock to reach really good value, and then watch for institutional or insider buying before making a move. As the stock price increases, they look out for other buyers to step in and move the price even further.

APPROPRIATE OPTION STRATEGY

Buying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which could be wiped out over time even as the stock gains in price. TIME DECAY is your enemy.

Selling covered calls each month in the option cycle on the stock you already own can significantly reduce the cost you paid for the stock in the first trade. Even if the stock goes down, you can still come out a winner!

(ii) Momentum or Trend trading

Once a stock has made clear move or breakout, the Momentum traders step in, and ride the stock up along a trend to its first major reversal. They hope to make shorter term profits from a rapid move in the price. Holding periods range from six weeks to six months.

APPROPRIATE OPTION STRATEGY

Buying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which will be wiped out over time even as the stock gains in price. TIME DECAY is your enemy with Momentum Trading, unless you have a particularly strong and fast moving trend.

Selling Credit Spreads is a good strategy, and in fact can be very profitable, because as you sell spreads on the opposite leg from the stock’s direction of momentum (e.g. selling put credit spreads in stock with a strongly bullish trend), you can repeatedly buy back the spreads for minimum cost and sell another spread closer in. This strategy can easily yield 10-15% profit per month. Time Decay is your secret weapon for trading this strategy.

Selling Naked Puts is a good strategy, and can be even more profitable than selling credit spreads. However, it leaves you a position of possibly having to buy a lot of stock if the trade goes against you, and so your broker requires you to have a lot of margin.

(iii) Swing Trading

Swing Traders buy and sell swings or oscillations within a trend. Holding times are from between 2 and ten days. This is a shorter term trading technique that is more dependent on the trend direction than it is on fundamentals or technical indicators.

APPROPRIATE OPTION STRATEGY

If you have mastered the skill of identifying reversals or swings within a trend, and know how to plan an exit strategy, you will be able to start buying calls and puts, or DITM options, which will take you to real profits! With Swing Trading, holding times are short (2-10 days) and so you minimise the effect of your arch enemy, TIME DECAY.

(iv) Day Trading

Day traders focus on the many small moves that happen during the trading day, mainly shown up by candlestick patterns. This strategy has a broker’s requirement of a minimum of $25,000 to qualify, which knocks out many beginners.

APPROPRIATE OPTION STRATEGY

Option trading is not appropriate with this strategy. Broker fees for options trading are quite high, and Day Traders end up paying vast sums to their brokers.

In Summary:

If you own at least 100 units of a stock that is not particularly trending in any particular direction, sell Covered Calls each month in the option cycle. You can reduce the net price that you originally paid for the stock by between 5-12% each month.

If you have at least $1,000 in your account, and can identify a trend, you can easily sell Credit Spreads or Sell Naked Puts each month in the option cycle.

If you have mastered Swing Trading principles, especially the idea of planning entries and exits, you can start to buy Calls and Puts, or DITM options and make phenomenal profits.

 

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