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Trading Stock Options: Basic Option Trading Strategies and How to Use Them to Profit in Any Market [Paperback]

admin — Sun, 20 Jun 2010 13:34:24 +0000

Many traders and investors dismiss stock options as either too complex or too risky. But did you know that options can be easily understood and the risk easily managed? This book will show you the basics of stock options in easy to understand terminology. You will be able to read option quotes with ease, get an option enabled trading account, and trade basic option strategies in no time. In Trading Stock Options, experienced option trader Brian Burns explains the basics of stock options and shows you how to trade the most successful option strategies. As you begin your journey on the option path, you’ll have the luxury of real-life trade examples to show you the way. The diagrams and charts help turn the complex world of options into easy to visualize and simple to understand strategies that even the most novice of traders can utilize. Trading Stock Options will show you how you can use options to: * Get paid to buy and sell your favorite stock * Purchase st (more…)

The Joy of Options

admin — Mon, 25 Jan 2010 08:26:06 +0000

Owning stock has only two, maybe three, possibilities. The stock goes up. Or the stock goes down. Or, as a third possibility, it does a little of both. If you buy a stock, all you want it to do is go up.
If you sell a stock short or close a position (or consider buying it and then decide not to , all you want it to do is go down. I call this one-dimensional trading. You’re long, you’re short, or you’re flat. Your gains and losses travel up and down the number line you may remember from elementary school in lock step with the movement of the stock. Not only that, but it takes a big move to make a big profit. And a big move against you can mean a big loss. Potentially all the way down to zero.
You need to add a second dimension to your trading. You need more choices than picking a direction and hoping you are right. You need to limit your losses, improve your returns, and increase your flexibility. You need options.
For many people, options are something to avoid, being dangerous, complex, and scary. I would like to introduce you to the joy of options. Any time you think you want to buy a stock, I’d like to get you in the habit of first looking at how you could do more with less using options.
In the stock and commodities markets, the type of option we just described would be known as a call. A call typically represents 100 shares of a stock. In the commodities markets, a single option contract represents a single futures contract. (For simplicity, from this point forward, I will talk about options on stock. Just remember that the same discussion applies to options on futures.)
Owning a call gives the owner the right to buy 100 shares (usually) of the underlying stock at the agreed upon strike price at or before the expiration date. (I say “usually” 100 shares because, due to splits or acquisitions, there are times when an options contract may represent something other than 100 shares.) Selling a call gives the seller the obligation to sell, if asked, 100 shares of the underlying stock at the agreed upon strike price any time up until the expiration date.
The other kind of option is called a put, and it is exactly the same as a call with one simple difference. A put gives the owner the right to sell 100 shares (again, usually) of the underlying stock at the agreed upon strike price at or before the expiration date. You can think of a put as insurance. No matter how badly the stock price crashes, having a put means that you can sell your stock for the strike price. On the flip side, selling that put means you may be obliged to buy stock at far more than its current market price.
An important distinction to always keep in mind: Buying an option gives you rights. Selling an option gives you obligations. Buying an option cannot cost you more than what you pay for the option. Selling an option can cost you far more than what you receive for selling the option.
Let’s examine the terminology of calls and puts. The underlying is the actual instrument such as a stock or commodity that is being represented by the options contract. In the real estate example, the house would be the underlying. Options are said to be derivatives because their value is directly tied to or derived from that of the underlying. An option has no meaning without an actual asset underlying it. It is the right to buy or sell that underlying asset that gives the option a reason for being and some value.
The strike price is the agreed upon price for which the underlying can be bought or sold under the terms of the option contract. In the real estate example, the strike price was $100,000. The expiration date, obviously, is the date when the option expires. The day after expiration, an option is worthless. This is the single most important fact about options that you must remember. This is why your friends think you are crazy for your interest in options. Unlike a stock, which you can hold forever, an option has a clearly defined shelf life.
One term remains, and that is the premium. The premium is what you pay for the option, when you are the buyer. Or what you receive for an option, when you are the seller. In our real estate example, the premium was $500. That’s what it cost you to hold the right to buy the house any time in that thirty-day period. The last day of the thirty-day period would, again, be the expiration date.
We have barely scratched the surface. I say that not to intimidate you, but to make you realize that you only have enough knowledge to be dangerous to yourself. Please do not think that you are ready to go out and buy calls or place spread trades. You are not. You don’t know how an option moves relative to moves in the price of the underlying. You don’t know what time does to the value of an option. You don’t know what volatility is or how it plays into option prices. You don’t know the types of spreads or what they are used for.
Please, please get yourself better educated before you start putting money into option trades. Resist the temptation to buy some cheap options, just to try it out. This is expensive education. There are plenty of advantages to trading options, but it’s still a ruthless market, happy to take your money, your wallet, and your hand if you give it an opportunity. Learn the rules of the game before you put money on the line.
Trading options can be satisfying, rewarding, stimulating, and fun. I invite you to add another dimension to your trading by including options to your repertoire.

Naked Options

admin — Sat, 23 Jan 2010 08:39:55 +0000

Options are one of the oldest trading vehicles man has ever used. Around a 1000 B.C Aristotle Thales predicted by the stars that there would be a bumper olive harvest and bought options on the use of olive presses.
When the harvest did in fact prove to be a great harvest Thales was able to rent the presses at a significant profit.
When you buy an option you have the right but not the obligation to buy (call) or sell (put) a specific underlying asset at a prearranged price on or before a given date.
Similar to futures, options can give the holder protection against adverse price moves.
Call options when bought allow you to buy an asset at a fixed price (strike price) on or before a specific exercise date.
Exercise date: some options can only be exercised on a particular date and they are commonly know as European options. Options that can be exercised on or before the due date are commonly known as American options).
A Put options is the reverse of the call option. When you buy a put option it gives you the right but not the obligation to sell an underlying asset at a predetermined date.
Now let’s look briefly at the result of selling naked calls. In this scenario, the call writer simply sells the call and does not own any of the underlying stock to cover the short call. If the stock plummets, the call writer is very happy and relieved.
The premium of $400 is his to keep, and no one will be knocking on his door asking to buy the stock for $100 per share, since it is available on the open market for $50. It’s his ideal scenario. Actually, any stock price at or below the strike price will be in his favor.
However, here’s a very bad scenario. The call writer sells short a naked call. And the stock leaps 50%. He’s got big problems. Somebody’s going to want to buy XYZ from him for $100 per share, just as the option contract states.
But he doesn’t own any shares of XYZ. So he now has to go to the open market and buy 100 shares at the current market price, which is $150 per share. He took in $400 of premium and now has to cover is with a $15,000 stock purchase, for which he will only receive $10,000. He loses $4600 ($10,000 – $15,000 + $400). Not a happy ending.
Do NOT even consider selling naked calls. Your broker probably would not allow you to anyway. However, until you really know what you are doing, don’t sell naked puts either. When the bottom drops out of a market, naked put holders get very, very badly hurt. They are forced to pay high prices for low priced stock. You do NOT want to be in this position!
An option gives you something called leverage. Leverage is when you are able to control a large amount of money with a small investment. Each option contract lets you control 100 shares of stock for far less than the cost of buying those shares. But leverage is not the best reason to trade with options.
True, with the leverage that options afford you, you stand to risk less and make more, assuming things move in your favor AND in your time frame. Remember the expiration date! You have traded leverage for limited shelf life. If things don’t move your way soon enough, you lose. So, what is the main reason to trade options? Spreads!

How to Make Consistent Profits Futures Trading

admin — Fri, 22 Jan 2010 09:37:39 +0000

The issue of direct access is an important one and it becomes more important the more short term your trading is. The market can change from a state of seeming paralysis to one of shocking volatility and activity in a flash. The length of time it takes between you deciding to enter an order and the order actually being in the market is obviously important.
When I first started trading I used a phone broker and was dismayed that my fills would often be so far from the price the market was trading when I first entered the order.
The first time I visited the trading floor, I discovered why. When I called in an order, first my discount broker would check my account equity, then he would call a phone booth on the floor, the phone broker on the floor would then write the order down and pass it on to a booth next to the appropriate pit, at that booth my order would be written down again and then signaled to a broker in the pit to be executed.
As you can imagine this would take quite a long time, even longer of course if the market was very active, as this would mean that the broker in the pit would be too occupied to take new orders. Compare this to my experience of trading as a pit trader. In the pit I was in the heart of the market and could observe every single order as it was executed (there was no delay in my price feed!).
To initiate a trade, whether it was to buy or sell at the market, or join the bid or the offer, all I had to do was open my mouth. You can start to see the huge advantage that trading on the floor gave me over off floor traders; and that doesn’t take into consideration the fact that my round trip costs fell by 96%.
Now the floor no longer exists, not in Europe at least, so why talk about the advantages of pit trading? Well the level playing field is now open to all, but very few take advantage of it. Trading with an electronic trading platform is exactly the same as trading in the pit, except I can sit down, it is much quieter and there are no crude jokes flying around.
I can trade with the click of a mouse; my order shoots to the exchange, enters in the market and appears back on my screen before I have time to blink. I think the advantages of direct access trading are clear and any futures trader still using a phone broker should move to direct access, they will also find their commissions are less (around $8 for private client traders).
The next question that arises is why trade futures? That is an important consideration given that there are a variety of alternatives vying for your trading capital (spread betting, CFDs and options), but in my opinion, futures are the only option (no pun intended) for successful short term trading.
A lot of traders are trading the stock indexes like the FTSE, the DAX, the S&Ps, NASDAQ and the DOW, but rather than use futures they are using spread betting firms. The reasons for using these firms is that they require very small amounts of capital to get started, a trader can trade very small amounts (like $1 a point on FTSE as opposed to $10 for FTSE futures) and these firms make opening an account so easy.
I understand the lure of being able to open an account with very little money and trading small amounts, but I have some serious considerations about using spread betting as a realistic vehicle for professional trading.
The two biggest selling points are no commissions and no capital gains tax. There are many different costs to trading, commissions are one and the spread is another (especially when you have to trade at the market as you do with spread betting, with futures you have the choice of joining the bid or the offer).
Commissions are important for an active trader and as an active trader you can get them very low, but lets assume they are $8 per round turn for futures and lets assume that the spread in FTSE futures is an average of 2 points. If the spread with a spread betting firm for FTSE is 6 points and assume that we are trading $10 a point we can compare the two trading vehicles.
Last week I made an average of 2.42 points per contract traded and I traded 48 times. That is, for each contract I bought and sold I made $24.20 before commissions, assuming my commission rate is $8, I made a profit of $16.20 per contract traded, which is $777.60 net profit if my average size per trade is one contract.
Had I had the same success trading with a spread-betting firm, with a 6-point spread, I would have lost $1718.40! Now I would rather pay tax on a profit that no tax on a loss.
There is one other very important reason for trading the futures market rather than a non-exchange traded market such as those offered by spread betting firms. The futures markets are exchange traded and this means that they are fully transparent, i.e. everything is visible and above the table, I can see every single trade that happens. Imagine the trading pit, as it used to be when traders stood physically in a ring trading with each other.
When a trade is entered, the order goes into the pit and is represented there, free to be taken by any other market participant. We can all see what is happening, we trade with the same information and with the same advantages/disadvantages.
Now assume you are a trader who can only trade with one broker in the pit, you can trade as much as you like, any size you like, but he sets the spread he is willing to offer you and you have to trade at market (i.e. buy at his offer and sell at his bid). This broker doesn’t want to loose money, naturally, so he always makes his spread wider than the real market spread, he also, naturally, puts his interests before yours, so he won’t always be willing to trade when the market is moving fast and he is uncertain.
Remember whenever you make money he loses, so he is very careful to maintain his advantage at all times. Who wouldn’t want to be in this brokers position (he isn’t really a broker, though he claims to be)? When you trade with a real futures broker, all the broker does is facilitate your trade; he gives you the ability to have you orders represented in the pit. A real brokers concern is that they execute your order as efficiently as possible, that is their job, they do not take positions and they do not take the opposite side to you.
They naturally want you to make money because by making money you become a client who will continue to pay them commissions. Trading with a spread betting firm is absurdly costly, spread betting firms are like amusement arcades, they can be fun, but to imagine you are going to make your living from slot machines is illusory.

Option Trading: Thinking “Outside the Box”

admin — Mon, 04 Jan 2010 20:46:24 +0000

Wouldn’t it be great if we could buy an option with five months left until expiration and sell an option with 2 months left until expiration for the same price? You couldn’t lose. Well we can’t. I love options spreads so much I realized something very important. We can buy a spread that has a lot of time value left at almost the same price as we can sell one with less time value left. The reason really opened my eyes and gave me new insight into options. Here is what I came to realize.
I started comparing how expensive options were in relation to the other strike prices in the same month and to the other months. I wanted to know based on th e price per day which options were more expensive.
The first 1 or 2 option months, as everyon e knows loses time value quickly. The at the money strike prices are very expensive compared to the out of the mon ey strike prices. Since there is not that much time left, how much can they charge for an out of the money option? Not much.
The next several months, the opposite is true. Compared to each other, the strikes that are closer to the money are cheaper in terms of price per day than the options further out of the money. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points
6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points
70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at the money option (43 points) is only less than 4X the price than the 6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost 15X the cost of the 6 day out of the money option (2 points) but only has 10X the time value. We will buy the cheaper options and sell the more expensive ones.
Sell 6 day at the money and sell 70 day out of the money. Buy 6 day out of the money and buy 70 day at the money. This will be done for a 4 point debit. We are now buying a spread that has 10X more time value than the one we are selling and are only paying 4 points for it.
When the 6 day options expire we can sell the next month to take in more premium, still keeping the 70 day option spread.
What goes up, must come down! We have all heard this befo re in reference to the laws of Gravity. We have laws in the commodity markets as well. What comes down, must go up! The greatest traders of our time like War ren Buffet know this. He is perhaps the greatest Stock trader ever. He had never traded commodities until a few years ago. He bought silver in the futures market. When the market went even lower he bought more. The “smart money”, commercials will not be scared into selling when a market they have purchased drops even further. They know better than anyone that a commodity has real value and will always be worth something.
There is a famous book, “You Can’t Lose Trading Commodities”. The author buys commodities and then just waits for the market to go higher. He would purchase more as the market fell.
You need a big bankroll for this. Personally I know corn won’t go to $1.00 but what if it did? I want to minimize the risk in case I want to end the trade.
I started trading the Soy Complex this way several years ago. Not with options. Strictly futures. I bought what was similar to a crush spread. I increased the contracts as the market went against me until the spread rebounded a little. Since I increased the contracts I didn’t need the market to come back to where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits on bets. It is a known fact that futures traders make good gamblers and professional gamblers make good futures traders. I am against gambling but even gambling done with a system is not really gambling.
These card players would bet something like this: $5 lose, $10 lose, $20 lose, $40 lose, $80 win. The losses add up to $75. They would win $80, so the profit is $5. Not a lot, but they would do this all day. Black Jack is just under 50% probability for the player.
The problem is there is a slight chance that you could lose 40 times in a row. Now with Commodities we have a 50% probability and we won’t lose 50 times in a row because the market can’t go b elow zero.
Now before I go an y further, I need to tell you that I am not recommending you double down on your trades. What you can find are mark ets that are near their lows where you can do a small scale trade. Spreads offer even better opportunities. They have a closer range (high to low).
By now you can see we only use this to go long a market since we can never b e sure how much a market can go higher. First we need to find a market that is low already so we won’t have to wait that long and also so there will be less capital needed. I prefer to trade this using options. There are many ways to do this. You could buy an option in a market like soybeans and choose how many cents the market will drop before you buy more. The problem is, an option is a wasting asset. The Theta (time decay) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably sell more Theta than I buy, so if the market does nothing I will make money just on time decay.

Forex Options Trading – What is Forex? (part 2 of 2)

admin — Sat, 02 Jan 2010 21:17:32 +0000

Companies, exporters and importers are also very much involved in the forex market as buying and selling of products takes place all over the world thus buying and selling of currencies to facilitate and complete all these transactions are needed. An exporter in the USA might have sold his products to a company in Europe in US dollars so the importer has to buy US dollars while selling his Euro dollars to pay for the products from the USA. Or a company may need certain parts for their equipment which is not available locally so they have to order from overseas.

This process requires the company to purchase the supplier’s currency so as to pay for the parts.

Lastly, we have the retail traders who have chosen the forex market above others like equities, commodities, etc. to do our trading or investments so as to make some profit. This is a growing segment due to the prevalence and accessibility of the internet which allows brokers to provide trading platforms and continuous price data feed to the small players globally. The low and affordable cost of the internet also helped many to participate in this growing phenomena.

Brokers are going online with their own platforms that allow easy and simple to use trading and also to provide education to these small retail traders. The mushrooming numbers of brokers in recent years also act to lower cost (wonder of competition) for the small retails traders.

Most brokers do not charge commission and the spreads for major trading currencies have also narrowed tremendously. There is no better time than now to start your foray into forex trading.

Commodity Options: Trading and Hedging Volatility in the World’s Most Lucrative Market (Hardcover)

admin — Fri, 25 Dec 2009 11:10:36 +0000

Don’t Miss out on Today’s Hottest Trading Arena: Commodity Options! “The authors have written the definitive work on trading commodity options. Their in-depth knowledge of this subject is legendary among industry professionals and expert traders alike, and their ability to relay their knowledge through text, pictures, and the spoken word is unparalleled in our industry.” –Lan Turner, CEO, Gecko Software, Inc. “This book captures the realities of commodity option trading in a simple and easy- to-read presentation that will be beneficial for traders of all sizes and skill levels.” –Chris Jarvis, CFA, CMT, Caprock Risk Management, LLC “Even the most experienced investors often overlook the fact that options on futures are fundamentally different from options on stocks. This book fills that gap and sets the record straight with clear and concise descriptions that are easy to understand. Guaranteed to become a true source of value creation for anyone interested in tradin (more…)

Optionsâ trading

admin — Mon, 21 Dec 2009 07:49:39 +0000

Optionsâ trading is a very fast way to make money hands over fist. However it could be too risky or dangerous if you are careless and do not know what are you doing. Rather than this option in stock trading has been getting the attention they deserve from traders. There are lots of advantages that one can get from it and with your skill and right strategies; you may able to prevent risk from actually happening.

One thing about stock options is that they are cost efficient that is they are well capable of leveraging or borrowing money in order to increase returns. Another good advantage of it is that by spending less money also you can make almost the same profit. Once you are knowledgeable and have some experience, trading options can be a great way to make money.

As a beginner you should go for spread. Basically a spread is where you can purchase calls and puts. How to spread money is entirely dependent on how the market is swinging. Beside this buy only those options that donât expire right away. It is because if it expired very quickly then you will not get the time to observe how your stock is moving.

Stock market is very risky and it needs lot of guts, especially for beginners. It takes time and experience to research the market as a whole. Many factors influence what happens in stock market everyday. Hence itâs necessary to have complete knowledge of market before making any move. By making a chart of earnings and losses you can easily figure out your areas of strong trader.

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Understanding Options

admin — Fri, 18 Dec 2009 08:12:07 +0000

Options are one of the oldest trading vehicles man has ever used. Around a 1000 B.C Aristotle Thales predicted by the stars that there would be a bumper olive harvest and bought options on the use of olive presses.
When the harvest did in fact prove to be a great harvest Thales was able to rent the presses at a significant profit.
When you buy an option you have the right but not the obligation to buy (call) or sell (put) a specific underlying asset at a prearranged price on or before a given date.
Similar to futures, options can give the holder protection against adverse price moves.
Call options when bought allow you to buy an asset at a fixed price (strike price) on or before a specific exercise date.
Exercise date: some options can only be exercised on a particular date and they are commonly know as European options. Options that can be exercised on or before the due date are commonly known as American options).
A Put options is the reverse of the call option. When you buy a put option it gives you the right but not the obligation to sell an underlying asset at a predetermined date.
Options are frequently used in real estate deals. A property developer may take the option on a piece of land he wants to develop. He may for example buy (call) the right to purchase a particular piece of land at $100,000 on or before sixty days beginning on the day he takes the option.
For the privilege of fixing the price for the next sixty days he agrees to give the seller $1000. This now gives him time to arrange any permits he may need to construct the building he wants. He also has the knowledge that he can buy that piece of property at any time in the next sixty days at the price he has already agreed upon.
If for some reason he can not get the permits he needs then he simply does not exercise his option to purchase. He will of course forfeit the $1000 that he paid for the option. The seller in this case was obliged not to sell that piece of land to anyone else for the next sixty days.
The same process can be applied to almost anything. If you apply the example of the property deal to the stock market you get the same situation.
Lets assume you buy a call (right to buy) 100 shares of Xyz company at an agreed price (strike price) on an agreed date (expiration date) at say $40 per share and you pay $5 for the option.
If on or before the expiration date Xyz is trading at less than $40 per share then you would not exercise your option and you would have lost the price you paid on the option $5.
If Xyz Company is trading at $50 per share on or before the expiration date your option is in effect worth $10. This is the difference between the price you have an option to buy Xyz at in this case $40 and the price it is actually trading at $50.
The reverse of this is a put (right to sell) option on an underlying asset. You might feel that the market is overheated at the present time and want to buy a put (right to sell) option.
This will give the individual who bought the put option the right to sell that option at and agreed price (strike price) on or before a specific date (expiration date).
You can also sell options (as opposed to buying a put). The writing of call options can be extremely high risk and I would not advise this for new traders until they thoroughly understand their liability. Buying an option either call or put gives you rights, selling (writing) options gives you an obligation.
The day after the expiration date an option has no value. At this stage it may seem that the buyer of the option has all the cards but don’t forget the seller of the option receives the money for granting the option. The money that is exchanges is commonly referred to as the premium.
Although option trading has more than its fair share of jargon remember the essence of all markets is that there is a buyer and a seller and both believe they have an advantage and have the potential to make money.
Think of an option in the same way that you would pay your house insurance company. The premium you pay each month gives you the right to a benefit if some event in the future happens and you decide to exercise your right to have the insurance company pay you for that event.
The insurance company on the other hand has the obligation to pay you should you should you exercise that right in exchange for accepting your premium each month.

Forex Options Trading – How to Read Forex Price Quotes (part 1 of 3)

admin — Wed, 09 Dec 2009 21:29:02 +0000

When you start trading in the Foreign Exchange market, you will notice that the prices for either buying or selling a currency pair always come in a pair of price quotes. One is called the ‘Bid’ (or Sell) and the other is called the ‘Ask’ (or Buy). You will notice the same in any other investment/trading products (e.g. equities, commodities, etc.). The price that you buy a currency pair is reflected in the Ask price while the price that you sell a currency pair is reflected in the Bid price.

The Ask price or selling price of a currency pair is always the higher one in a price quote. While the Bid price or buying price is the price at which you buy the currency pair. What this means is that you will always buy at the higher price and sell at the lower price of a price quote.

You will notice that between the Bid and Ask price there is a difference and this difference is what we call the “Spread”. The spread is the cost of the trade or transaction. Usually this is the only cost for the trader as most forex brokers nowadays (due to competition on the internet) do not levy any additional commissions unlike when you are trading on other investment markets like equities, etc.

At the beginning it may seem confusing for a beginner as when we purchase something only 1 price is given to us. However, beginners just have to remember that you will always have to buy at the higher price of the 2 prices while selling a currency pair you would have to remember that it is the lower of the 2 prices. It doesn’t make sense for the broker to sell you at a lower price and then buy back from you at a higher price.

To be continue… on Forex Options Trading – How To Read FOREX Price Quotes (Part 2 of 3)