Protective Put Secrets » Stock Market

What is a Vertical Spread?

admin — Thu, 21 Jan 2010 19:58:55 +0000

What Are we Trying to Achieve When Trading? Part 2

admin — Tue, 19 Jan 2010 19:43:14 +0000

To truly get an accurate picture of a comparison between the likelihood of success for two different strategies, we must use a real life example, and compare ‘apples to apples’. We are going to do that here with two strategies: That is, we will compare selling ‘at the money’ Put options (spreads) with buying ‘at the money’ Call options, and using the Actual Risk on both.
We will use a real trade and real company for this example, but we have changed the company code, the ‘ticker’, to XYZ.
XYZ closed at $28 even, so we’ll use this to give us an accurate comparison between the two strategies. The figures used are the overnight Indicative Margin Prices for Options (fair value) provided by the ASX.
Example A – Selling Put Spreads
Jenny thinks the share price of XYZ is going to go up, and decides to sell ‘at-the-money’ Credit Put Spreads. It’s the start of the month, and she sells the $28 put and buys the $27 put (a $1 spread) and receives a premium of 37.5c, or $375 per contract.
This means the Actual Risk is 62.5c per share, or $625 per contract of 1,000 shares ($1 per share minus the premium of 37.5c). No matter what happens to the price of XYZ, the most Jenny can lose is 62.5c per share, or $625 per contract.
Jenny has $10,000 to invest, so she is able to sell 16 contracts, and receives a net premium of $6,000.
As long as the share price is above $28 by the end of April, Jenny will receive 100% of her net premium, being $6,000.
The ‘break even’ point – where Jenny doesn’t lose any money, but also doesn’t make any money – is $27.625 (the exercise price of $28 less the premium received of 37.5c).
Jenny loses all her money ($10,000) if the price finishes below $27 at expiry (her bought put level).
Example B – Buying Call Options
John also thinks the share price of XYZ is going up, but instead he decides to buy at-the-money Call Options.
The price of the $28 call option is 94c. John also has the same amount of money to invest, that is, $10,000.
With this $10,000 he can buy 10 contracts, which means his Actual Risk is $9,400.
For John to realise the same profit as Jenny – $6,000 – the share price must be $29.54 at expiry. Why? It’s the exercise price of $28, plus the cost of buying the put (94c), plus the $6,000 profit which is another 60c per share.
For John to break even, the share price must be $28.94.
The point at which John loses all his money is if XYZ is $28 or below at expiry.
Let’s compare the two on a ‘like for like’ basis…
JohnJennyDifference
InvestmentBuy 10 Contracts of Calls at $28Sell 16 Contracts of $28/$27 Spread
Minimum Price needed to earn $6,000 profit
$29.54$28$1.54
Price at break even point
$28.94$27.625$1.315
Price at which lose 100% of investment
$28$27$1
As you can see, John needs a much higher share price than Jenny does to be as successful.
Jenny makes 100% of her profit at a share price $1.54 lower than John
Jenny breaks even with a share price $1.31 less than John, and
The price has to drop by $1 more for Jenny to lose all her investment.
The question we ask ourselves is this – Which do we think is more likely?
a) XYZ finishes above $28 by end April, or…
b) XYZ finishes above $29.54 by end April.
To me, this is a pretty easy choice! There is a much greater chance it will be above $28 than above $29.54.
I know Jenny will be successful considerably more often selling Put Spreads than John will be buying call options, because she have such a larger margin of error, and doesn’t need the share price to move at all. With call options, the share price MUST move significantly just to break even!
Having said that, the call option strategy will yield a considerably higher profit if XYZ goes well above $29.54, since the profits for Selling Insurance is capped. That’s the trade off – even though Jenny’s spread trade is more likely to be successful, the maximum profits are fixed. John’s bought call is much less likely to be successful, but if it is, his profits are unlimited.
This example is a rise of 5.5% in under a month. Again, I ask myself – which do I think is easier to achieve: a) picking a stock that doesn’t need to go up at all, or b) picking a stock that needs to increase by more than 5.5% in a few weeks?
I don’t think anyone can argue with the fact the former is considerably easier and will be achieved much more regularly.
The example above is a ‘like for like’ basis, with the same exercise price (exactly at the money) for both examples, and is really the only way to get a true comparison.
However, in the real world we would probably not do these exact trades. Let’s compare a couple that is more ‘real’…
Example A – Selling Put Spreads (2)
Jenny still thinks XYZ will go up in price, but decides to sell her spreads at a lower price to build in a bit of a ‘buffer’, namely $27 with $26.50 protection. For this she receives a net premium of 16c per share, or $160 per contract.
Her Actual Risk per share is now 34c, or $340 per contract. If she has $10,000 to invest, she now sell 29 contracts. She will therefore receive $4,640 in total premiums.
The minimum price Jenny needs to realise 100% of her profit is $27 even.
Her break even point is $26.84, and the point at which she loses all her investment is anything under $26.50.
Example B – Buying Call Options (2)
John thinks XYZ will go up in price, and decides to buy call options at $28.50, and pays 72c per option, or $720 per contract. With $10,000 he can buy 14 contracts, and therefore spends $10,080.
To earn the same as Jenny – $4,640 – John needs the price to go up to $29.45. Why? It’s the $28.50 exercise price, plus the 72c cost of buying each put he needs to make back, plus 33c per share (14 contracts at $330 = $4620) to equal Jenny’s profit.
To break even, John needs the price to go up to $29.12.
And the price that John loses all his investment is $28.50
Let’s compare the two now…
JohnJennyDifference
InvestmentBuy 14 Contracts of Calls at $28.50Sell 29 Contracts of $27/$26.50 Spread
Minimum Price needed to earn $4,640 profit
$29.45$27$2.45
Price at break even point
$29.12$26.84$2.28
Price at which lose 100% of investment
$28.50$26.50$2
John now needs the share price to go up over a whopping $2 more than Jenny does to achieve the same results!
Jenny makes 100% of her profit at a share price $2.45 lower than John!
Jenny breaks even with a share price $2.28 less than John!
The price has to drop by $2 more for Jenny to lose all her investment!
Who do you think is going to get it correct more often and make money more regularly?
I certainly know who I’d be betting on…

What Are we Trying to Achieve With Our Trading?

admin — Tue, 19 Jan 2010 08:02:34 +0000

I wanted to make a few comments today on the comparisons between different stock market strategies. First, let me say I am yet to come across a strategy that doesn’t work, given the right circumstances. They can all make money, some just require more skill, more time, or more luck than others. Everyone has their preferences, and I thought we’d compare a couple today.
I’m constantly intrigued by people who decide on an investment strategy without the faintest idea of ‘why’ they use that particular strategy, or without having a look at an alternative strategy, with other possible advantages, that achieves the same (or similar) thing.
Of course everyone invests to ‘make money’. The question of ‘why’ goes to the specific intention of a particular strategy – “why do you use one form of investing over another?”
The only way to answer that question is to first ask yourself another – “What am I trying to achieve?”
Are you hoping to get the maximum benefit out of the movement in the share price – to get the most profit from a stock rising (or falling) quickly? Are you willing to try and capture these profits on the big winners, knowing that most of the time you may pick losers, but keeping your losses small and your winners big (hopefully)? If so, are you happy to continue trading when you know you may only get 30, 40 or (if you are one of the brilliant few) 50% correct?
Or, are you trying to make money ‘regardless’ of the share price movement? Are you happy with steady and very high (if not spectacular) returns on a regular basis.
The question I will address in this article is simple: Would you prefer to be in a position where the share price MUST go up to make money, or would you prefer it if the share price doesn’t need to go up (it can stay the same, or even go down a little), yet you still make 100% of your profits?
I’d like to take this opportunity to explain the ‘rationale’ behind one particular investment strategy – the Credit Put Spread strategy (sometimes called “Selling Insurance”).
This article is an attempt to explain exactly WHY you may trade the Selling Insurance strategy, rather than any of the dozens (hundreds?) of other option strategies available.
This article does not attempt to explain the intricacies of any particular strategy, nor the various options available to the trader throughout the trade (rolling out/down, closing early etc), rather to explain in simple terms the ‘principles’ behind why you may choose this particular strategy over a multitude of other strategies.
Please be aware I have either traded or investigated just about every strategy using options that I know of, and the Selling Insurance strategy certainly has its place in a diversified portfolio, with many advantages over other strategies. More importantly, it satisfies several criteria that we look for in our trading.
Let’s look at why. As mentioned, we first need to understand the reasons why we would use a particular strategy, and determine what it is we are trying to achieve. Without that goal, finding the correct strategy for YOU is impossible.
When we first started out, we detailed 5 specific criteria that needed to be met with any investment strategy we use. All of these conditions had to be met, otherwise that type of investing was not appropriate for us.
Now, your criteria may be completely different to ours, and that’s fine. Only YOU can choose what is right for you. You may have a completely different set of criteria, but the point is the same: Before choosing any investment strategy, make sure you lay out what you want, then choose the strategy that suits your criteria.
Here’s the criteria we settled on, and how the Selling Insurance strategy fits the bill…
1) Trading doesn’t take up too much TIME.
Any investment must NOT consume too much of our time. The entire purpose in making money is not for money itself, but to create a lifestyle. Therefore as little time as possible must be spent on any strategy.
The time it takes you to read this article will be greater than the time we have spent in the last 2 months implementing this strategy, and was still able to earn some considerable profit.
Most other type of trading, especially any form of ‘directional’ trading, requires a considerably more active mindset, with positions being monitored consistently, stop-losses enforced etc. For the most part, they are not ’set and forget’ investments, and require considerably more time to apply, monitor and manage.
The Selling Insurance strategy enables us to live the lifestyle we want, without the need to be watching the market every second.
2) It must have a High Probability of Success.
There must be a high chance that our investment will return as expected, most of the time.
With the Stock Market, the way we view it is there are essentially 5 things that can happen in respect to the price of the stock…
1) The price can go up a lot
2) The price can go up a little
3) The price can stay the same
4) The price can go down a little
5) The price can go down a lot
With our Selling Insurance strategy, we format our investments so we make 100% of our expected profit if 1) to 4) above occur.
So that’s an 80% chance of success – without applying any skill at all!
It is only if 5) occurs that we need to take any action, and we then have several choices to either retain our profits or slightly reduce them. We can only lose a maximum set amount if we choose to close our position entirely.
With most other types of trading, you are essentially making a ‘bet’ as to which way the stock will go – commonly known as ‘directional trading’. Therefore, a profit is only realised when the share price goes up a lot if you are long (no 1), or down a lot (no 5) if you are short, giving a substantially less likelihood of a profit on any and every trade.
The flipside to this is that while there is much less chance of making a profit with directional trading, the profit achieved can be considerably higher if the price does go your way, as opposed to the Selling Insurance strategy where profits are capped.
That’s fine with us – we’re not trying to make millions with one trade – that is not our goal. We’re trying to earn a steady, consistent and recurring income on a monthly basis.
This is a point I can’t stress strongly enough, and is the reason for this entire strategy! We do NOT require the stock to move in a specific direction to make money. That means we make money more often than any other strategy I know of.
3) We are always PROTECTED on the downside.
With our Selling Insurance strategy, our losses are capped, and if a ‘worse case’ scenario happens, I am not wiped out. We know exactly what our possible losses are BEFORE entering the trade, and these are managed to be minimised as much as possible.
With good money management this can be comfortably achieved with most strategies, so while I can’t stress enough the importance of ‘loss prevention’ and ‘risk management’, because it can be achieved with most investment strategies it’s not really a deciding factor on choosing one strategy over another.
4) We make a ‘regular’ INCOME so we don’t have to work.
We need to be able to live our lives the way we want – day in and day out. That means we need income. I’ve got bills to pay. I’ve got a wife with a penchant for Italian shoes. Hell, I’ve got a penchant for Italian shoes!.
The whole point of being wealthy is to live a certain lifestyle, and that lifestyle costs money. So we need an ‘income’ to fund that lifestyle.
Investing just for ‘capital gains’ or ‘long term growth’ is all well and good, but in the meantime any investment strategy must supply enough income to live on, and live well!
The Selling Insurance strategy has only one goal – to provide income on a regular basis (generally monthly). That’s it. It’s important to understand this strategy is NOT for long term capital growth – although it can be achieved if you re-invest the profits – but was designed purely to replace income. Not too many other strategies can do that as effectively.
5) LOCATION is not important.
We need to be able to manage my investment from anywhere in the world.
Again, most strategies can be done with a laptop and an internet connection or a phone from anywhere in the world, but this point goes hand in hand with the ‘time’ factor.
The Selling Insurance has the advantage of being less time consuming, therefore if I’m travelling the world or relaxing somewhere, I don’t need to spend hours in front of my computer managing my trades. A few minutes a day is all I need, so this is a big advantage over most types of directional trading.
So, all in all, the main criteria that indicate a better investment strategy for us would be Selling Insurance over most other ‘active’ types of investment is 1) Time, 2) Income and 3) Probability of Success and 4) the fact it can be done easily no matter where I am or what I’m doing.
What I consider to be the biggest advantage, and the most important reason I use this particular strategy, is the high probability of success. That’s the clincher for me, and the deciding factor that means the Selling Insurance strategy is one strategy I put my money into time and time again.
In Part 2 of this article, we’ll examine this part of it in more detail, and compare the results of different strategies to highlight why this point is so important. Understanding that may help to ensure you make money from the markets over the long term. Until then…

Stock Trading Disaster (std) Prevention

admin — Mon, 18 Jan 2010 09:36:25 +0000

I thought such an eye-catching title would be appropriate for an article on risk management. Often times, beginning traders forget the fundamentals of proper trading in their quest for instant riches in the stock market. Those of us who have been trading for some time now are fully aware of the danger in that type of thinking.

I was a cocky beginning trader. Soon after attending a stock trading seminar, I had several big wins. In my own mind, I was the exception to any and all stock market trading principles. I could do no wrong. My short-lived reign as a trading Adonis came to an abrupt end. All my money began raining down into the pockets of real stock market professionals. Fortunately, I wised up before it was too late.

In short, I was a young punk who knew everything about nothing. I often times had to learn things the hard. Learning to trade in the stock market was no exception. So, here are my top three ways to prevent an STD.

#3 Way To Avoid An STD

Perform thorough market research! Taking proper research for granted is a one-way ticket to Brokeville. Trust me, I know. Due diligence is required in order to side step a poor stock decision. Remember, getting into a bad trade is simple…getting out is costly. Give market research the time and attention it deserves.

#2 Way To Avoid an STD

Remove hope from your emotional make up when trading! Wishful thinking is a dangerous mindset to be in when you are a stock trader. Hope and wishful thinking lead to irrational decisions based on emotions rather than factual information. Going down with the ship is far from an act of nobility. You will make mistakes. As a trader, you must be willing to make corrections quickly. In the stock market, making too many errors, too fast will certainly cause you to be prematurely ousted from the markets if you do not adhere to the method #1.

#1 Way To Avoid an STD

Make use of a protective stop loss! After placing your order, ALWAYS set a protective stop. Failure is not to far off in the distance for a trader who handles the duties of risk management in the absence of a stop loss. A stop loss is not perfect but the only insurance policy a trader has against stock trading career ending losses. Stop being a philanthropic trader who continues to give money away to the markets.

Using a protective stop loss continues to be the most effective method of risk management. Fortunately, it is also the easiest of the three to apply. Methods 1 and 2 are developed over time as you gain experience. Simply use my top three ways of preventing an STD and you have cut your chances of getting burned.

10 Tips To Succeed In Trading Currency Commodity

admin — Sat, 16 Jan 2010 07:43:37 +0000

Whatever the job type, everyones ultimate goal is to succeed and gain surplus. You need to have the right knowledge in order to become successful. Being a business person, you should learn the most reliable and right way to become successful in trading market. Learning the trading commodities concept requires a trader to use different trading tricks, and by using law of charts. This can help in profiting from trading commodities.
In trading commodities, to gain bigger profits and earn large amount of money is to identify the market trends as quickly as you can before anyone else finds it. Currency trading can have many supports or resistance at the same time. If you are quick in determine the market trend then you can earn good profit. Trend is not limited to a specific time. Market trend can change at any time including intra-day, daily, weekly or even monthly.
Some trading commodities tools are available to help you identify these trends. Given below are some trading style for you :
1. Look out for trading up of prices. If you see a trading up in the trend it is advisable to buy at that time. In order to overcome the anticipative resistance, enter into the buy signals which are more than the current prices. On the other hand, if the trading down occurs, you should consider selling. Look for selling opportunities. To break the anticipative support, you must do exactly of that when trading up occurs i.e. to enter those sell signals which are well lower than the current prices.
2. You should look for optional objectives depending on whether it is short or long. You should consider short for anticipative support and long for next level resistance.
3. You should always have a protective stop on your trades till it hits.
Pay attention to some of the factors given below to make sure you know about the opportunities
4. The best time to look for buying opportunity is when the behavior of market changes from normal to bullish.
5. When the behavior is bullish you should hold protective stops for long positions which are below support level.
6. You should let go of the long positions if status changes to neutral.
7. Start finding short positions if the status changes to bearish from bullish. Bearish status is a good opportunity to find selling opportunities.
8. With bearish status you should hold resistance on short positions with protective stops.
9. Let go of short positions when status changes to neutral.
10. Find long positions if status changes from bearish to bullish.
You should have the knowledge about what to expect in future related to market trends. Have knowledge about directional bearish and proprietary bullish market forecast and resistance and support. Listen to different comments about the trends. Always remember that change in market which can be either bullish or bearish is very important in deciding which position to let go and which opportunity to grab.

A Simple 5-step Trading Plan

admin — Fri, 08 Jan 2010 07:52:32 +0000

As a beginning stock market trader, I frequently visited an unpleasant place called Loss Vegas. It was teeming with would be investors and traders with grand aspirations of making a killing in the stock market. Differing life experiences, bank account balances, and strategies separated them but they were all bound by the possibilities of great riches there for the taking. Some were even aware of the chances of success being less than ideal and were not deterred. I could be counted among those who would not be denied.

The numbers don’t lie! 9 out 10 stock traders will fail, miserably! That is the same ratio for starting a business. At least in the case of running a business, there’s a 5-year failure window. I would say that a very small minority of beginning traders makes it past their first year. The reason for such an unbalanced success/fail ratio is simple. 9 out of 10 people entering the market would be better categorized as gamblers and not traders. Yes, I too, was one of those gamblers masquerading as a stock market trader.

Successful traders employ proven, winning trade strategies. Most beginning traders systematically make the same mistake over and over again. Venturing into the market without a sound trading plan is financial suicide. Here is a guide to structuring your own winning trading strategy.

Many principles of running a successful business can be applied to stock trading. Having a trading plan is essential to the success of your new venture. Consider this trading plan to be your road map that guides you to stock trading mastery. Skipping this step will ensure your permanent residency in Loss Vegas.

The trading plan must outline the why or purpose for trading the markets. If your purpose is to simply make money, you are in for a rude awakening. The number one objective of a stock trader is to trade well NOT make money. Focusing on trading well will result in you making money. Making profitable trades is a by-product of trading well. Calculating profits while practicing your trade is counter-productive to your efforts. You certainly wouldn’t want a lawyer tabulating his fees while researching your case, would you? The same focus needs to be applied while you trade. There will be plenty of time for counting your windfall once you have closed out your position.

After committing yourself to learning to trade well, the next step in the process is executing the plan. This includes but is not limited to:

1. Conducting Market Research-stock selection, risk/reward ratios

2. Pinpointing Entry Points

3. Money Management- where to place protective stops

4. Establishing Exit Points

5. Trade Review

I use this exact process when trading stocks and options. Deviating from your trading plan can hinder your progression as a trader in two areas. First, the effectiveness of a trading strategy cannot be accurately measured when a trader is inconsistent in the execution of a trading strategy. And secondly, altering your strategy in the midst of a trade is hazardous to your wealth. A prime example would be moving your protective stop in the opposite direction of your trade. This allows for a wider, much riskier stop loss cushion. Moving protective stops in the opposite direction of the trade is a sure sign of a rookie trader.

Following this simple formula will not eliminate visits to Loss Vegas but will ensure shorter, less frequent stays. Happy trading and here’s to your success!

Hesitating Before a Trade

admin — Fri, 01 Jan 2010 07:42:57 +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.

Online Stock Trading System

admin — Wed, 23 Dec 2009 20:20:34 +0000

Stock trading system software is getting increasingly popular among stock exchange traders. There are also handbooks and guides written by seasoned stock traders that can come in very handy. These are useful for professional traders as well as for amateurs looking to make some money in the stock market. A stock trading system is a software application that automates trade decisions.

It is programmed with a certain set of rules and these rules govern trade decisions. A stock trading system takes the emotion out of trading. Traders do not need to speculate on a prospect. If the numbers are right, the stock trading system will prompt them to buy and sell. This prevents a trader from falling into greed or being swayed by misdirected instincts. Many traders have successfully adopted stock trading systems but you must consider the option carefully before purchasing a system of your own.

When buying one of the newer seats, people should look at the hardware package for two foam-and-epoxy washers. To fix the new toilet seat, they should turn the seat upside down, and center one on the bottom of each bolt-head housing. When the stage is set for the seat to be mounted, the protective tape must be peeled off to expose the bottom of the two washers. Once the epoxy is exposed on the bottom of each washer, turn the seat over, line up the holes, and set the hinge in place. Finally, the bolts may be pinned through the hinge and the bowl.

Trading Systems provides detailed information on Trading Systems, Forex Trading Systems, Stock Trading Systems, Future Trading Systems and more. Trading Systems is affiliated with Option Trading.

Learn how to trade options

admin — Tue, 22 Dec 2009 19:40:51 +0000

Options trading involves trading the option to buy or sell a stock, at a set price (strike price), until the option expires. With commodities, this is also known as futures trading. Options expire on the third Friday of each month. Options with expirations of over a year are called LEAPS, which stands for Long Term Equity Anticipation Securities. Option premiums (the cost to buy the option) can start as low as $.05, depending on the underlying price of the stock. The most common price range of premiums is around $2.50 – $5.00. When you buy an option, your are buying the option to buy 1oo shares. So, if you buy 5 options with a premium of $5, then you will spend $500 for your 5 options ($5 x 100 shares).

There are two basic options: calls and puts. A call is the option to buy a stock at the strike price. The object of a call is to have the stock price go up. Your option is considered out of the money if the stock price goes down and never rises above your strike price before expiration, then you will lose your premium – the amount you paid to buy the option. Your option is in the money if the stock is trading above your strike price.

A put is just the opposite of a call. The object of buying a put is having the underlying stock price go down. A put is the option to sell a stock at the strike price. A put is in the money if the underlying stock is trading lower than your strike price, and a put out of the money if the stock price is trading higher than your strike price.

An option can still have a premium if it is out of the money. This is considered time value. An option premium is determined by two factors: tive value and intrinsic value. Intrinsic value is how much the option is in the money.

More Advanced Options Trading

You can also sell calls and puts. Selling (or writing) a call while you hold the current stock is termed a covered call. Covered calls are used very often and it’s a way the investor can bring in extra money during a stagnant or down trending market. If you sell a call without holding the underlying stock, this is termed a naked call. Naked calls are very risky because the stock price can go up infinitely and when the calls are exercised you are obligated to give the buyer the shares at the strike price but you have to buy them at the market price (you lose the difference between the strike price and the price on the open market).

Buying a put while holding the underlying stock is termed a married put. An investor buys the put for protection or insurance from the stock price falling. A married put is like an insurance policy – you are guaranteeing yourself a sell price of your stock until expiration.

Selling (or writing) a covered put means you have the cash secured in your margin account to cover the cost it would take to buy the stock back at the strike price from the buyer if the stock is put to you. If you don’t have the cash secured upon selling the put, then this is termed a naked put. You are liable for the cost of all the shares at the strike price if the put is exercised (put to you).

A straddle is buying both a call and a put at the same time. The object of a straddle is that the investor believes the stock is going to significantly move up or down. If the stock price rises above your call strike or falls below your put price, then you are in the money. A straddle is used when the stock is very volatile and is expected to move, but you just aren’t sure which way.

A short stradle is the opposite of a straddle. A short straddle involves selling a call and a put at the same time. The investor thinks the underlying stock is not going to move allowing the options to expire worthless and the investor profits the premiums from selling the options.

A spread is the buying and selling of the same option type (call or put) at the same time. A credit spread is when a higher premium option is sold and a lower premium option is bought. The investor is credited more than is debited (the money made from selling the options is more than what it cost to buy your options). A debit spread is just the opposite – more money is spent on buying then options then what is received from selling the options.

A calender (or horizontal) spread is when the expiration dates on the long and short leg of the option differ. A verticle spread is when the strike prices of the long and short leg differ, not the expiration date.

For more, please visit http://www.wallstreetknowitall.org

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD).

Stock Option Trading Strategy

admin — Tue, 22 Dec 2009 07:44:36 +0000

Short of having a crystal ball, picking winners when stock option trading is not as hard as many people would have you believe. In the first place, when considering purchasing or selling stock options, you need to conduct extensive research on the underlying stock yourself, or rely on someone else to do it for you – someone you trust. Many factors must be considered. Among these are:

1. The stock’s past history and movement.

2. Expected earnings reports of the stock’s parent company.

3. Volatility and volume of shares traded daily.

4. Any current news concerning the company’s growth or profitability.

5. The price of the option with respect to how you think the stock will perform. If you do not feel the stock’s movement will handily offset the cost of the option, plus the trading fees, then buying or selling the option would be fruitless.

6. Supply and demand of the underlying stock. (Industry group market action.)

Once you have decided upon which stock to pick, you next need to decide whether you believe the stock’s price is likely to rise or fall. (With stock options you can make money in either direction.)

By purchasing a Call option:

1. You expect the price of the underlying stock to rise, so you can then purchase it at the lower strike price, making a profit in the transaction.

2. You have the right to control 100 shares of stock for a fraction of the cost of purchasing the stock outright.

3. You are managing your risk by limiting the downside to the premium paid for the option. The major downside to buying any option is time decay. Your option expires within a finite period of time. If the underlying stock price behaves as expected, you will not need to be concerned about execution.

Having shown you the benefits of buying Calls over the risks of purchasing the stocks outright, we must emphasize the fact that buying short-term Calls has its associated risks as well. A Call buyer, especially a short-term Call buyer, is severely limited by the time-decay factor. The nearer to the expiration of an option, the less the option is worth, and the less time is remaining for the option to become profitable. Within the leverage used by gambling casinos (the house), the concept of short-term Call buying is completely understood, as well as exploited, as gamblers are considered short-term Call buyers.

Example: Consider your long-term Put, or Call, as a 6 to 8 month license to operate a casino. It allows you to capture short-term premiums; money that gamblers continuously give to you in attempting to beat the odds by speculating they will make profits on very risky bets. They feverishly feed the slot machines, ante up at poker, double-down on blackjack, or spin the roulette wheel. The odds are overwhelmingly against these short-term buyers. You, as the casino owner, continuously capture these short-term premiums, easily offsetting the expense of the license to operate the casino, then earning substantial, clear profits in the following months. They know the odds are with the casino owner, but they still take the enormous gamble on the slim chance they will hit a jackpot. The lottery works in the same manner.

On one side of the position, the transaction is definitely gambling, while on the other, the casino is simply engaging in business. Would you rather bet on the remote chance of a gambler’s rare, limited success, or rake in the steady, routine premiums captured from operating a successful business? Yes, occasionally a gambler does beat the odds to enjoy a limited, windfall return on his bet. For the casino owner, that is simply part of the cost of doing business. But we all know where the true, long-term profits lie. 30%, 40%, 50% and more, are common, and in short periods of time. The odds are with the short-term option seller, not the buyer.

When you choose a stock for short-term Call buying, you not only must carefully consider the proper stock for the type of option you are purchasing, you must also decide which direction the stock will move, then, that movement must occur within a specified, very limited period of time. Many investors have gone broke by attempting to make those same decisions. In short, time is not on the side of the short-term option buyer. It is on the side of the option seller.

Summary: 1. Buying stocks is risky.

2. Buying short-term options is less risky, but still risky.

3. Selling short-term options is the least risky, especially with a hedge, or insurance.

By selling a Call option:

1. You expect the underlying stock price to fall, so the option will not be exercised, but expire, worthless.

2. You can capture the entire premium that was paid to you, as profit. If the underlying stock price rises, you are obligated to sell 100 shares of stock at the lower strike price. If you do not already own those shares, you would then have to buy them at a higher market value, then sell them at the strike price, in order to meet your obligation. This situation is called a “Naked,” or “Uncovered” position, and is extremely dangerous. Anytime you sell a Call option you should consider buying the same option with a slightly lower strike price, and longer expiration date. This will reduce your profit potential, but will also reduce your risk considerably. (Remember the parallel twins, Risk and Reward

- If you want to reduce risk, you must also give up some degree of potential rewards. You may wish to lower your cost basis in the stock, to the extent of the premium received.

By purchasing a Put option:

1. You expect the price of the underlying stock to fall, allowing you to sell stock at the higher strike price, and thereby earning a profit.

2. This option is also used in a combination strategy as a hedge against selling Puts. We will explore that strategy later, in detail.

3. Buying Put options could also be used as a hedge, or insurance, against the possibility of a price drop in stock you already own. Consider the following:

You own 100 shares of ABC stock, and are concerned that the stock price could suddenly fall. You purchase a Put option on the same stock, with a strike price at current market value. If your stock falls in price, you would have the right to exercise your option and sell 100 shares of ABC stock at the higher strike price. The premium you paid for the option could be far less than the loss you would have incurred without that insurance. In this instance buying Puts acted as a hedge against the possibility of a price decrease in the stocks you already own. If the price of the underlying stock increases, your loss is limited to the premium you paid for the option. The option acts as an insurance policy against possible loss.

Selling a Put option without an opposing hedge -”Naked” You expect the price of the underlying stock to increase, causing the Put option you sold to expire worthless. You can then capture the entire premium paid to you, as profit. If the underlying stock price were to fall below the strike price, then you would be obligated to purchase the stock at the strike price, or pay the difference between the strike price and the stock price, if you do not want to own the stock. Your upside is limited to the premium received for selling the option. Your downside is potentially unlimited to the base value of whatever you could sell the stock for on the open market, or to the difference between the strike price and the stock price. This is a “Naked,” or “Uncovered” position, and should never be allowed to occur, unintentionally. Without the implementation of combination strategies, the main objective of the Put seller is to hope the option expires, allowing him to capture the entire option premium as profit. Nearing expiration, if the stock price moves below the strike price, changing the option’s value to ITM, and highly vulnerable to exercise, then the option seller must move quickly to buy back the option, perhaps lessening his profit potential, while also managing his risk. Even so, a small loss would be better than having to buy 100 shares of stock at inflated prices. Also, the loss can be immediately compensated for by simultaneously selling another Put expiring in the following month. We use OPM (Other People’s Money) to buffer downside risks, while buying more time for the stock price to rise.

Stock Option Trading, when done properly, can drastically reduce, or even eliminate, these two stumbling blocks to stock market success. In the first place, A trader of stock options never is not required to own the underlying stock in which an option is based. He or she can design a trade in such a way that downside risk is limited to the cost of the option, which in itself is a fraction of the cost of the stock. We capitalize on traders and speculators greed to get rich who purchase overvalued short term options bid up to inflated levels by an excess of demand over supply, by being the house or casino owner and capturing the inflated premium from the players or buyers. We buy reinsurance at a low cost by purchasing a longer term ( 5 to 6 months) out of the money option to sell the stock at a fixed price no matter how low it may drop. We buy this reinsurance ( puts ) to create a profitable hedge and sell overvalued puts repeatedly, month by month to bring the cost of our hedge down to zero and a credit so that we can enjoy a free ride capturing this inflated premium income. This strategy is known as diagonal put spreads and you do not need to pick a winner to profit.