Strangle Options Strategy » Call Option

Reduce Your Risk With Stock Options

admin — Thu, 14 Jan 2010 20:50:28 +0000

Options trading, and specifically writing options, is normally poorly understood, and more often than not, poorly communicated. This is why most people dismiss it as too complicated or too difficult. So many traders are put off trading in options purely because of lack of knowledge. But once educated in this area you will find you can actually work options to your favour to produce regular income and reduce your risk.Options are just one type of Derivative. They’re a financial instrument which has another asset as its underlying base and includes futures and warrants. They provide exposure to shares but they deliver greater leverage and enable you to trade bullish or bearish markets and make money regardless of the direction the market is trending.People trade options for the leveraged factor. For a minimal capital outlay you can generate great profit, but leverage is a double-edged sword. When you win, your profit can sometimes be ten times the amount the underlying share has moved, but when you lose your loss is magnified to the same extent. There are two types of options, call option and put option. An option is a contract written by a seller that conveys to the buyer the right, but not the obligation, to buy (in the case of a call option) or to sell (in the case of a put option) a specified quantity of shares at a specified price (strike price) at or before a certain date in the future. In return for granting the option, the seller collects a payment called the premium from the buyer. A call option will rise in value exponentially when the underlying share rises in value and a put option will rise exponentially when the underlying share decreases.You will hear plenty of horror stories about people’s experience trading options. Some of these stories may be based on truth, so it is important to know why people are sometimes repelled from trading options after being introduced to the market. Usually they have only employed a buying of options strategy, which is called directional trading and requires a high level of concentration and knowledge about where markets are heading because if your stock goes the other way to which you intended you will be at a loss, a leveraged loss at that also. More investors lose money when adopting this buying of options only strategy. It is believed to be up to 80 – 90% of people lose money when buying options for directional trading. This is because the buyer needs their option to move further in-the-money to make a profit, and if it doesn’t they will be looking at a loss. In-the-money means the share price has to go up for a call and down for a put. This is why it is imperative you explore the other side of options and see the advantage of being the seller. When you have sold another trader an option, you have put yourself in the enviable position of having sold a depreciating asset. The value of an option decreases exponentially the closer it gets to expiry, it will lose two thirds of its value in the last third of its timeframe. Once an option has been purchased, if it is out-of-the-money (share price is below option strike price with a call option and above with a put option) at expiry, it will be worthless. The seller will have the money in their bank account and the buyer of the option will be holding a worthless asset. The buyer’s view of the option moving further in-the-money has failed.There is one advantage though with buying options, but it is only when buying a put option to protect shares you already own. If you own 1000 shares for example you can buy put options to insure those 1000 shares at a strike price at or close to your purchase price. What that means is, if the share price is below your strike price at the time of expiry, you can automatically have those shares sold at your nominated strike price.When used correctly options can definitely give you regular income as well as protection for your capital thus reducing your risk. But when used incorrectly, can quickly demolish your trading account.

Be a Money Spinner with Call Option Trading

admin — Thu, 26 Nov 2009 18:42:45 +0000

You could be a money spinner with call option trading. Several traders in the market try to make a difference by adopting complex call option techniques. However, at times when you look around for complex solutions, the solution may actually be one that is absolutely simple.
Similarly sometimes it is the simple or the basic call option trading that is just right for the prevailing market trends. The below mentioned guidelines would be of great help to make a good profit with call option trading:
The secret to success with call option lies with understanding the pulse of the market. You should be able to correctly understand and predict the direction in which the market would move. Call option trading is actually playing with the direction of the market although your money meter would start ticking only if the market moves upwards. It is being able to predict the movement of the market and capitalizing on the upward movement.
There are many key indicators that can be used to predict an upward movement like for instance the market news, fundamental information like a rise in the dividend of a company, charts and graphs like reverse head and shoulder, upside price breakout to name a few. Some traders use a combination of indicators to understand the market trends. You must be able to predict or estimate the target where the price movement is headed.
The time factor is another important element. You should be able to estimate the time when the upward movement would take place and how long will it take to reach your target price. Deciding your call option expiry would depend on these factors. Your broker can be of great help in providing information regarding the options chains and other market news.
You must be clear about details like which stock exchange you want to deal at. Being able to decide the expiration date is very important. For this you should be able to estimate the time in which your price movement would take place and by when would your target price be achieved.
Study the market scientifically. Make proper comparisons of the Delta, Gamma, Theta and Vega for different target prices in the same expiry.
Keeping a track of the open interest and also the volumes in the market is very important. Choosing the best call option is another important factor. You must be able to rightly estimate the exit point and also the stop loss. Looking at the market dispassionately and scientifically is essential.
Close the position on time keeping track of the market trends. For making a good profit it is very important to monitor the market on a regular basis and understand call option trading perfectly before making any deal. You must not be carried away by the sudden ups and downs and make impulsive decisions.

How Option Trading Profit In Any Market Conditions

admin — Tue, 24 Nov 2009 22:39:26 +0000

All stock market multi millionaires must be able to profit under any kind of market conditions. If you are able to profit only when stock markets go up, then you will find it a gargantuan task to ever have any sustainable success, much less become a stock market millionaire.
Yes! It is possible and easy to profit whether stocks are up, down or sideways using option trading. If the ability to trade all kinds of market conditions is the doorway to becoming a stock market millionaire, then option trading would be the very key.
In this article, I will outline some common ways by which you can profit from all kinds of markets by option trading.
Simple Option Strategies for Up Markets
Buy Call Option – You could buy the same number of equivalent stocks for a fraction of the price using call options and profit when the stock goes up. If the stock should crash, you will lose only the small amount you put towards buying the option instead of the whole amount that you would have put towards buying the stock itself.
Sell Naked Put Option – Instead of buying call options, you could sell short put options thereby pocketing the entire amount you made on selling the put options if the stock should go up.
Bull Call Spread – A bull call spread consists of buying call options at the money and selling short out of the money call options of the same month. The benefit of this strategy is that you profit when the stock goes up and profit also when the stock stays sideways!
Simple Option Strategies for Down Markets
Buy Put Option – Instead of shorting stocks and risking a margin call, you could simply buy a put option. Buying a put option is exactly the same as buying call options except that you profit when the stock goes down instead of up.
Sell Naked Call Option – Instead of buying put options, you could sell short call options thereby pocketing the entire amount you made on selling the put options if the stock should go down.
Bear Put Spread – A bear put spread consists of buying put options at the money and selling short out of the money put options of the same month. The benefit of this strategy is that you profit when the stock goes down and profit also when the stock stays sideways!
Simple Option Strategies for UP or DOWN Markets
Straddle – A straddle consist of buying a call option and a put option at the same strike price on the same stock. This strategy allows you to profit whether the stock moves up or down and is excellent when you are certain that a stock will move greatly soon but isn’t sure which direction that may be.
Strangle – Similar concept to a straddle but buys out of the money call option and put option instead of at the money ones in order to reduce the cost of the position.
Simple Option Strategies for Sideways Markets.
Covered Call – If you are holding on to a stock that is moving sideways, you could collect “rental” out of it by selling the call option of that stock month after month and pocket the whole amount of the sale should the stock remain sideways.
Short Straddle – Instead of buying call options and put options as described above in a Straddle, you would sell short them instead. In this way, you create an option position which profits when the stock remains sideways.
Are you amazed now at how easy it is to profit in any kind of market conditions by option trading? These are only very few of the many more option trading strategies that you can use to your specific portfolio needs. To learn more about what option trading and stock options are for free, please visit http://www.OptionTradingPedia.com .