Options Trading For Beginners – Getting Started

January 30, 2010 · Posted in options trading · Comment 

No matter what you do in life there is always a first day. Walking as a baby, driving a car or starting a new job all fall into this category. This is true of beginners options trading in the stock market as well. Even if you have experience trading stocks you might not know the difference between a call and a put; dont get worried because this isnt going to lead to a pop quiz. What is going to happen is that we will look at options trading for beginners and give you some of the basics to get you started. If you have never been exposed to options trading, welcome to your first day!

What Are Stock Options?

Lets start our beginners options trading discussion with the topic of what options arent. Stock options are not ownership in anything; unlike stocks, the holder of an option doesnt possess part ownership in a company; this is simply an agreement between two investors that one party agrees to deliver something to another party within a specific time period and for a specific price. This eliminates the ownership part of the agreement as well as the idea that you must possess a particular stock in order to implement a position. Interested in selling short an option? In the stock market you have to borrow the stock to do it; in options trading beginners only need to understand that there is no ownership and no problem making the transaction.

What Are the Advantages of Stock Options?

Options have a number of nice advantages that the options trading beginner should understand. Among these benefits are:

Leverage Options also have the advantage of leverage; your option is purchased with a multiplier of 100 so your fortunes are affected by 100 shares of stock and not only one.

Limited Risk This is not true of all options investing, but overall options trading has limited risk. When buying options, your risk is limited to the price of the premium, or the amount you paid for the option. For example, if you buy straddle (the name for a particular option) and the price of the stock is wrong for your position, you can, in essence, allow the option to expire. This offers a great start in options trading for beginners since they can purchase options without the fear of staggering losses.

No Risk Paper Trading Thanks to the power of the Internet, paper trading has become a valuable asset for the options trading beginner. You simply register to use the software and follow the directions of the site. You will be able to implement positions and see the effects of your decisions on your account. Lose your money? No problem, it was only virtual money but a real experience beginners options trading.

What Do You Need To Do To Get Started?

Getting started is never really difficult. Remember, it is your first day. However, there are several things you need to do as a beginner in options trading:

1. Start Learning There is no substitute for education. Read books about options trading, talk with others that trade options and search the Internet for information about options trading. Once you start investing your own money, you will be glad to understand options trading.

2. Create a Stock Trading Plan This is just as important as your education. You need to outline your goals and objectives as well as your strategies in an unemotional manner. This way, when emotion tries to creep into your decision making process, you will have already decided your course of action.

3. Select a Broker This is a personal, but important part of the process. You can implement your own trades but you need someone to actually place the orders. Some full-service brokers offer more services and most Internet brokers offer lower commissions. Even though youre a beginner in options trading, define what you want from your broker and find someone who meets your needs.

4. Use Japanese Candlesticks This powerful charting system will help not only the beginner in options trading but is valuable to the expert as well. Candlesticks will help you to find the trends in the market that most others miss.

Conclusion

Is that enough information for your beginners options trading lesson? Remember that this is your first day but everything you do will build off of it.

Author: Stephen Bigalow
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Stock Options Trading – How Much Risk Do You Need to Succeed?

January 27, 2010 · Posted in options trading · Comment 

Risk is the single most frightening aspect of trading any form of securities. In fact, some investors can become so swayed by the fear of losing money that they can become completely paralyzed. This very inactivity can be just as deadly as making the wrong decision, because in the stock market time is money. Bear in mind that when it comes to investing, risk and reward are thought to be the parallel twins of productivity. Where one goes, the other follows. When investment risks are high, there is usually an underlying cause for the associated volatility, creating a similarly high high profit potential. When risks are low, so it seems is profit potential.

There is risk associated with virtually all types of investing, be it stock ownership, or stock option trading. However, you can learn to mitigate those risks, as well as hedging your stock portfolio, by using specific stock option strategies. Once you learn to manage risk in any situation, the process becomes more enjoyable and the potential rewards greater.

To begin with, there are a number of basic differences between investors and traders:
Investors generally tend to passively leave their investments in place for longer periods of time, through both the highs and lows of market fluctuation.

Traders tend to make shorter-term “trades,” taking advantage of market highs while attempting to avoid the lows.

Techniques employed by traders are generally more active and are intended to primarily make money on the trade itself. If a trader’s portfolio is truly balanced, it will contain both short, as well as long-term holdings. Trading options is a method of using small amounts of money to make exceptionally high profits within a short period of time. Conversely, all things being equal, you can lose the same amount of money in the same amount of time.

Many savvy investors combine stock ownership with stock option trading, using options as a hedge against catastrophic drops in share prices. Whether used in combination with stock ownership or on its own, part of the appeal of trading stock options is that it is done with little interest in market fluctuations. With stock options trading, you will no longer need to scour the Internet while keeping one ear tuned to CNBC for any scrap of news that could potentially mean disaster, or opportunity, to your life savings. Using well thought out stock option trading system means that you will be able to enjoy a methodical, low-stress system of risk management trading.

Prudent option traders:
* Don’t care whether they are in a bull or a bear market.
* Can achieve positive portfolio performance without owning stock.
* Don’t lose sleep over market fluctuations.

Of course, owning stock in itself is a high-risk proposition, due to the fact that shareholders only makes money when the stock price rises. Additionally, stock investors risk one hundred percent of their investment. Anyone who purchased shares of WorldCom or Enron can appreciate this fact.

Knowledgeable options traders, on the other hand, can place trades where the only risk is the price of the option, which is a fraction of the stock’s price. More importantly, trades can be structured to produce a profit whether a stock’s price rises, falls or remains the same, depending upon the technique employed.

Getting started in stock option trading doesn’t mean breaking the bank. Many traders open their accounts with relatively small amounts of money, between $2,000.00 and $10,000.00. The Security and Exchange Commission mandates a minimum of $2,000.00 to open an account. However, most brokerage firms have established their own required account minimums.

The SEC also requires traders to have a basic knowledge of the stock market before providing a customer access to trading. If a trader incurs losses beyond his or her financial ability to cover them, the brokerage firm that made the trade is held responsible.

The system must guard against those who would act without obtaining the proper knowledge, expertise, or funds to do so. Do not put yourself into that category. Invest prudently and intelligently. Seek knowledge and guidance before trading stock options.

Begin by thoroughly familiarizing yourself with options trading. Develop a solid system of operating parameters and stick with them. Avoid naked positions, where your risks are high. Keep accurate accounting records. Set realistic goals on every trade. When your goals have been reached, take the profits and move onto your next opportunity. Don’t get greedy.

Most importantly, when trading stock options, look before you leap. Know before going in what the risks are, as well as the potential rewards. Don’t take positions where the resultant downside can wipe out your portfolio, or worse, produce a margin call from your broker. Especially in the beginning, make conservative option trades that can produce consistent earnings without betting the farm. Since the terms of option trades are relatively short and the investments relatively small, you don’t need high risk positions to achieve overall success.

Author: Don Shapray
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What’s So Exciting About Stock Option Trading?

January 24, 2010 · Posted in options trading · Comment 

Option Trading seems to be more popular now than ever before. We all know that options can help leverage the money that you trade or invest. But, for the beginning stock trader, the concept of options trading can be a little confusing. In this article, I will to talk about what options are and the different types of options. I will also show the advantage that the options trader could have over people who do not trade options.

Options can be broken down into two broad and general categories. There are call options and put options. The decision as to whether or not you want to use call or put options in your option trading depends on your opinion about where the market will go and how you want to make money based on that opinion.

One of the initial concepts that traders seem to find confusing is how options are priced. Usually, when people see the price of an option, it can be anywhere from a few cents to a couple of dollars. But, since a stock option represents 100 shares of the stock, the actual price that the trader will pay for an option has to be multiplied by 100. So, in option trading, a stock option that is priced at $.25 will actually cost $25 to purchase.

A call option is the right but not the obligation to purchase a specific stock at a certain price for specific duration of time. This allows a trader to purchase the right to buy 100 shares at the strike price of the option before the option expires. So, if you purchased an XYZ $50 call option that expires next month, you have purchase the right to buy 100 shares of XYZ stock at $50 before the option expires next month. These expiration cycles are normal to option trading.

Some traders don’t see the advantages that others do in option trading until they do the math. Let’s suppose you purchase the above option for $.50. Since you purchase the stock option for $.50 and have the right to buy the stock and $50, you need the stock to trade above $50.50 in order to make money. This is called your breakeven price.

Let’s suppose that you check the stock price of XYZ stock and it’s trading at $52. In order to calculate how much profit we would have on this trade at this price, you simply subtract the current stock price from the breakeven price. So, in this case you, would have profited $1.50. And, since options are traded in hundred share lots, this would translate to $150 profit. While this may not seem like a lot of money, keep in mind that in order to initiate this trade you only had to purchase the option for $50.

In the above scenario, the trader made money when the stock went up. Can we employ our option trading skills when the market goes down? You bet we can. If you are just looking to purchase options, this type of option trading strategy would employ put options.

A put option is the right but not the obligation to sell a stock to someone at a specific price before a definite period in time. So, traders speculating that a stock may go down would purchase a put option. Let’s clarify this with an example.

Let’s say that you expect that ABC stock will go down. With this in mind, you purchase the ABC $25 put option for $.75. Now, remember that the stock will need to be below our breakeven price in order for us to make money. In order to calculate the breakeven for this trade we would need to subtract $.75 from $25. So, once the stock begins trading below $24.25 you will be making money.

Option trading is not as confusing as some traders make it out to be. The concept of purchasing calls and puts are relatively straightforward and simple. As we have seen, the leverage potential and limited risk features found in trading options can be very attractive. For some traders, these are the two reasons that they get excited about stock option trading.

Author: Sam Perdue
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Option Trading Basics

January 21, 2010 · Posted in options trading · Comment 

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

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

Options – An Overview

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

In other words, options are like tradable insurance contracts.

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

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

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

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

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

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

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

The expiration month is the month the option contract expires.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To Your Trading Success,

Author: Tony Spann
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6 Common Options Trading Newbie Mistakes

January 18, 2010 · Posted in options trading · Comment 

Are you about to put one toe into the world of options trading? Have you started on options trading and made some initial losses? This article is written just for you.

After 6 years of professionally mentoring beginners in options trading, I noticed that there are a few mistakes that keep showing up, causing initial losses. Good thing is that I always make sure my students start out options trading using virtual trading or paper trading in order to harmlessly get through these initial mistakes and to learn from them.

These mistakes have been responsible for most of the initial losses that I see options trading newbies make and having an understanding of them would certainly help you avoid these mistakes and avoid the initial frustration of losing money.

Mistake 1: Choosing the wrong (usually out of the money) options

Many options trading newbies prefer to buy “cheap” out of the money options the reason being why buy expensive when cheaper options would also profit if the stock moved up (for call options). Well, that one decision alone has resulted in much of the initial losses when a stock moved up insignificantly and the position remains in a loss. Out of the money options are only good if you expect the stock to move strongly in that direction. If you expect to profit from relatively small movements, at the money or in the money options should be what you should buy. Buying out of the money options is also the reason why many options trading beginners lose all their money in one go. This happens when the options they bought never got in the money all the way up to expiration.

Mistake 2: Making complex positions as your first few tries at options trading

Many options trading newbies start out making complex positioning strategies such as iron condor spread or butterfly spreads as their first few options trades and then totally screw up as they did not know how to maintain the position and some don’t even know how to set up the positions properly. If you are new to options trading, stick to making a few simple call or put options trades using a small amount of money (or money you can afford to lose) in order to have a feel of how it works first before moving on to more complex strategies. Complex strategies are only good when your trading experience is as comprehensive as they are.

Mistake 3: Buying options that do not conform to your expected trading horizon

Most options trading beginners have no idea what an expected trading horizon is in the first place and commonly find the options they buy expiring before the underlying stock made the move they expected it to. If you expect a stock to be a mid to long term performer, make sure you buy options that are half a year to a year out. If you don’t know how a stock is going to behave, make sure you give yourself plenty of time by buying options with no lesser than 3 months to expiration.

Mistake 4: Placing the wrong orders

Yes, when under pressure, especially when real money is involved, beginners tend to make silly human errors such as clicking a wrong button, buying a wrong option, buying a wrong expiration month or placing a wrong stop loss order that got the position sold off immediately. Such newbie human errors can only be reduced through an extended period of virtual trading practice on your chosen options platform and then progressively practice using only very little money in order to get used to the feeling of trading real money. Sadly, we are all human, while experienced options traders tend to make lesser of such mistakes, they still do sometimes. However, it is more prevalent in newbie trades and certainly hurts trading confidence. Always give yourself a few months of virtual trading practice on your chosen platform before going on real money.

Mistake 5: Trading with borrowed money (or money you cannot afford to lose)

There is a saying “you can’t afford to win if you can’t afford to lose”. This is exceptionally true in trading, not only options trading, but any kind of trading. If you trade using money that you cannot afford to lose, the mental pressure will reduce your odds of winning when your odds of winning are already very low as a beginner. This is why we always advise people to trade only with money they can afford to lose.

Mistake 6: Trading without guidance

Would you learn to drive a car without anyone guiding you? Why then would you learn to trade without anyone guiding you? Yes, a mentor or a teacher is extremely important to beginners in options trading not because they can give you “tips” but because they can shed light on your situation and reveal weaknesses that you may not have noticed. Newbies trading without guidance typically repeat mistakes over and over again, and if you have traded options before, you know it don’t take many of those mistakes to wipe your account out.

So, there you have, the top 6 mistakes that newbies make in stock options trading. Take note of these commonly made mistakes and you will avoid the frustration of losing money unnecessarily.

Author: Jason Ng
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Successful Options Trading Lesson – Understanding Options and How They Trade

January 15, 2010 · Posted in options trading strategies · Comment 

Understanding how to trade options is a very power skills that many Wall Street professionals lack the skills needed to successfully navigate the options market. Using the StockMarketFunding.com proprietary options trading formulas and options trading calculator, we can teach you how options are really priced.

Many retail traders and retail investors do not understand how to trade options or how options are really priced. To successfully learn how to trade options a trader must act like and trade with the market maker. A great example of that is the Google January 590 Put that had closed at $6.93 on 1-13-10.

Has Google gapped down and the Put Options shot up to $9.10 where a lot of retail traders paid put for the put protection. 12 minutes into the trading day they dropped those contracts to $5.50 a 39% drop for the people who bought on the highs. On the other side of the trade, the Google January 590 Calls closed at $4.00 and there was a very quick drop down bid that took the contracts to $2.00 before they bounced to $5.90 in a 25 minute period.

That represents a 295% return if you had your options orders out prior to the market opening. Volatility To be a successful options trader, traders need to learn to think and act like a market maker. Day trading firms often teach techniques that don’t provide the level of skill needed to successfully navigate the options market.

Watch a free options trading video HERE to learn more about how to trade options visit our website and sign up for the free 5 day online trading seminar. Visit the SMF Pro Trading School to learn more about stock trading visit our website and sign up for the free 5 day online trading seminar.

Visit the SMF Pro Trading School to learn more about <a rel="nofollow" target="_blank" href="http:/stock” target=”_blank”>www.stockmarketfunding.com”>stock trading.

<Learn how to trade options

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Options Trading and Trading Successfully

January 15, 2010 · Posted in options trading · Comment 

Ordinary people think that options trading is always risky in nature. It has a reputation for being risky, but this is a misconception about options trading. While it may be true that options trading is extremely risky, it can be highly profitable if one is equipped with great trading skills and strategies. Like any other form of offline or online trading, it involves risk and uncertainty. Risks and uncertainties in trading options are greater if one has no idea of what he is doing.

I want to begin with the basics of options trading, its introduction in the USA and how it becomes profitable to many and losing venture to others. Later in this article I will discuss some basic things you need to know about options trading that could help you win a day in the market where losing money and uncertain investment are just the norms.

What is Options Trading

An option is an arrangement where one grants another the right to buy or sell something in the future. In the case of Dow index future options, when one buys a Dow call options this entails that they are buying the right/privilege to purchase that underlying Dow future at a definite price at a specific time in the future. This definite price is called “strike price” while the specific time is called the “expiration date”.

This trading can also be understood as when one investor buys a put, they are basically selling the market since a call fundamentally buys the market. In the same manner, when an investor sells a put, they are essentially buying the market since selling a call basically sells the market.

In order to have that chance to buy an option on this future, investors pay a so-called “premium.” In case the market does not make the strike price of the option, then that option will be considered worthless on the expiration date. Moreover, in case the market does not reach the strike price of the option on the expiration date, it follows that the investor will be allocated the underlying future at that specific strike price.

How Options Trading Began

This market enterprise started in the 19 century. The beginnings of options trading coincided with the time when stock trading commenced. However, the scenario is different as newspaper advertising must be used at that time so that options buyers can find options sellers. It can be assumed that during that time options trading had not yet gained ground in the market.

Options trading started officially in 1848 when the Chicago Board of Trade was founded and options contracts began to trade in the United States. Other exchanges began to trade options when the Chicago Board of Trade, Kansas City Board of Trade, Minneapolis Grain Exchange and the New York Cotton Exchange commenced to trade contracts involving options.

Be that the case, options trading was still not popular as an option to invest into the market. The apparent reason for this low popularity is the low options liquidity during that time.

Significant changes came only in the middle of the 20th century when the Chicago Board of Options Exchange was opened and paved the way for options trading. Since then liquidity of options grew tremendously making it as a pull factor for spectators to trade options.

Another important milestone was achieved in 1977 when options puts started to trade on the Chicago Board of Trade. In 1985 the NYSE and the NASDAQ began to trade equity options contracts.

Since then, options trading has been one popular way of investing into the market. The reason for this popularity is high liquidity and great leverage. Today, there is a wide range of the options that exist on the market. Options on equities, futures, indexes and currencies may be the considered by investors. Be that as it may, options trading is still regarded as one of the extremely high risky kinds of investment on the market where one may lose all invested capital.

Things you need to know about options trading

As mentioned earlier, options trading is highly risky if one is not equipped with great skills and basic knowledge about it. It pays a lot to know everything there is about trading options before you begin. If you are not equipped with enough knowledge and skill, you can lose a king’s ransom in the first hours or days of the deal. What you need to get is the proper and correct information in order to gain success in this venture. If you are given the wrong information, you can lose everything.

So what should you do before you start trading options? First, be abreast with what options trading is all about. Give time to understand as much terminology used in this venture.

I have mentioned some basic terms above. Knowing these terms will pay off later. In addition, knowing the difference between the types of options means a lot. There are two types of options. These two types are totally different. Don’t ever confuse them as this might lead to you losing everything.

Author: Charlie Prenicolas
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Options Trading Edge

January 12, 2010 · Posted in options trading · Comment 

Many private traders deem that options are thought to be traded by experts with good mathematical skill. There are two reasons why many private traders think so, that are. trading options are too risky and difficult. Many private traders think that it is easier to just trade stocks or futures. So, a simple question, if trading futures or buying stocks looks so much easier and less complex to do, then why options are available to be traded? The actual reason is that options, which are unlike other trading vehicle, can offer a trading edge to the private traders and allow them to cover almost any investment strategy and risk profile with flexibility. In many ways, options are the most superior trading vehicles that many traders use nowadays. To trade options, you certainly do not need to be an expert in financing.

In the book “The New Market Wizards” written by Jack Schwager, concludes that nobody can win without an edge, even you have the world greatest discipline and money management skill. If you trade futures on the All Ordinaries Share Price Index (SPI), you have to know exactly what is your trading edge; particularly, if you are a professional floor trader. With the trading edge, you should able to see the buy and sell orders that coming into the trading pit and also who is buyer and seller. Besides, the speed of execution of your orders and the transaction costs also should able to see. The popularity of the stocks, options and futures is increasing; therefore, many people trade these products. Only a small proportion of these traders apply a real trading edge. The main reasons for the unsuccessful of many private traders in the financial markets are due to the lack of a trading edge, poor risk management and insufficient capital. The key point here is to find an edge, utilize it consistently and use the right risk and money management techniques. When the odds are in your favor, it is better that you learn how to trade options. It is also importantly when the odds are not in your favor, make sure you stand aside. You are doing yourself with the best possible chance of success if you doing so. Trading systems are as many as traders. We won’t trade a system if it doesn’t provide us with some sort of edge. If you have a system, which is able to give you an edge, why not further enhance your edge by trading options in a right circumstance. Before placing a trade, try to get as many factors that going in your favor as possible. By practicing this, you provide yourself with a much greater chance to success in the long run.

Without doubt, with any form of trading, there are no absolute guarantees. You can’t help compared to the many of the people who do not know anything about options and trade without an edge. But, you have a better chance to succeed in the long run and reach your financial ambitions. Flexibilities that can be offered by options are as follows:

i) Profit gained from an accurately anticipating rising or falling market.
ii) With a relatively small disbursement, your potential returns can be greatly magnified.
iii) If the market goes to the way that you anticipate, you have unlimited profit potential, whilst you limit your risk by choosing an amount that you afford to risk.
iv) Profit still can be gained by correctly picking options where the market will not go.
v) Profit gained from flat or non-trending phases markets.
vi) Profit gained by letting the time passes by.
vii) Profit gained at an increasing rate when the market moves further in your favor.

Extremely flexible trading tool is option. You can use options trading strategies that are precisely suit your view of market, whilst sewing them closely to your personal risk tolerance level.

People who trade options for a living and as their business will try to understand and apply the principles, which have been outlined in this article. They do so because they know that there is an edge for then to be gained compare to the people who don’t. They are similar to the typical casino gambler if they do not trade with edge; their money will be destined to be lost ultimately. They are exactly like the casino itself if they trade with trading edge. For those people who trade the markets to make their living, you probably don’t have the chance to talk with them. Their occupation looks exotic and these people are imagined as weird mathematical geniuses who could give their money to Kasparov to run it in a chess tournament. The flair of occupational options traders couldn’t be going beyond from the veracity. Although many of the professional options traders who involve in the financial markets are intelligent people, they were not in the genius category. Nevertheless, they have one thing in common among them. They knew and applied certain unique principles in their options trading. The principles that they utilized offered then an edge to successfully trading in the market. Therefore, throughout their options trading life, they earn a good living.

You don’t have to be a professional options trader. The edge offered from the principles to the professional options traders also available to the private traders as well. Practically, these principles can be learnt and applied by yourself and the odds can be helped to put it more squarely in your favor. All the advantages that most of the professional options traders have may not be possessed by you. By using the same principles that they used, you can learn to make your trading more selective. In this way, you too can benefit from a trading edge.

Author: Alexander Chong
Article Source: EzineArticles.com
Provided by: Canada duty rates

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Is Option Trading Gambling?

January 9, 2010 · Posted in options trading · Comment 

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 (http://startradingsystem.mastersoequity.com) that I have taught online for years.

So, isn’t it time you reviewed your attitude and approach towards option trading?

Author: Jason Ng
Article Source: EzineArticles.com
Provided by: US Dollar credit card

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Keeping It Simple When Developing An Options Trading System

January 7, 2010 · Posted in options trading strategies · Comment 

So you’re ready to set out on a profitable and enjoyable options trading career. While we applaud your enthusiasm, options cannot be rushed into without at least knowing the basics. One of the gifts of options investing is the versatility it affords investors. There are ways to profit from bullish and bearish moves, of course, but there are also strategies that can help you earn a few bucks in choppy, sideways markets. In addition, you can start an options trade in one direction and add legs to it to switch directions and enhance your time horizon to bolster your chances for a winning trade.

The other side of this coin is that while the versatility that options offer is a great thing, it can also be confusing to investors new to the options game. Options strategies abound with funny names like collars, strangles, spreads and straddles that are not for new investors. That doesn’t mean you can’t make some nice profits trading options. It just means options rookies need to refine their system before getting into the game.

Know The Basics

In an effort to keep things simple, new options investors should focus on equity options. These are options where the underlying security is a common stock. There are options available for myriad products and these are worth including in your portfolio, but only after you’ve mastered the basics of equity options. Remember that when you see the price for an option that price is for each share in the contract and an equity options contract grants you control of 100 shares. So if you see an options quoted at $2, it will cost you $200 to buy one contract ($2 x 100 = $200).

Next, let’s look at the basics of beginning options strategies. As rookie options traders, it’s probably best to stick with buying puts and calls. We buy puts when we’re feeling bearish about a stock. As put buyers, we’re “long” on the puts because the puts increase in value as the underlying stock decreases. Buying puts is a great alternative to directly shorting stocks because our risk is limited to the premium paid for the contract. When we directly short stock our risk is unlimited because, in theory, the stock could rise to infinity, destroying our account in the process.

The next beginner options strategy is buying calls, which we do when we’re feeling bullish about the underlying stock. Again, our risk is limited to the premium paid for the contract and that keeps our risk profile low. Another advantage of calls is that if we pick the right ones, they pack great profit potential and can often return greater percentages than the underlying stock even as the stock rises itself.

Finding The Best Options

While we would never enter into any investment vehicle without knowing the chances for success, this is especially true with options. See the rub with options is we can’t hold them forever. We can’t even hold them for three or four years like we can with stocks or bonds. Options are impacted by time decay. Options contracts expire on the third Friday of every month and as our contracts get closer to expiration, time decay becomes more of an issue.

Look at it this way. Let’s say you buy some August 50 calls in Coke when the stock is trading at $49. You need Coke stock to be ABOVE $50 on expiration date to make money on this trade. The other problem with time decay is that as expiration date draws near and your option is sitting out-of-the-money more traders start to take positions in the opposing contracts that are in-the-money, making it harder for you to make money.

To counter this problem and put the probabilities on your side, you have to study statistical and implied volatility. Both of these can help options investors calculate their risk and understand their desired options’ chances for success. Beginning options traders need to understand time decay in order to be successful.

One More Step For The Rookies

It may seem like a good idea to take on more risk by purchasing puts or calls that are out-of-the-money, meaning a call’s strike price is below the current market price and a put’s strike price is above where the stock is trading at. The premiums for out-of-the-money options are cheaper for a reason: Because they are riskier. Yes, there is more profit potential, so consider buying out-of-the-money options as a step you graduate to after becoming proficient with in-the-money purchases.

There’s no doubt that playing options is great to boost your portfolio’s returns and hedge risk in the process. Options are suitable for investors of all stripes, from aggressive to conservative and everyone in between. Just remember that an informed options trader is a successful options trader.

Article Source:http://www.articlesbase.com/day-trading-articles/keeping-it-simple-when-developing-an-options-trading-system-1677603.html

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