Strangle Options Strategy » Options Trading

Fellow Options Traders, Why Aren’t You Selling Options in Your Trading Account?

admin — Mon, 25 Jan 2010 21:08:17 +0000

The only explanation which would seem acceptable is no one has shown you how to perform this marvel of printing money before, so you are a bit unsure of how to go about doing so!If this is your situation, then you are excused…But if not, you are truly missing out. Even if you are in the first situation, you are still missing out!No matter how long have you been an options trader, you will eventually find out that there is quite a bit of uncertainty involved with buying options.The Chicago Mercantile Exchange estimates over 80% of all options sold expire worthless. So why aren’t you selling them instead of buying them?An option is considered a “wasting asset.” Time value erodes as each day passes, accelerating as the option’s expiration nears. This is referred to as “time decay”.If the underlying contract does not move far enough by expiration, the option will have no value left and expire worthless and the option seller will keep the premium.When selling (or writing) an option, we get paid the premium up-front and we take advantage of “time decay”.However, it is simply not enough to know that to selling options generates significant premiums, you must also have a well throughout strategy for performing this. Along with this, you will also need to make corrections for when the market goes out of your favor.We have solved this by only selling straddles. You seasoned guys know what a straddle is. It is simply having a neutral outlook on the market, and trading it accordingly. By selling straddles, we are essentially playing both sides of the market. Stocks go up, down or stay the same. So we hedge our bets in both directions and hope that the stock remains flat.Our view stems from the fact that, a directional move will increase one side of the option play, and decrease the other side. So even if you may loose money in one position, we are gaining money in another. and by staying flat, both sides simply reduce to zero.Since we only sell out of the money positions, unless the stock breaks through the strike price, at expiration, best case scenario is we make money on both option legs. Worst case scenario is we loose on one leg, and we gain on the other, coming out with a wash.Or the more likely scenario, is both option legs are reduced to a level which we are happy to take profits.However, even though we believe selling options can potentially put the odds of success in your favor, it still requires good, solid market analysis. That’s how we, as seasoned traders arrive at our option picks!After trading options for many years with so much success, we see no reason to buy options. We have discovered, when options are sold correctly and carefully, they can generate a higher percentage return than any other option or stock trading strategy.Novice traders benefit the most from our alerts because they soon realize the difference is, selling options gives you a larger margin for error. You don’t have to be exact, only close.OPTIONXSPREADS is a group of ex-stockbrokers and investors who have developed this site to allow the ordinary investor to trade along with the pros, and have a chance to double, tripple and quadruple their investment dollar. And all you have to do is follow our trades and make money!Even if you do not follow our trades, realize that you should incorporate option selling into your trading strategy, to take advantage of the favorable odds! To see how we provide tremendous gains to our members every month, visit our website: www.optionxspreads.com

How to Choose the Best Options Broker

admin — Thu, 21 Jan 2010 21:41:58 +0000

The money market and banking system have suffered considerably over the past few years. Many investors have lost big sums from the stock and money market while some big banks are still in precarious financial situations. So you may be wondering if investing in stocks and money market is still viable. Well, you still have another alternative to participate in the money market by trading options. As long as you can choose the best options broker, then there are good chances that you can still make a profit by trading at the money market. Here’s a brief overview of options trading and how can you maximize your profit from it. Trading options is radically different from stock and traditional Forex trading. By trading options, you are actually entering into a trading contract that gives you the right to buy or sell an asset for a certain fee. The good thing about contract options is that you are under no obligation to buy or sell. So if you think that the trade is favorable for you, then you can complete the trade. If the trade is unfavorable, you can abandon the contract and all you have to lose is the fee for the options. That is why options trading can minimize your risks when you invest in the money market. The best options broker should be able to explain the intricacies of options trading for you through its tutorial and trading lesson. When choosing the best options broker, it is important if you can look beyond the commission cost that is being charged by the broker. Although commission charges are the leveling factor in choosing the right broker, you also need to determine if the options broker can provide excellent customer support and assistance. There are thousands of options strategies that will be available for you. A good broker should be able to walk you through these strategies so you can make a solid profit from your options contracts. It is also important to choose a broker that can perform quick market order execution as well as contract entry. This is pretty complicated for a novice options trader so better find a broker that can provide tools simplifying order, execution, and entry of options contract. Finding the best options broker is important but it also equally important to have a solid banking partner where you can draw funds for your trades. You can make a killing at options trading so better choose a bank that can protect your deposits at all times. When choosing the right banking partner, it might be very useful to create an account with a bank that can offer free checking accounts. You can avoid paying exorbitant bank charges if you have a free checking account. It would be very useful also if your bank can provide a high yielding savings account where you can deposit your profits from options trading. By opening an account with a reliable bank, you can ensure that your investment money can be shielded from banking risks.

Is Option Trading Gambling?

admin — Sun, 17 Jan 2010 20:44:45 +0000

We have seen it way too often, haven’t we?
Advertisements that tout making thousands of percents in profits within days and millionaires made within weeks, all by option trading! Such advertisements usually draw hordes of hungry, indebted gamblers who need that “one big win” to recover their debts or losses elsewhere to their unusually expensive seminars.
95% of those who walked into such seminars, paid for it and actually traded options, lost all their money. 3% will make some money within the first few trades and then lose it all subsequently. 1% will really make some sustainable money and a final lucky 1% will make the 1000% a month on their first month (again, just to lose it all within the next month). Anyone who has been in this predicament usually think that option trading is nothing more than just a gamble on an instrument that has no value of its own.
Yet, many professional traders and fund managers are making a good, consistent profit from option trading! These professionals don’t make 1000% a month in profits, neither will they ever, but they continue to make a living in the markets month after month, year after year (me included)!
So, what makes option trading a real investment and trading activity to these professionals and a mere gamble for those who lost all their money attending option trading seminars?
The difference is in ATTITUDE. Attitude governs decisions and actions. Anyone who approaches option trading with the “get-rich-quick” attitude will also soon find themselves “getting-poorer-quicker” simply because these punters hoping to “make-it-big” on their next trade, totally rejects any semblance of a trade management strategy, totally cast aside sensible analysis in favor of a 50/50 “bet” and take totally senseless out of the money positions that either make it big or expire completely worthless!
A real option trading professional utilizes sensible money management strategy on every trading opportunity, weighted against the potential risk of non-performance. This means that a real option trader will never put all his money into one big out of the money position! A real option trading professional utilizes trade analysis methods based on proven methodologies so as to put the odds of performance in their favor and never treat every trade as a 50/50 bet. A real option trading professional calculates the amount of options leverage to be used on every trade so that his portfolio is never over-leveraged. A real option trading professional do not expect to make it big on his next trade and he is not aiming for one huge home run but a series of small wins that eventually adds up. A real option trading professional never allow one loss to wipe out his portfolio because he treats the market with respect knowing that no matter how much analysis has been conducted, there is always a chance that the market will work against him.
In a nutshell, a real option trading professional (and an option trading winner who stays in the game for years) differ from a gambler (who rarely survives for more than a month) mainly in terms of mental attitude! The wrong mental attitude transforms option trading from the sensible and sophisticated financial instrument that it is into nothing more than lottery tickets.
The problem with most option trading seminars today is that they don’t put these critical elements of successful option trading together! All they teach are how option trading can make anyone rich very quickly! It is like teaching someone how to queue up for a lottery ticket! A real option trading system incorporates all the critical elements to successful option trading; From looking for trading opportunities systematically, to analysis of that opportunity in view of the trading horizon required, to selecting the correct option based on the requirements of that opportunity to risk balanced trade management and more! One such option trading methodology is the Star Trading System that I have taught online for years.
So, isn’t it time you reviewed your attitude and approach towards option trading?

Options Trading Lesson: Volatility

admin — Sun, 17 Jan 2010 08:42:25 +0000

To get a firm grasp of volatility’s effect on vertical spreads, let us examine three spreads against different implied volatilities while keeping the stock price constant at 67.5. These are the 60 – 65, 65 – 70 and 70 – 75 call spreads.
In-the-Money Vertical Spreads
Looking at the in-the-money spread (June 60 – 65), we see that as volatility increases, the value of the spread decreases. This is because with the increased volatility, the stock has a greater tendency to move. That brings a higher probability of the stock moving to a price where the June 60 – 65 call spread will no longer be in-the-money.
To adjust for higher volatility risk, the spread will have less value. A general rule of thumb is that as volatility increases, the value of an in-the-money vertical spread decreases. Conversely, an in-the-money vertical spread’s value increases as volatility decreases.
At-the-Money Vertical Spreads
A change in volatility has very little effect on the at-the-money vertical spread (June 65 – 70). With the stock price located equidistant from the two strikes, each strike’s volatility component will be very similar. Therefore, both options will increase equally once volatility increases. Being long on one and short on the other, the increase in values will offset each other so the spread’s value will hold fairly constant. When volatility increases or decreases, the value of an at-the-money vertical spread will stay reasonably constant.
Out-of-the-Money Vertical Spreads
The out-of-the-money vertical spread (June 70 – 75) has the opposite effect of the in-the-money vertical spread (June 60 – 65). As volatility increases, the value of the out-of-the-money vertical spread will increase. This is because the increase in volatility assumes that the stock price is more likely to move. Thus, the out-of-the-money vertical call spread is more likely to finish in-the-money.
Because of this spread’s increased potential to finish in-the-money, its value will increase. The spread’s value will decrease if volatility decreases. On the other hand, an out-of-the-money vertical spread’s value increases when volatility increases.
When trying to estimate how your spread will change in price with volatility movement, you must understand how the price and Delta of both of your options – long and short – will act.
It bears repeating again that each spread is different and will act differently depending on where the stock is in relation to the spread and what implied volatility does.
Median Value
An important thing to note is that when volatility increases, spreads crunch to their median value. For example, the median value of a $5.00 spread will be $2.50 while a $10.00 spread will have a $5.00 median value.
Crunching to the median value means that a $5.00 spread with a median value over $2.50 will lose value and head toward the median price. That happens with an increase in volatility. Meanwhile, increased implied volatility will make a spread with a value less than $2.50, increase in value and rise toward median value.
When implied volatility decreases, the value of a $5.00 spread will move away from the median price of $2.50. Therefore, when implied volatility decreases, all the spreads valued above $2.50 will increase in value toward maximum value. Spreads valued below $2.50 will lose value and head toward $0.
The Effect of Time
Time affects the spread differently depending on where the stock is. Look at the QCOM 65 – 70 call spread. Look at the spread’s reaction to the passing of time with the stock price of $65.50.
The chart below shows what the spread’s value does as expiration approaches.
Month Months to Expiration 65 – 70 call spread value Change from prior
Jan. 05 (8 month option) 2.06 N/A
Oct. 04 (5 month option) 2.05 -.01
Jul. 04 (2 month option) 1.92 -.13
June 04 (1 month option) 1.65 -.27
With the stock at $65.50, the spread has $.50 of intrinsic value. Holding the stock price frozen at $65.50 until expiration, the spread would be worth $.50. The table above shows that the spread loses value as time passes and decreases in value toward its $.50 intrinsic value.
Next, look at the 65 – 70 spread’s reaction to the passage of time with the stock priced at $67.50.
Month Months to Expiration 65 – 70 call spread value Change from prior
Jan. 05 (8 month option) 2.33 N/A
Oct. 04 (5 month option) 2.37 +.04
Jul. 04 (2 month option) 2.44 +.07
June 04 (1 month option) 2.47 +.03
With the stock price located directly in between the two strikes, the price of the spread holds at approximately $2.50 throughout the passing of time. Take note that time has very little effect on a vertical spread when the stock price lies halfway (equidistant) between the two strikes of the spread.
Now, set the stock price at $69.50 and observe how the spread reacts over time.
Month Months to Expiration 65 – 70 call spread value Change from prior
Jan. 05 (8 month option) 2.55 N/A
Oct. 04 (5 month option) 2.67 +.12
Jul. 04 (2 month option) 2.96 +.29
June 04 (1 month option) 3.27 +.31
This spread increases in value as time passes. With the stock at $69.50, the spread has an intrinsic value of $4.50. If the stock held at $69.50 until expiration, the spread would be worth $4.50 because that is the amount of the spread’s intrinsic value. As time passes, the spread’s value will increase to finally reach $4.50 at expiration.
In conclusion, time’s effect on a vertical spread is contingent on where the stock is in relation to the spread.

Why Simple Put Options Buying Fail in Volatile Markets

admin — Sat, 16 Jan 2010 09:01:27 +0000

The recent stock market crisis (2008) took the stock market down by more than 30% in less than a year. This has a lot of traders thinking that big money can be made simply by buying put options on stocks that will move down with the market, especially high beta ones. Nothing can be further from the truth. Most amateur options traders who did that either failed to make any money, make very little money or outright lose money even though the stock moved down a lot as predicted. Why is that so?
Volatile market conditions are especially bad for buying stock options due to 2 reasons. Firstly, the extreme volatility resulted in extremely high implied volatility which increases the extrinsic value of options dramatically, depressing its profitability. Secondly, extreme volatility leads to extreme speculation which encourages market makers to open up the bid ask spread to an unreasonably wide level in order to fill their own pockets.
Extrinsic value is the price one pays to the seller of stock options in order to justify the risk undertaken by the seller for giving such a right to the buyer. This price is arrived at in theory by options pricing models such as the Black-Scholes model. Extrinsic value directly affects the profitability of the options as the higher the extrinsic value of an option, the more the underlying stock needs to move in order to breakeven or profit. For example, if two options based on the same underlying stock, the same strike price and expiration month have different extrinsic values (of course this cannot be the case in reality), the option with the higher extrinsic value will make lesser money in profit than the option with the lower extrinsic value when the underlying stock moves by the same amount when held to expiration.
Extrinsic value is affected mainly by the level of implied volatility of the underlying stock. If the underlying stock is expected to make big moves, implied volatility goes up and the extrinsic values of its options go up as well. In times of extreme market volatility, extrinsic values go up dramatically across the board, depressing the profitability of options. In fact, one could end up losing more money than usual if the stock does not move according to expectations due to the higher extrinsic value paid. This is why a lot of amateur options traders who simply bought put options recently failed to make much money or any at all. This situation is made even worse by the wide bid ask spreads provided by the market makers.
Market makers are whom options traders really trade options with. When you buy an option, you are really buying directly from market makers who hold an inventory of those options and when you sell options, you are really selling back to these market makers who want to maintain an inventory of those options. Market makers buy and sell options in the exchange, ensuring the liquidity of all options contracts and profit primarily from the bid ask spread that they provide, buying at the bid and selling at the ask. They function exactly like used car dealers, buying at lower prices and selling at higher prices. Typically, the more actively traded the options are, the closer the bid ask spread tend to be due to competition between market makers, however, in times of extreme volatility where there are a lot more buying and selling on panic and more than enough business to go around for all market makers, they usually open up the bid ask spread in order to make even more profits. That is why we saw unusually wide bid ask spreads in this recent crisis. Wider bid ask spreads result in larger upfront losses which again depress the already depressed profitability of stock options due to the higher extrinsic values.
The higher extrinsic value and wider bid ask spread makes profiting from simple stock options buying extremely difficult and are the main reasons why amateur options traders fail to make money buying put options during the recent stock market crisis. Conversely, writing options are an extremely profitable way to trade options during a volatile market where extrinsic values are high. Naked writes and Credit Spreads are really the way to go in a volatile market condition and are what most beginner options traders do not know about. Selling options instead of buying them turns the table around and creates an extremely profitable position during times of high extrinsic value. Learn more about credit spreads at http://www.optiontradingpedia.com/free_debit_credit_spread.htm now.

Balance of Risk and Reward in Options Trading

admin — Fri, 15 Jan 2010 21:03:12 +0000

You don’t need to be a trader or an investor to know that the higher the risk, the greater the reward. This concept is true in all aspects of life and business. The more risk you are willing to undertake in life, the more life returns to you. Indeed, risk and reward are directly proportional and often in trading and investment, the more risk your account is exposed to, the greater the return on investment when things work out as planned.
Knowing that risk and reward are proportional makes finding the correct balance of risk and reward extremely important to all kinds of traders; stock traders, futures traders, options traders etc. There is no one solution that works for everyone and the correct balance is decided upon the risk appetite and risk tolerance of the individual trader.
For stock traders, balancing risk and reward primarily involves adjusting the amount of growth stocks and defensive stocks in one’s portfolio. Generally, the more growth or speculative stocks in one’s portfolio, the greater the risk due to greater uncertainty and therefore the higher the gain when things works out as expected. The more defensive stocks in one’s portfolio, the more predictable returns become and therefore the lower the return as these stocks does not generally move a lot. This degree of risk / reward balancing is at best crude compared to the surgically fine degree of balancing you can have in options trading.
Stock options are the most versatile trading instrument in the world right now due to the wide array of options strategies that are employable. Yes, not only can risk and reward be balanced through employing different mix of strategies in your portfolio, there are also different risk and reward profiles achievable by each individual options strategy. There are options strategies that range from making over 1000% profit while risking all your money to options strategies that make a mere 0.01% return while risking nothing as well as every centimeters in between.
As long as you understand what your personal risk appetite and risk tolerance is, you will be able to find an options strategy that suits your needs 100%. Here’s a general outline of the kind of risk reward balance that can be achieved through options trading:
Highest Risk, Highest Reward – OTM Call / Put buying
This is the options strategy that produces the legendary 1000% profit that amazed so many beginners. What those ads did not tell you is that the risk is losing ALL the money that you put into the strategy. This options strategy involves buying out of the money(http://www.optiontradingpedia.com/out_of_the_money_options.htm)call options when you think a stock is going to go up or buying out of the money put options when you think a stock is going to go down. Professionals use this options strategy with only a very small portion of their money in order to place a bet on an uncertain event such as leveraged buyout. Some lucky amateurs use this options strategy with all their money and then become millionaires overnight. The downside of this strategy is the fact that if the stock did not move far enough in the direction you expected it to, you can lose all the money you put into the strategy. That is also why so many beginners break their accounts overnight in options trading.
Various Degrees of Risk and Reward – Options Spreads
There are literally hundreds of possible options spread strategies out there with various degrees of risk and reward for every market condition. There are more aggressive bullish, bearish, neutral and volatile spreads and there are more conservative ones. All of them shares the same logic of higher risk compensated with a higher profit potential.
Lowest Risk, Lowest Reward – Options Arbitrage
Yes, there are literally risk free trading opportunities in options trading which also returns very small, sometimes negligible returns. These are the legendary options arbitrage strategies. Options arbitrage strategies such as conversion/reversal aims to make a fixed return totally risk free through simultaneously buying the underlying and shorting the overpriced synthetic equal or vice versa. The problem with such strategies is that the returns are so low that most of the time, it’s even lower than the commissions you will pay for the trades made. Even if you manage to return a positive return, the return can be as low as 0.01% in percentage terms. That is why arbitrageurs aim to make an absolute return using enormous amounts of money.
With this in mind, the most conservative traders may choose to specialize totally in arbitrage strategies (http://www.optiontradingpedia.com/options_arbitrage.htm) while the most aggressive traders may choose to specialize in leveraged speculation using OTM options. Everyone else would be able to find something to suit your risk appetite in the hundreds of spread possibilities. This degree of flexibility and range of risk/reward possibilities makes stock options the most versatile trading instrument in the world today and why options trading (http://www.optiontradingpedia.com) is so popular these days.

Why Trading Stock Options is Better in a Recession

admin — Thu, 14 Jan 2010 09:19:03 +0000

The 2008 recession and stock market crash is the worst financial and economic crisis since the great depression. By Feb 2009, the Dow has dropped almost 50%, erasing all its gains since 1998. In terms of absolute points, the Dow has dropped over 7000 points, which is more than the entire Dow index before 1998. Without doubt, this stock market crash has rendered many traders and investors helpless in search for profit.
Even though profiting during such market condition is a really tough thing to do, traders and investors still bought stocks in hope of a recovery only to be disappointed again and again leaving a bunch of stocks in deep losses in their account. When money is used this way, what it really does is to rob investors and traders of cash for investing when the real recovery starts.
So, is there a way to place those bets with very little money and limit your losses to negligible amounts if your bet is wrong as it had been so many times in this stock market crash so far? Yes, the answer can be found in stock options trading (http://www.optiontradingpedia.com).
Everyone knows that stock options trading is risky and that you could potentially lose all your money. What everyone failed to recognize is the fact that stock options trading is also a risk limited way of trading for big profits while controlling potential losses to negligible amounts!
Stock options (http://www.optiontradingpedia.com/stock_options.htm) are contracts that allow you to buy a stock at a specific price no matter how high the price of that stock is in the future (Call Options (http://www.optiontradingpedia.com/call_options.htm)) or sell the stock at a specific price no matter how low the price of the stock is in the future (Put Options).
By replacing the buying of the stock with buying its call options, you will be able to control the profits on a stock using just a small amount of money. If the stock goes up, you simply sell the call options for the same profit as you would as if you bought the stocks. If the stock goes down, you lose nothing more than the small amount of money you paid for the call option contract. See where I am going with this? If you had bought only the call options of those stocks that you have bought all of last year, you would have lost only a small fraction of the losses that you would already have incurred through buying the stocks.
Let’s look at an example.
John and Peter have $15000 to invest with each and they both decided to buy shares of Apple Inc, AAPL, after it has dropped to $141 in October 2008, expecting a rebound. Peter decided to buy 100 shares with $14,100 and John decided to play it conservative and bought 1 contract of AAPL’s call options with strike price of $140 which was asking at $10.20 for a total price of $1020. 1 contract of call options allows you to control the profit of 100 shares of the underlying stock. In this case, John totally replaced the buying of 100 shares of AAPL with buying 1 contract of its call options. 2 weeks later, AAPL fell all the way to $85 as the recession deepened. Peter lost over $5600 while John lost only the $1020 that he spent buying the call options.
Assuming both Peter and John were right about AAPL and the stock rallies to $200. Peter would have made $5900 in profit while John would have made the same $5900 less the amount of $1020 that he paid for the call options.
See how buying stock options rather than the stock itself in this volatile condition allow you to make a few bets for a rebound without risking all your money? In the above example, Peter would only be able to make one bet once on AAPL with $15,000 while John would have been able to make those same bets more than 10 times at strategic support levels. Who would have a better chance of winning?
By replacing the purchase of stocks with controlling the same number of shares of that stock through its call options, you would definitely have a better chance of survival in this recessionary market condition. Be warned however, that you fully expect to lose the entire amount of money paid on the call options should the stock continue to go down, which is why you NEVER use all your money in a single trade.

Hesitating Before a Trade

admin — Fri, 08 Jan 2010 21:23:20 +0000

Hey Joe! No matter how hard I try, I still find myself hesitating before a trade. Any comments about that?

There are any number of reasons why a trader hesitates before a trade. The main one is lack of planning. Without a plan, there is no degree of confidence a trade will be successful, it’s all wishful thinking. Unless they are outright gamblers, traders usually have a strong need to protect their assets and avoid risk. This is especially true for beginning traders. It can take a long time to build up sufficient capital for serious trading. By that I mean sufficient capital to be able to trade for a living. It is quite understandable to fear losing all or part of your initial capital. Beginners tend to seek absolute certainty before taking a risk, and gaining true confidence in you ability to trade successfully can take time. Unscrupulous marketers of mechanical trading systems and methods take advantage of the beginners fears and lack of confidence by advertising “sure-fire” “magic” ways to trade, instead of revealing the truth about the difficulties in becoming a consistently successful trader.

When it comes to short term trading, there isn’t very much time for long deliberations. Market conditions are in continuous flux. Decisions need to be made relatively quickly, and if one waits too long to execute a trade, he or she may miss a significant opportunity. The reasons for hesitation are everywhere, and traders must be aware of them, and create a plan to prevent them. Let’s look at a few of the things that cause traders to hesitate:

The complex charting software available these days tends to increase hesitation. Traders think that the more confirmation they can get from indicators, the more certain they can be that a trade will be successful. However, all indicators lag the market. The notion that an indicator can somehow predict what will happen once a trade is entered is nothing more than wishful thinking. An indicator may give some degree of confidence about entering a trade, but the indicator cannot trade the trade, only the trader can do that. Once a trade is entered, it becomes entirely a process of management. It’s tempting to look at as many indicators and signals as possible. Doing so, however, can be very time consuming. That’s why seasoned traders advise looking at only a few if any key indicators.

Hesitation is often related to a lack of confidence in the trader’s trading strategy or trading ability. There are numerous reasons for such lack of confidence. Some of the reasons are shallow and mostly on the surface, like being distracted by watching financial TV while trading. Other reasons are more deep-seated, and actually reflect psychological problems dating all the way back to early childhood. A trader may not believe that his or her trading plan is adequately developed. Nevertheless, they are determined to trade, so they muster up their courage and finally jump into a trade almost guaranteeing that the outcome will be a matter of pure chance. Some traders may question their trading plan because they know that they did not spend enough time preparing it. Sometimes hesitation is intuitive, warning the trader to avoid the trade. All too often, traders are not tuned into their own intuitive feelings. In the case of intuition, hesitation can act as a motivator. If the trader feels the hesitation is because of lack of adequate preparation, then that trader must learn to spend more time preparing for trades. By studying the markets a trader can come to see new higher probability setups, thereby reducing doubt and indecision, and in turn stop the hesitation because of more adequate preparation.

Hesitation sometimes reflects a deep desire to be right and a fear of being wrong. It has been our experience that many of the people who are attracted to trading fit into this category. Great care must be taken by physicians, engineers, scientific types, and mathematicians, who seem to be the most prone to this type of hesitation. They are often perfectionists afraid to face their inadequacies. By putting off a decision, they don’t have to face their limitations, and can pretend they are better traders than they really are. If I had the time and space, I could give you dozens of examples of this kind of hesitation. The perfectionist’s reality states that everything must be in order and follow rules. They think strictly inside the box. They want everything to be perfect, so they continually second guess and doubt themselves and what they are doing. They believe that they cannot cope with being wrong. This occurs in trading decisions as well as other life decisions. Extreme perfectionists often think that once they make a bad trade, it will be the start of a downward spiral and a complete blowout of their trading account.

Hesitation very often relates to low self-esteem or other deep-rooted psychological issues. We see these more times than we would like to. Traders with low self-esteem usually lack confidence, not only in trading, but other areas of life. Beneath it all, they doubt their ability to trade, and hesitate making a trade until they the guilt of not doing so overcomes their fear. At that point in time, they enter a trade out of pure compulsion driven by guilt. This exposes them to a trade with no real plan to support it. They become victims of pure chance. We also find that traders who hesitate may have a conflict regarding their success. They can actually fear success. They have been told by parents or others that they were no good, that they would never amount to anything, that they were “bad.” These people strive for success at one level of their consciousness, but at a deeper level, they secretly believe they cannot attain it, or do not deserve it.

Identifying, directly facing, and eventually eliminating a problem of hesitation is the only way to truly deal with it. Chronic hesitation will eventually destroy the confidence a trader needs for success. If the problem is not dealt with and the traders continues to hesitate, miss important market moves, and see his or her equity begin to dwindle, that trader runs the risk of becoming a phantom trader, a pretender, becoming convinced that the imaginary trades being made are real. If you are prone to hesitation, it’s vital that you deal with this problem early in your trading endeavors. Identify the reasons for it, confront the problem, and make changes as soon as possible. These are changes you have to make within yourself. If you will truly engage in self-examination with the object of eliminating hesitation, you can trade become consistent and successful in trading profitably.

Stock Options Trading: the ‘lean’

admin — Tue, 29 Dec 2009 08:49:47 +0000

Professional traders use the term “lean” to refer to one’s perception about the directional strength of the stock. When you own a stock and intend to hold it for a period of time, you are aware that you will probably be holding it while it goes up and while it goes down.

This means that at any given moment in time, you might have a different opinion of the potential movement of that stock. Knowing this, there is a way to address your present level of confidence or “lean.” You do this by your choice of which option you sell.

While it is true that the at-the-money option has the most amount of extrinsic value, it might not always be the ideal option to sell in every situation.

For instance, if you feel that the stock itself has a very high chance of producing capital appreciation above the potential amount of premium you could receive from selling an at-the-money call, then sell an out-of-the-money-call so you can allow yourself a little more room to the upside on the stock.

For example, let’s say the stock is trading at $27.00. Normally, you would sell the 27.5 calls at say $1.00. If the stock were to rise quickly and eclipse the $28.50 mark, then with the buy-write strategy, your position would have maxed out at $28.50, and you would have a $1.50 one month gain. Not bad, but if the stock went to $29.50 then you would have missed out on another $1.00 profit. However, if we had sold the 30 calls for $.30 then we would have another outcome. You bought the stock at $27.00 and sold the 30 calls for $.30 and the stock goes to $29.50.

You would have made $2.50 in capital appreciation and $.30 in option premium for a total of a $2.80 return.

So, if you feel the stock has a real good shot at taking a run up, you can lean your position long by selling an out-of-the-money call.

If you have a more neutral view on your stock you would sell an at-the-money-call in order to receive a bigger premium which allows for greater downside protection if the stock trades down and higher potential profit if the stock becomes stagnant.

This strategy also works on the downside. If, by chance, you feel that the stock may trade down a bit during the life of the option, then you can sell an in-the-money-call. The effect of this would be to provide you with a little extra premium to cover more downside risk.

Remember when you sell an option you seek to capture extrinsic value. An in-the-money option not only has extrinsic value but also some intrinsic value.

When you feel that you want to lean your covered call strategy (buy-write) a little short, choose to sell an in-the-money call so you can also have some intrinsic value to cover your downside.

As an example, say your stock is trading at $29.00 and you feel that your stock may trade down a little but still remain in an uptrend cycle. You don’t want to get rid of the stock but you also don’t want to lose any money so you sell the 27.5 call at $2.00.

The stock starts to trade down and finishes at $26.00. If you had owned the stock naked, then you would have lost three dollars since you owned the stock at $29.00 and it closed at $26.00 on expiration.

However, because you sold the 27.5 calls at $2.00, you would only realize a $1.00 loss in the stock. The premium received will offset the loss due to the fact that you identified and adjusted for a likely move.

As you can see, the buy-write strategy can be altered to fit any directional view you have on your selected stock.

Finally, if you intend to use the buy-write strategy successfully, you generally need to sell the calls against your stock on a consistent, recurring interval, over a period of time.

This means that you will have to be prepared to “roll” your calls out to the next month come expiration. Sometimes, all you’ll need to do is to sell the next month out call.

Demystifying Options Trading – Call Options Explained For Everyone

admin — Mon, 28 Dec 2009 09:04:39 +0000

When it comes to options trading, most people have been mystified by what seems like a lot of mumbo jumbo. This article will explain the investment terminology for Call Option in everyday terms that anyone can understand and appreciate.

To illustrate the concepts, let’s go on a shopping trip.

You’ve been thinking about buying a MacBook Air, Apple’s thinnest laptop, for a few days and you’ve done some research to find the best deal. You head for the mall on Saturday and spend most of the day trying to find the lowest price. This turns out to be $1799 for a 2.13 GHz MacBook Air.

Suddenly you realize that you have a dinner guest coming this evening and need to get groceries. Fortunately, the nearest store is right in the mall. Unfortunately, you discover that you forgot to bring your credit card and need to pay cash for the groceries. This leaves you with $150 plus some change.

On the way to your car you discover another electronics store, and to your amazement, the 2.13 GHz MacBook Air is advertised at $1499. Not believing your eyes, you go in and the store manager confirms the price but says that they have only one unit left. How are you going to nail down that price without sufficient cash and without a credit card?

You ask the store manager if he will hold the unit for you in return for $100, and that you will return in two hours to purchase at $1499. If you are not back in two hours, the store manager can sell it to someone else.

You make a written agreement, signed by both parties, that the unit cannot be sold to anyone else for next 2 hours but only to you at $1499 in exchange for $100, and that the $100 is forfeit if you do not return within 2 hours.

You have just engaged in “Options trading” The following options trading terminology should now make a lot more sense to you.

Options Contract – is what the note is called that you and the store manager just signed.

Underlying (underlying stock/share) – is the MacBook Air 2.13 GHz that you have agreed to pay ($1499).

Strike Price – is the agreed upon purchase price (in this example $1499).

Call Option – the type of contract in this example is a “Call Option.” It gives you the RIGHT but not the OBLIGATION to buy the MacBook Air. In order to exercise the “right to buy” you must return within 2 hours, and the store manager must sell it to you at $1499. If you change your mind, you do “not have an obligation” to buy. You simply don’t return and lose your $100 hold money.

Option Expiry – for this example the expiry is 2 hours, meaning that the option contract will cease to exist after 2 hours.

Option Premium – this is the $100 hold money you paid. It’s the cost to enter into this contract. This is not a deposit against the purchase price, but money the store will keep either way for providing you with the convenience. So, your effective purchase price will be $1599, which is still better than the $1799 “best deal” you had identified earlier, and it is the reason you entered into the contract.

Long Call and Short Call – for this example you have the “Long Call” since you are buying the contract for $100, and the store manager has the “Short Call” since he is selling the contract and gets to keep the $100.

Now let’s evaluate the risk exposure for both parties to the contract:

Your risk is limited to the $100 hold money you paid, i.e., a Long Call Option buyer’s risk exposure is limited to the premium paid. If, hypothetically, the price for the MacBook Air tumbles to $1000, then there is no way you would return and purchase it for $1499! If, hypothetically, the price shoots up to $2599 within the 2 hours, then your immediate profit would be $1000.

The store manager, on the other hand, has unlimited risk and limited profit potential. A Short Call Option seller’s risk exposure is unlimited while the profit potential is limited to the premium received. Yes, he gets to keep the $100 in case of a price drop where the buyer is not returning to purchase, but if the price for the MacBook Air shoots up to $2599 within the 2 hours, he stands to lose a lot of money because he cannot sell it to someone else for the revised price.

Hopefully, this will have taken some of the mystery out of options trading and its lingo. As illustrated by our example, we are engaged in these types of transactions in some form or other in our daily lives. We’re just not aware of it. As you gain knowledge and practice, it will come to you quite naturally.

At TradeGreeks we focus on educating investors in the world of options, where profit potential is unlimited and is not restricted to a bull market. We have created options trading strategies that are so strong and so predictable, that we can solidly stand behind an unprecedented guarantee: You will get the return we promise, or your money is refunded with no questions asked.

Visit us at http://www.tradegreeks.com for more options trading articles and register for a free membership.

This was an article from our series ‘Covert Life of Investment’.