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Understanding Option Trading, Simply

Sep 21

Posted by admin in Stocks Mutual Funds

Option trading is one method of trading that you can partake in. But, in order to take advantage of it, you need to find out just what it is and how it works. This will help you to make decisions that will affect you throughout your trading experience. Here is some basic information about option trading to help you.

What Is An Option?

Your basic question of what an option is can be answered like this. It is a contract that allows two parties to come to an agreement that the buyer will have the right to buy or sell a parcel of the shares. It is set at a predetermined price and at a predetermined date. The buyer does not have to take the option though. He has the right but not the obligation to do so. To get this right, the buyer will provide a premium to the seller.

Call Options

There are two types of option trading that you need to know about. In a call option, the buyer has the right to buy underlying shares of a stock. It is set at a predetermined price and also a predetermined date. Again, the buyer has the right but not the obligation to do this.

Put Option

The second type of option is the put option in option trading. In this type of option, the taker has the same fundamentals but is selling underlying shares. He has the same set up of having the right to do so but not the obligation to do it. Also, the same standards of the predetermined price and date also apply. The buyer of a put option is required to deliver the underlying shares only if they exercise the option.

If you would like to learn more about option trading, you simply need to contact your financial advisor and find out how it can serve your needs.

for more information please see http://www.option-trading-advice.co.uk

Writen By : Leon Chaddock

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Timing Your Trades

Sep 19

Posted by admin in Currency Trading, Stocks Mutual Funds

Timing is everything. You\’ve heard it a million times. It\’s a worn-out, over-used cliche that happens to be true. No matter what you\’re up against, timing is everything. If you\’re a futures or stock trader, timing is the only thing between you and the poor house.

It\’s a statistical certainty that if you play a zero-sum game with unlimited downside risk long enough, you will lose everything you own. The number of traders that don\’t understand or ignore that fact astounds me. If the above is news to you, then wake up and smell the coffee my friend, because you might very well be a train wreck waiting to happen.

Timing is not just simply buying low and selling high. It\’s not just jumping on or off at the most opportune moment. The most important element of timing is to understand and cope with the duration of your trade. That is, the time-frame in which your trade matures and develops.

System traders using technical or fundamental indicators analyze data looking for entry and exit signals. Once an entry signal has been acted upon and a trade entered, one generally waits for an exit signal. Only three things can happen to a trade at this point:
1) It flat-lines and price goes nowhere;
2) Price increases and we have a paper-profit; or
3) Price decreases and we have a paper-loss.

That\’s it! Only three! Now if any one of the above has occurred in a time frame that you can\’t explain, you\’re trading strategy is fundamentally flawed. And, more importantly, it\’s only pure dumb luck that\’s keeping you from going broke and then some. If this applies to you and your trade, get out now.

Not only must you understand when to get in and out, you must have a clear and profound understanding of how long it should take to meet your trading goals. The longer you are in a trade, the greater the risk you are exposed to even if price does nothing. Remember, if you stay in indefinitely, you will lose. It\’s not if, but when!

The next time you decide to jump into the market, know full well how long you plan to spend in that market. The planned duration of your trade is directly correlated with the risk you are assuming. Anything outside that time-frame means you must reassess your position and act decisively. As it turns out, my friend, timing is more than everything: It\’s the only thing!

Bert Terhart makes it easy to trade profitably in any market. Learn the essential keys that separate trading success and failure. To receive your free 10-part mini-course \”Trading Profits: Personal Success Formulas\” visit Forex Training.

Writen By : Bert Terhart

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Option Spread Trading

Sep 10

Posted by admin in Stocks Mutual Funds

Spread trading is a technique that can be used to profit in bullish, neutral or bearish conditions. It basically functions to limit risk at the cost of limiting profit as well.

Spread trading is defined as opening a position by buying and selling the same type of option (ie. Call or Put) at the same time. For example, if you buy a call option for stock XYZ, and sell another call option for XYZ, you are in fact spread trading.

By buying one option and selling another, you limit your risk, since you know the exact difference in either the expiration date or strike price (or both) between the two options. This difference is known as the spread, hence the name of this spread treading technique.

VERTICAL SPREADS

A Vertical Spread is a spread where the 2 options (the one you bought, and the one you sold) have the same expiration date, but differ only in strike price. For example, if you bought a $60 June Call option and sold a $70 June Call option, you have created a Vertical Spread.

Let\’s assume we have a stock XYZ that\’s currently priced at $50. We think the stock will rise. However, we don\’t think the rise will be substantial, maybe just a movement of $5.

We then initiate a Vertical Spread on this stock. We Buy a $50 Call option, and Sell a $55 Call option. Let\’s assume that the $50 Call has a premium of $1 (since it\’s just In-The-Money), and the $55 Call has a premium of $0.25 (since it\’s $5 Out-Of-The-Money).

So we pay $1 for the $50 Call, and earn $0.25 off the $55 Call, giving us a total cost of $0.75.

Two things can happen. The stock can either rise, as predicted, or drop below the current price. Let\’s look at the 2 scenarios:

Scenario 1: The price has dropped to $45. We have made a mistake and predicted the wrong price movement. However, since both Calls are Out-Of-The-Money and will expire worthless, we don\’t have to do anything to Close the Position. Our loss would be the $0.75 we spent on this spread trading exercise.

Scenario 2: The price has risen to $55. The $50 Call is now $5 In-The-Money and has a premium of $6. The $55 Call is now just In-The-Money and has a premium of $1. We can\’t just wait till expiration date, because we sold a Call that\’s not covered by stocks we own (ie. a Naked Call). We therefore need to Close our Position before expiration.

So we need to sell the $50 Call which we bought earlier, and buy back the $55 Call that we sold earlier. So we sell the $50 Call for $6, and buy the $55 Call back for $1. This transaction has earned us $5, resulting in a nett gain of $4.25, taking into account the $0.75 we spent earlier.

What happens if the price of the stock jumps to $60 instead?

Here\’s where the – limited risk / limited profit – expression comes in. At a current price of $60, the $50 Call would be $10 In-The-Money and would have a premium of $11. The $55 Call would be $5 In-The-Money and would have a premium of $6. Closing the position will still give us $5, and still give us a nett gain of $4.25.

Once both Calls are In-The-Money, our profit will always be limited by the difference between the strike prices of the 2 Calls, minus the amount we paid at the start.

As a general rule, once the stock value goes above the lower Call (the $50 Call in this example), we start to earn profit. And when it goes above the higher Call (the $55 Call in this example), we reach our maximum profit.

So why would we want to perform this Spread?

If we had just done a simple Call option, we would have had to spend the $1 required to buy the $50 Call. In this spread trading exercise, we only had to spend $0.75, hence the – limited risk – expression. So you are risking less, but you will also profit less, since any price movement beyond the higher Call will not earn you any more profit. Hence this strategy is suitable for moderately bullish stocks.

HORIZONTAL SPREADS

We now look a Horizontal Spreads. Horizontal Spreads, otherwise known as Time Spreads or Calendar Spreads, are spreads where the strike prices of the 2 options stay the same, but the expiration dates differ.

To recap: Options have a Time Value associated with them. Generally, as time progresses, an option\’s premium loses value. In addition, the closer you get to expiration date, the faster the value drops.

This spread takes advantage of this premium decay.

Let\’s look at an example. Let\’s say we are now in the middle of June. We decide to perform a Horizontal Spread on a stock. For a particular strike price, let\’s say the August option has a premium of $4, and the September option has a premium of $4.50.

To initiate a Horizontal Spread, we would Sell the nearer option (in this case August), and buy the further option (in this case September). So we earn $4.00 from the sale and spend $4.50 on the purchase, netting us a $0.50 cost.

Let\’s fast-forward to the middle of August. The August option is fast approaching its expiration date, and the premium has dropped drastically, say down to $1.50. However, the September option still has another month\’s room, and the premium is still holding steady at $3.00.

At this point, we would close the spread position. We buy back the August option for $1.50, and sell the September option for $3.00. That gives us a profit of $1.50. When we deduct our initial cost of $0.50, we are left with a profit of $1.00.

That is basically how a Horizontal Spread works. The same technique can be used for Puts as well.

For more information on spread trading, visit:
http://www.option-trading-guide.com/spreads.html

Steven is the webmaster of http://www.option-trading-guide.com. If you would like to learn more about Option Trading or Technical Analysis, do visit for various strategies and resources to help your stock market investments.

Writen By : Steven T. Ng

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The Stock Trading Plan – Why You Must Have One To Trade Successfully

Sep 10

Posted by admin in Stocks Mutual Funds

This is the continuing story of our two imaginary traders, Peter and Paul.

Peter is a professional trader, Paul is not. Peter has a tested, proven, written trading plan that he follows each time he enters a trade, Paul does not.

Peter and Paul have had vastly different Stock trading experiences – Peter has just made another substantial profit – this time from the Bear market, Paul has lost heavily.

A chance meeting with Peter\’s group of friends one day at lunch launches Paul on a learning curve that will see him become a good trader, but not without some hard lessons along the way.

Today Peter shares his trading plan and the importance of having a trading plan with Paul.

\”Today we will work on your Trading Plan,\” Peter told Paul as they sat down for the start of their next weekly mentoring meeting.

Peter handed Paul a copy of Robert Miner\’s book, Dynamic Trading, and said, \”Here, read this section of this wonderful trading book.\” Paul read to himself quietly as Peter poured them both a cup of coffee.

\”The purpose of Technical Analysis is not to be able to accurately identify every market position, all of the time. While this may be the daydream of many analysts and most amateur traders, it is an impossibility.

\”Every method of technical analysis has it\’s limitations and at times will provide contradictory information. Unless the analyst, trader or investor is willing to accept that his or her analysis will from time to time not provide a confident opinion of market position, he or she is doomed to failure.

\”The objective of technical analysis is to identify those market conditions and the specific trading strategies that have a high probability of success.

\”If there is a key concept associated with trading and investing, it must be probability. All consistently profitable traders and investors know that every trading and investing decision only has a probability of success, never a certainty.

\”Losses are inevitable and are just as much a part of successful trading as profits. If a trader has a successful trading plan, he or she should have no more emotional response to a loss than to a win. Each will be inevitable.

\”While it may be difficult to maintain a completely non-emotional relationship to trading and investing, an understanding that trading is a Business of probabilities will go a long way towards developing a stable attitude towards the Business.

\”All successful traders have a defined, written trading plan. The trading plan can take many forms. At the very least, it will provide the minimum guidelines that must be satisfied before a trade will be considered. It may be as complex as a long set of very restrictive rules that must be satisfied before a trade can be considered.

\”Each has it\’s strengths and weaknesses. Neither method, whether rules or guidelines, guarantees success, but the lack of either will ensure failure.

\”Why have a trading plan and not follow it? Each guideline and rule must be included with reason and purpose. All successful traders and investors consistently follow their trading plan and they know that if they violate their trading plan it will always be costly in the long run.

\”A trader who does not consistently abide by his or her trading plan is doomed to failure.\”

Paul looked at Peter after he finished reading, and understood the implications of what Robert Miner had written. He had never had any sort of trading plan. He had just taken the advice of other people and bought, held and hoped for the best.

Peter said, \”You need a trading plan my friend if you are ever going to make money in this Business. Then you have to have the ability to follow it.

\”The paragraphs you have just read are as important, and maybe more so, than learning any method of analysis or trading strategies or methods.

\”Even a trading plan that included technical analysis and trading strategies that were 100% accurate, in other words, would indeed predict the future trend of a Stock or Index every time with perfect certainty, would not result in you making a profit if you do not know and act in accordance with the qualities discussed above.\”

\”With this in mind, I will now share with you my trading philosophy, trading plan and rules.

\”I have found having this set of guidelines gives me a high probability of making successful, profitable trades. As Robert Miner said in his book, some losses are inevitable no matter what rules or strategies are used. They are a cost of doing business.

\”A Trading Plan and rules that you have tested and trust will help you remove the two biggest enemies traders face – Fear and Greed. These two factors have probably cost more traders more money than anything the market can throw at us.

\”By writing down and consistently following a solid plan that you have back tested and proven to be profitable with you paper trading, you put yourself ahead of 90% of market participants who fail to do any research or testing before they risk their capital in the market, and are eventually wiped out or give up because \”the market just isn\’t for me.\”

\”You must remember however,\” Peter continued, \”These are my guidelines. You might feel comfortable with them or you may not -you have to develop your own style.

\”These rules also do not constitute trading advice…you must sit down and determine what your rules and guidelines are going to be. Use these…or not. You must however decide which of the parameters you are going to use for your trading, then -

Write them down into a plan of action – and follow the plan.

Peter\’s Trading Philosophy -

He went on, \”My trading objective is to enter trades in the direction of the major trend using daily end of day data. There are three conditions under which I will enter a trade -

When pattern, price and my mechanical filters indicate a trend reversal has taken place.

On the first correction within the new trend, for example, the first higher low in a new uptrend.

On any trend continuation signal once the Stock or Index has signaled the new trend is underway.

\”The initial trend reversal position will always be in lots of 2 Futures positions or $20,000 invested in a Stock. A trend continuation trade entry will be 2 or more futures positions and $10,000 invested in a Stock.

Stop loss orders will be placed 5-50 cents or points past the extreme of the most recent swing pivot at the time the trade is placed – the number of points or cents used depends of the Stock or Future being traded.

\”These numbers will be different for every trader depending on risk tolerance and account size. Only take on as much as you can handle psychologically, or you set yourself up for failure.

\”If your position size is too large, you will tend to jump out at the first sign of trouble, often at the worst possible time. Trade within you comfort zone and success is much easier.

\”My initial capital exposure never exceeds 5% of my available account equity. Additional positions will not be taken unless the initial position is in profit and taking the additional position keeps the risk of the entire position below 5% of account equity. In other words, additional positions are only taken using the markets money.

Trading Rules and Trading Plan -

Peter continued as Paul took notes, \”My Trading Plan and rules offer two types of trades – Trend Reversal entries and Trend Continuation entries.

\”Trend Reversal entries are taken any time a Stock or Index completes a reaction and appears to be going into an Impulse Trend.

They are also taken when a clear 5 Wave sequence has completed, as we can expect at least a substantial correction, and possibly a change in trend at the end of a 5 Wave sequence.

The rules for Trend Reversal trades are -

The price must break a valid trendline.

The Moving Averages must cross, indicating a change in the short term trend.

For Long Trades, the Stock or Index MUST make a higher swing high, followed by a higher swing low on the daily chart. We enter the trade once the price rallies from the higher low.

For Short Trades, the Stock MUST make a lower swing low followed by a lower swing high on the daily chart. We enter the trade once the price falls from the lower high.

\”Trend Continuation entries are taken within the Impulse legs of Trends. They are not taken when price is within a consolidation period or a reaction.

The rules for Trend Continuation trades are -

For Long Trades, the Stock price must be above a valid Trendline.

The price bars must be above the longer term (usually 18 days) Moving Average on the daily chart.

The Stock must be making higher swing highs and lows on the daily chart.

The reactions within the uptrend must be less than 4 days.

For Short Trades, the Stock price must be below a valid Trendline.

The price bars must be below the longer term (usually 18 days) Moving Average on the daily chart.

The Stock must be making lower swing lows and highs on the daily chart.

The reactions within the downtrend must be less than 4 days.

\”Moving average periods are Stock or Index specific, in other words, try to find a combination that works on the markets you are interested in trading that don\’t give too many whipsaws. For example, 9 and 18 periods work well on many Stocks. Sometimes you can go as low as 6 and 13, or you may need as much as 15 and 30.

\”Play with it and find the optimum Moving Average numbers for the Stocks you trade. Then you can add the Trendline and swing high and low rules and you are ready to look for some trades.

\”A Valid Trendline must touch at least 2 and preferably 3 data point extremes – three significant highs or lows within a trend.

So, in summary, this is Peters Trading Plan…

To enter a trade on a Trend Reversal, he needs a Trendline break, a Moving Average crossover, and a swing higher or lower to get set in an uptrend, and a trendline break, a Moving Average crossover and a lower swing low and lower swing high to enter a downtrend.

To enter a Trend Continuation Trade, he needs a strongly trending market with reactions to the main trend of less than 4 days. He enters with the main trend as the reactions come to an end and places his stop loss orders just past the swing pivot extreme in case the trend fails to continue.

\”Now we have looked at my rules for entering trades, lets put them to work on a Stock,\” he said to Paul.

Turning to his computer screen, Peter opened a chart of IGT and scrolled back to 2001 – about half way through the bear market.
Charts available at StockTradingReview.com

\”We know that at this point in time, the weekly and monthly trend in this Stock was down, so we are looking for a valid entry with the trend at the end of a larger degree reaction – a trend continuation trade.

\”I have removed all but two moving averages for clarity – these are 7 and 13 periods.

\”You can see that the Stock made a low on August 8th, then rallied for 14 trading days including the inside day after the day of the high.

\”It then fell sharply, breaking a swing low. Two inside days then one day up followed, then another inside day, followed by a day that broke the low of the inside day but closed slightly higher.

\”The moving averages were coming very close together, therefore the third filter I use to enter was nearly in place, as we had already had the trendline break and lower top.

\”The Stock broke down the next day, and at the close, the moving averages had crossed – I sold $20,000 worth of IGT short at the close and it fell sharply for 5 days before recovering.

\”It had a two day rally, then a day down, so I moved my stop loss order to above the swing high this day down formed and was taken out of the trade three days later after price rallied.

\”My entry was at $13.18, my exit was at $10.70, giving me a net profit after Brokerage of $4,605 for a 13 day trade.

Paul could see the set-up quite easily now once it was shown to him in an example.

Peter continued, \”Lets have a look at another example.\” Peter opened a chart of MER and scrolled back to one of his trades from May 2002. Charts available at StockTradingReview.com

\”This trade was also when the bear market was well underway and MER was in a strong downtrend on the weekly and monthly chart.

Looking at the daily chart, Peter said, \”This Stock made a low, then rallied for 10 days. It then made a lower swing low and then rallied 2 days – the lower swing low is Filter one.

\”It touched my short term trendline 4 times as it rallied before breaking down – that is Filter two.

\”It then fell two days, had a one day rally, then gave a sell signal as it took out the low of that day.

\”This trade didn\’t result in the same quick profit as the one in IGT, but it was very satisfying all the same. My entry was at $40.55 and my exit was at $33.20 as it broke upwards through my stop loss order above a swing high.

\”This Stock gave me several more good profits as the downtrend continued. The set-up is always the same.

\”A short term Trendline break, a Moving average crossover, a lower low and lower top in a downtrend.

\”Let\’s have a look at an uptrend so you get the idea of what it looks like in a rally.\” Peter opened a chart of MSFT from Mid 2003, when the weekly and monthly trend had turned upwards.
Charts available at StockTradingReview.com

\”You can see here that MSFT made a high in early July and then sold off for nearly over 5 weeks.

\”Then the moving averages crossed and the short term downtrend line was broken convincingly by a large rally off multiple lows at around $25.50. This set up a 5 day rally, then the Stock fell one day before recovering at the close to be up on the day.

\”The buy signal was generated at the close, as this met all of the conditions. The Stock rallied over 20% during the next 5 weeks – that was very pleasant to watch.\”

Paul could see the simplicity of Peter\’s trading methods and was keen to go out and apply them in the Stock market.

Peter cautioned him however, \”Remember Paul, not all trades are this easy and turn out as well, but by trading these types of trends on the daily chart, when the weekly trend is also in the same direction, we have a high probability of a profitable outcome in a large percentage of cases.

\”Trying to guess tops and bottoms is a dangerous practice. It is a high risk trading strategy that rarely produces consistent profits.

\”It can be done using time, price and pattern to help us, as I did at the low in the S

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How Covered Calls Turned A Trader Around

Sep 6

Posted by admin in Stocks Mutual Funds

Sidney felt sick as she looked at her latest OptionsXpress trading statement. In just 8 months, she had managed to turn her $120,000 account balance into less than $70,000.

Tears welled up in her eyes as she realized that the financial freedom she so desperately sought was slipping uncontrollably out of her grasp. For the first time since the accident, she felt desperately fearful of the future.

How would she be able to keep custody of her two young children, Paul and Sara, without an income once the money was gone? She just knew her violent ex-husband, Tom, would file for custody as soon as he discovered that she had no way of providing for her children, and then she would be on her own. Her situation seemed hopeless…

12 months earlier, she had received a compensation payment for a work related accident and at the time had no idea of what to do with the money.

Her injuries were so severe that the likelihood of her working again in the near future was slim at best. She needed financial advice, but who to turn to, she had no idea.

A well meaning friend had mentioned an options trading course he had attended and suggested that trading might be a way for Sidney to earn above average returns on her compensation payment money, as interest and dividends would not be able to provide enough income for the family to live on.

She thought about it for several weeks, $5000 was a lot of money to put up to learn something that seemed totally foreign to her. Her other friends, when asked for their advice, warned her not to even consider options trading – it was a casino and everyone who ventured there lost their shirt.

The thought of extra returns however was too much for her, so she signed up for an upcoming course and hoped she could learn enough to succeed where so many others had failed.

The weekend course came and went in a blinding flash of trendlines, moving averages, support and resistance and Bollinger bands. She didn\’t know what had hit her.

At home the following day, she sat and stared at the course materials and was more confused than ever about options and spreads, puts and calls.

She looked at her two young children as they slept peacefully and decided that she simply HAD to get this right – she could see the potential – the course presenter had shown them trading statements showing profits of up to $25000 on a single trade, and no losses, so it was possible.

For the next two weeks, she read and re-read the course notes and listened to the CD\’s of the event she had received in the post after shelling out another $1400 at the seminar for them.

It finally started to make some sense for her one Saturday afternoon when her seven year old daughter looked at the chart she had on her computer screen and said, \”That line is going up, Mommy, what is it?\”

She looked into her young child\’s eyes and smiled, thinking \”How simple was that?\” She had just written out a trading plan for a put option trade based on her analysis of that very chart – she thought the price would go down; how wrong would she have been?

She stared at the chart for several long minutes and then she saw it.

She had been told that the safest place to buy put options was on the first lower top – at the start of a downtrend. However, she also had been told to place a 30 day simple moving average on the chart and never to trade against the direction of that indicator. The Stock had made a lower top, but the trend was still up.

These two conflicting filters had confused her until now. She re-read her notes and found that she must never trade against the direction of the 30 day moving average.

She felt like she had discovered the Holy Grail of trading.

She went back over her charts and looked at the 30 day moving average on each one – in all cases, that had been the trend direction and it just kept going – she had been trading against the trend! If she went with it she would be raking in the profits in no time.

Armed with this new insight, she decided that she would take the next trade that presented itself with real money and she was sure she was on her way.

The opportunity duly presented itself. She bought 10 (no use starting small) MSFT (Microsoft Corp) July Calls for $1.12, a total outlay of $11,200 plus commission.

The Stock promptly fell for three days straight. She panicked and sold the options at what turned out to be the low of the third day for $0.38 cents – a loss on her first trade of $7500! She was shattered. The next day, the Stock rallied and within two days it was at a new high for the move.

What had happened? She had sold at the very low of a reaction to the main trend. How could she have been so stupid?

She watched as the option premium quickly rose to $2.14 without her. This movement consumed her completely and she didn\’t even bother looking at her other watchlist Stocks – she was mesmerized by the one that got away.

The Stock continued to climb, as did the option premium – $2.85, $3.41, $3.82. Each day she watched as it doubled, then tripled her original stake. She cried – why?

It seemed the trend was going to continue forever, so she decided to get over it and buy some calls at the bottom of the next 3 day reaction – yes, that was it.

The Stock was having reactions of 2 and 3 days, so at the end of the next one, she would buy calls and make her lost money back.

That week, the price of MSFT started to come off a little, and had three big days down.

She bought 20 MSFT calls (well she had to get her money back, didn\’t she?) at a much higher strike price than the last ones and paid $1.31 for them, expecting the rally to come the next day.

Overnight, the US market fell 4% after terrorists attacked a Government building and threatened more similar attacks in the weeks and months that followed.

Sidney woke up to see the carnage in the US Stockmarket and just knew it was going to be a bad day.

MSFT opened down $1.30 along with the general market. Her call options were bid at $0.40 cents.

She remembered the last time this happened – she had sold in a panic. This time, she decided to hold on for a better price. The Stock continued to fall. The rally never came this time – the season had changed in the Stock Market.

Sidney held those options all the way to expiry – to zero, because she didn\’t have the stomach to take another loss like the last one. In two trades, she had lost over a quarter of her compensation payment. Things looked grim.

Her trading continued on for the next few months in much the same way. Small profits, large losses.

She frequented the trading forum of the group that had held the seminar but couldn\’t find any answers there either – most of the traders who posted comments were in the same boat.

Her friends kept saying \”I told you so!\” so she stopped hanging around with them. She was consumed with getting this thing right and nobody was going to stop her.

Then came that fateful day when she opened her monthly Options Account statement and saw the account balance had dipped below $70,000.

She wept uncontrollably for hours that day. She had failed. Her kids would be taken away by her ex husband and there was nothing but black for as far as she could see into the future – her life looked bleak.

In the midst of this horrible experience, her 12 year old daughter came home from School and found her mother in tears. \”What\’s wrong mom?\” her daughter asked. \”Oh, this option trading will be the death of me darling,\” Sidney sobbed.

\”Why, what\’s happened?\” Sara asked. \”Every time I buy an option, it goes down in value,\” her mother answered. \”Who do you buy the options from, mum?\” Sara asked after some thought. \”Other traders,\” Sidney answered.

Then Sara said the most profound thing Sidney had ever heard a child say, \”Mom, it sounds like those other traders are getting the best deal, and you are getting ripped off. Why don\’t you do what they do?\”

Sidney was about to explain why she was an option buyer instead of a seller, but stopped mid thought when she realized the power of what her daughter had just said.

Of course, every option that she had ever bought and then sold at a loss had made a profit for the seller, at her expense. She was speechless…

She had to change her strategy – immediately! She would become a writer of covered calls and sell options to others.

The next day, she went to the library and found three books on option writing and studied them cover to cover. It was simple…she would become an option writer and take the profits from the punters expecting extraordinary profits that rarely came.

To do this, she would start buying Stocks and writing covered calls over them. But which ones. She studied the pages of Investors Business Daily, looking for the options with the highest volatility, because she knew from her studies that she had to sell high volatility options to get good premiums.

She also wanted a low Stock price so she could buy more than a couple of thousand of them to minimise the effects of Brokerage fees on her profits.

The US options market appeared to be a goldmine for sellers because so many Stocks tended to hold strong trends, while still offering good premiums for their options – apparently many traders expected the trend to change every day, therefore bidding up the prices of options that were clearly not going to make them a profit if the trend continued – Sidney would use this to her advantage.

After careful study and several weeks of research on the Internet, Sidney chose one Stock to focus her initial attention and looked for a buy point.

Please Note – the following example is for illustration purposes only and does not constitute a recommendation to buy the Stock mentioned or any other Stock for that matter – please do your own research before undertaking any investment strategy mentioned – we cannot give you investment advice.

She waited for the trend to turn up, and bought 2000 Airtran Holdings (AAI) at $4.30 in January 2003 as the Stock had appeared to start a strong rally. The charts below show the trades Sidney took in this Stock. (Charts available at StockTradingReview.com)

She wrote (sold) 20 January $5.50 strike call options (one option contract covers 100 Shares) and received $440 after Brokerage.

Three weeks later, the Stock was trading at $6.00 (point 2). The options were exercised, as they were in-the-money at expiry and Sidney was forced to sell her Stock at the strike price of $5.50, netting herself a capital profit of $2400 plus the option premium of $440, a total of $2840 for three weeks or around 33% on her invested capital for the period!

She was hooked. \”That was more like it,\” she thought.

She immediately bought 3000 more AAI and wrote 30 February call options with a strike price of $7.00. She received a total premium of $670.

The Stock price basically tracked sideways for that month, and the options expired worthless (point 3). \”AHA,\” the light was coming on for her.

\”That used to be me,\” she thought to herself, as she called the Broker and sold another batch of $7.00 strike price options, this time for March expiry. Another $680 was deposited into Sidney\’s trading account. \”Every little bit helps,\” she thought.

The Share price rallied during March, but come expiration day, AAI again failed to close above $7.00. The options expired worthless and Sidney again kept the premium (point 4).

Sidney\’s total profit so far was $4190. And it had only taken her a few minutes a month to earn this income. \”How long had this been going on,\” she thought to herself.

The buyers of all those options had to sweat out weeks of time decay only to receive a small profit in one case or a loss at the end of the time. \”That used to be me!\”

She decided to increase her stake, and purchased an additional 3000 AAI Shares at $6.85 at the beginning of April (for a total of 6000 shares). She then wrote 60, $8.00 strike price call options for a total premium of $1240, and then just waited for expiry.

On the day of expiry, the Stock price closed at $7.85 (point 5) – she again kept the all the premium and the buyers of those options lost all of their stake.

For May, Sidney sold 60 more call options at a strike price of $9.00 as the Stock continued to rally.

Her premium income was $1195. The Stock price moved sideways for the month and the options again expired worthless. (Charts available at StockTradingReview.com)

Sidney bought another 2000 AAI in June and wrote 80 $9.00 call options. Her premium income was $1585. She sold her call options a long way above the market because it looked like the trend was accelerating and she didn\’t want to leave too much profit on the table by selling them too low.

During the month, the Stock did indeed rally strongly and closed on the day of expiry at $10.47 (point 6). Her call options were exercised and she received a total of $72000 from the sale of her Stock.

For July, she immediately reinvested this amount plus a little of her own funds and again bought 8000 AAI and wrote 80 call options with a strike price of $12.00.

She wrote a higher strike price this time around because the trend appeared to be accelerating and she didn\’t want to miss out on too much capital growth if it continued to rally.

Her premium income was much less this month, due to the options being further out-of-the-money than previously.

She only received $650, but with the trend accelerating, she was confident that she would be exercised and stood to make a good capital gain if she was right. The price didn\’t quite make it, closing at $11.83 on the day of expiry (point 7)…

She continued to buy more AAI Stock and write call options during August and September. Her total profits and premium income from trading this one Stock and strategy have made back nearly three quarters of her losses from the previous 8 months. Plus, she now had a good income to live on. Her children would be able to stay with her and the future looked much brighter.

The Stock continued to climb in price to above $20 and Sidney rode it all the way, writing call options over her ever increasing portfolio. When the trend eventually changed, she sold this Stock and moved on.

Sidney can now confidently continue to build on this initial success using other Stocks that are rising in price. There is a large universe of Stocks that are both optionable and often trend strongly, which give traders huge opportunities to profit from this strategy.

There are of course some ground rules to follow, but the fact that 85% or more of out-of-the-money options expire worthless puts the balance of probability on the side of the writer rather than the purchaser in most instances.

Some things to consider are -

1) When considering writing covered calls, always buy Stocks that are trending higher – if the 30 day moving average is rising and the price bars are above it, the trend is currently up – that doesn\’t mean it\’s going to continue in that direction but you will be trading with the balance of probability.

2) Always have a stop loss order in the market in case the trend reverses and you have to exit the Stock. You will have to buy back your sold call options prior to selling the Stock as the Shares are held as security by your Broker.

3) Start off slowly and build your position over time. Continue to look for covered call writing candidates and switch Stocks if you find something better than the ones you are currently trading.

I trust this example has given you an insight into writing covered calls. It is often a lower risk strategy than straight buying Stocks or options. It can provide a great income stream for people to live on or to build wealth for the future.

To Your Trading Success,

Tony Spann and the Stock Trading Review Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

Copyright(C)2005 Stock Trading Review

Writen By : Tony Spann

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Option Trading Basics

Sep 6

Posted by admin in Stocks Mutual Funds

Options trading can increase the profits you make when trading Stocks if you understand how to use them and know what you are doing. Options can be a very useful tool that the average investor can use to enhance their returns.

This article – Options Trading Basics, looks at what options are and discusses some of the options trading strategies traders can use with these versatile instruments.

Options – An Overview

Options give the buyer the right, but not the obligation, to buy (a call option) or sell (a put option) the underlying Stock or futures contract at a specified price up until a specified date.

In other words, options are like tradable insurance contracts.

An investor can purchase a Put option as insurance against a decline in the Stock price or a Call option in case the Stock rises. Buying an option gives the purchaser time to decide whether they will buy or sell the underlying Stock. The price is locked in until the expiry date, which in the case of LEAPS can be years into the future.

Options trading has several advantages that every Stock Market investor should be aware of, such as high leverage, lower overall risk than owning the physical security, more versatility and the ability to generate extra income from a current Stock portfolio.

An option\’s value fluctuates in direct relationship to the underlying security. The price of the option is only a fraction of the price of the security and therefore provides high leverage and lower risk – the most an option buyer can lose is the premium, or deposit, they paid on entering into the contract.

By purchasing the underlying Stock of Futures contract itself, a much larger loss is possible if the price moves against the buyers position.

An option is described by its symbol, whether it?s a put or a call, an expiration month and a strike price.

A Call option is a bullish contract, giving the buyer the right, but not the obligation, to buy the underlying security at a certain price on or before a certain date.

A Put option is a bearish contract, giving the buyer the right, but not the obligation, to sell the underlying security at a certain price on or before a certain date.

The expiration month is the month the option contract expires.

The strike price is the price that the buyer can either buy call) or sell (put) the underlying security by the expiration date.

The premium is the price that is paid for the option.

The intrinsic value is the difference between the current price of the underlying security and the strike price of the option.

The time value is the difference between current premium of the option and the intrinsic value. The time value is also influenced by the volatility of the underlying security.

Up to 90% of all out of the money options expire worthless and their time value gradually declines until their expiry date.

This clue offers traders a very good hint as to which side of an options contract they should be on…professional options traders who make consistent profits usually sell far more options than they buy.

The option contracts that they do buy are usually only to hedge their physical Stock Portfolios – that this is a powerful distinction between the punters and small traders who consistently buy low priced, out of the money and close to expiry puts and calls, hoping for a big payoff (unlikely) and the guys who really make the money out of the options market every month, by consistently selling these options to them – please think about this as you read the remainder of this article.

The seller of the option contract is obligated to satisfy the contract if the buyer decides to exercise the option.

Therefore, if he has sold Covered Call options over his Shares, and the Stock price is above the option strike price at expiry, the option is said to be in-the-money, and the seller must sell his shares to the option buyer at the strike price if he is exercised.

Sometimes an in-the-money option will not be exercised, but it is very rare. The option seller (or writer) has to be prepared to sell the Stock at the strike price if exercised.

He can always buy back the option prior to expiry if he chooses to and write one at a higher strike price if the Stock price has rallied, but this results in a capital loss as he will usually have to pay more to buy the option back than the premium he received when he originally sold it.

Many option writers simply get exercised out of the Stock and then immediately re-buy more of the same or another Stock and simply write more call options against them.

The buyer of an option has no obligations at all – he either sells his option later at a profit or a loss, or exercises it if the Stock price is in-the-money at expiry and he can make a profit.

The vast majority of options are held until expiry and simply decay in price until there is no point in the hapless buyer selling them. Very few options are actually exercised by the buyer. The vast majority expire worthless.

Having said all this, lets look at an example of how to use options to gain leverage to a Stock price movement when the trend does go in our favour…

For this example we will use MSFT as the underlying security. Let\’s assume MSFT is trading for $24.50 a share and it is early January. We are bullish on this Stock and based on our technical analysis we think that it will go to $27.50 within two months.

In this example, we will ignore Brokerage costs, but they do have an effect on the percentage returns. The prices and price moves of the Stock and the options are hypothetical – they are intended as a guide only.

Buying 1000 physical shares will cost $24,500 and if we sell our position at $27.50 a share, we will make a profit of $3,000 or a 12% return on our capital. We will have $24,500 at risk if we take this position for a potential of 12% or $3,000 profit.

Instead of using cash to buy the physical Stock, we can buy 10 call options with an expiration that is at least three months into the future and a strike price that is close to current price of the underlying security.

10 contracts represents 1000 shares of the stock, a call option is bullish, three months until expiry gives us some time for a quick move, and buying an option with a strike price that is close to the current price of MSFT allows us to get the full potential of the intrinsic value.

We buy 10 MSFT $22.50 April Call options. These options are currently selling for $2.80 and they are in the money.

$24.50 (the current price of the Stock) minus $22.50 ( the strike price) is $2.00, which is our Intrinsic value. $2.80 (the option premium) minus $2.00 (the Intrinsic value) gives us $0.80, which is the Time value.

If the price rallies to $27.50, as we believe it will, the intrinsic value of these same options at that point will be $5.00 ($27.50 – $22.50). That means that if the Stock gets to $27.50 a share, our option premium would be at least $5.00 plus a small amount of time value, depending on the remaining time until expiry.

Ten option contracts will cost us $2,800 ($280 times 100) and if MSFT goes to $27,500, we could sell our option contracts for at least $5,000 ($500 by 10 contracts), maybe more.

We will have $2,800 at risk if we take this position, rather than the full price of the Stock ($24,500) for a potential of 80% or $2,200 profit, plus whatever time value is left in the option, probably another $100.

Our options buying strategy gave us a much larger percentage profit with a much smaller potential risk. Don\’t forget though that, for us as the buyer, these options will expire worthless if not sold or exercised by the expiry date.

The option seller or writer simply has to sit back and wait until expiry to see if he is going to be exercised. If the Stock price is below the strike price at expiry, he keeps the premium and can write another option over the same Stock.

If the Stock price is above the strike price, he will most likely be exercised and will have to sell his Shares if he doesn\’t exit the position by buying his options back on the open market (quite often at a higher price than he originally sold them for).

The downside of buying the option over the physical Stock is that if you bought the Stock itself, even if the price had not moved, you would still own it, but by buying the option, if the price doesn\’t move in the desired direction, you lose part of your trading capital.

To make options trading work, the underlying security must move fairly quickly in the direction you expect, or you will lose money at an ever increasing rate as the expiry date draws nearer.

As you can see, options strategies can offer much higher percentage returns with less risk for the same trade. The majority of your cash is still safely in your trading account rather than being exposed to the market.

This is just one example of using options trading to increase your Stock Market returns. There are many more strategies and ways to use options and I encourage you to explore them further.

All options expire worthless if they are not in-the-money at expiry, so the buyer must close out or exercise his position on or before the expiration date or he will lose the entire premium.

The time value portion of the option premium decreases gradually until expiration date. The closer to expiry, the faster the time value reduces, as there is less time for the option to move in the desired direction for the buyer.

For buyers, top traders advise never to hold an option with less than 30 days to expiry due to the exponential rise in time decay during this period.

For sellers, it is usually most profitable to write options that have 30 days or less to expiry, due to this same time decay effect…the buyer of these options has the odds stacked against them and will require a large price movement in his desired direction to make a profit – remember, the vast majority of options expire worthless – so this is the side of these instruments the wealthy usually find themselves on – just a thought…

There are many other intricacies of options trading that investors and traders should be aware of. This article is only an introduction to options trading and there is a lot more information for you to learn.

For a more in-depth look at the various Options strategies available, visit AcornTrader.com.

This page has a series of articles on options trading and outlines some of the strategies traders can use to profit from these extremely flexible vehicles.

We encourage you to study these instruments carefully if you decide to trade them. Then use the trend trading strategies outlined in these stories and articles to position yourself on the right side of the market – whether as a buyer or a seller.

To Your Trading Success,

Tony Spann and Stock Trading Review Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

Copyright(C)2005 Stock Trading Review

Writen By : Tony Spann

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Options Trading Made Easy – Learn How To Profit

Apr 5

Posted by admin in Structured Settlements

If you’re trading stocks or bonds, there are a whole range of strategies you can follow, which range from the long term buy and hold, right through to day trading using technical analysis. Options trading is very similar.

Understanding exactly what an option is one of the trickiest things to understand when you’re starting out. Basically, an option is a contract that gives you the right to buy (a call option) or sell (a put option) a stock or bond at a set price (the strike price) on or prior to a set date (the expiration date). You might need to read that a few times to get the hang of it!

There are different types of options available in the marketplace, with ‘American’ options able to be exercised anytime between purchase and expiration, and ‘European’ options only able to be exercised on the expiry date. Although the terms are geographical, nowadays the location where you buy options doesn’t automatically mean you’ve bought one type or the other. As a general rule of them, American-style options are mostly used for stocks and bonds, whereas European-style options are for indexes.

Officially, options expire on the Saturday after the third Friday of the expiry month of the contract. However as US markets are shut on Saturdays, that makes the Friday the effective expiry day. Talk about confusing!

Now that you have a basic understanding of what an option is and how it works, let’s take a look at some basic strategies. I’ll just focus on American-style options for stocks.

When you buy or sell an option, you basically have two choices – you can hold it to maturity, or you can choose to exercise it prior to expiry. A large proportion of investors do hold their options until maturity before exercising it to trade the underlying asset. Let’s look at an example.

You’ve purchased a call option for $1, with a strike price of $25. As options contracts are generally for 100 share lots, your purchase (ignoring commissions) would cost you $100, and you’d have the right to purchase $2500 of stock through the option. Now, if the expiry date arrives and the stock is worth $27, it makes sense to go ahead of buy the stock, because you only have to pay $25. That means you’ve made an immediate profit of $2 per share if you sell them again immediately on the stock market. However you still have to factor in what you paid to buy the option, which was $1 a share. So after your purchase costs are deducted, your overall profit is $1 a share. Well done!

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