Option Trading Tip – Credit Spread Cashflow

You may or may not have heard of credit spread option trading but they can be used to profit in bullish, neutral or bearish conditions.

They are a cashflow generating strategy that involves both the buying and selling of either calls or puts of different strike prices but same expiration date to establish an overall ‘credit’ i.e. spendable cash.

It is a great option trading strategy for taking advantage of the ‘time decay’ that option selling provides, but with limited risk.

The amount of potential profit of course is limited to the credit received when the trade is first made.

Let me give you an example of this powerful, yet underutilized option trading strategy.

Let’s say that the QQQQ (The Nasdaq 100 tracking unit) is trading at $30.50 and we believe that it will continue to go up in price.

To create a vertical credit spread using puts (selling puts is profitable if the market rises), we could do the following:

1) Sell the $30 put (expiring this month).

and

2) Buy the $29 put (expiring this month).

TIP:

In my experience, it’s always best to sell short-term, ‘Out-of-the-money’ option premium for 3 main reasons:

1) Out of the money options have lower deltas, meaning the stock has to move further before the value of our sold option increases (remember we want it to decrease).

2) Selling ‘current month’ options (30 days or less to expiry) is when time decay is at it’s most rapid and the value of our sold option is eroding away with each day.

3) Contrary to buying options, if the stock does moves very little or not at all, we win!

Let’s say we received $0.90 cents per contract for selling the $30 puts and we paid $0.40 cents per contract by buying the $29 puts.

This transaction gives us an overall credit of $0.50 cents per contract ($0.90-$0.40).

If we sold 20 contracts of the $30 Put and bought 20 contracts of the $29 Put, this would give us a total credit of $1,000 (2000 shares x $0.50 cents).

So basically, if QQQQ expires at any price above $30 we will make our maximum profit, which is the initial credit we received ($0.50 cents).

On the other hand if QQQQ expires at any price below our breakeven point of $28.50, we will be facing a loss.

Let’s look at all the possibilities.

Once we have entered the trade the QQQQ can either:

1)Go up a little bit.

2)Go up a lot.

3)Go sideways.

4)Go down a little bit.

5)Go down a lot.

The beauty of this style of trading is that we will win in four out of five of these situations, and in many instances we can even win in all five!

Let me demonstrate how.

The QQQQ is trading at 30.50, if it moves up a little bit to say $30.80, our sold option ($30 Put) will expire worthless and we will keep all of the premium.

If the QQQQ moves up a lot to say $32, the same will occur and we will get to keep the premium.

If the QQQQ moves sideways and stays around $30.50, again the ($30 Put) will expire worthless and we will get to keep the premium.

If the QQQQ goes down a little bit to say $30.15, the same will occur and we will keep the premium.

OK, so far so good!

The only way we can LOSE in this trade is if the QQQQ goes down a lot to below $29.50 (which is the higher strike price minus the premium).

If it were the end of the month of expiry and the QQQQ was trading below $30 (our sold option strike price) we would be exercised and our total loss would be the difference between the sold option strike price and the current stock price less the total credit we received.

Our maximum loss will be realized at any price at or below our bought option strike price.

$30 – $29 = $1, less the premium of $0.50 cents = a maximum loss of $0.50 cents per contract or $1000 (20 contracts – 200 shares x $0.50 cents)

However, before it gets to this point, we would intervene. If the QQQQ is falling strongly then we were obviously wrong in our initial analysis.

Before we entered the trade though, we decided that if the QQQQ fell through support at $30 (which it does) we would move to plan B.

At this point we can do a little ‘magic’.

With the click of a mouse through our online broker, we can instantly jump from the bullish camp to the bearish camp!

We do this by buying back the options that we sold which in this case is the $30 puts, and this removes all of our obligation.

At this point though, we have taken a loss BUT, we are still long the $29 puts which would have already increased in value.

If the QQQQ wants to go down, then we are going to let it and just ride the $29 puts as far as they will go.

The more the QQQQ falls in price, the more our option will increase in value.

If it falls far enough, which in this case it does, (falling to $28.50) then we will not only make all our money back, we will start to move into a profitable position.

With credit spreads, we give ourselves the flexibility to change our position mid stream, and the chance to not only recoup some of our losses (if we get it wrong), but to possibly move from a loss into a PROFIT!

And this is just the plan B if things go wrong. Plan A, on it’s own, has statistically, a very high probability of success.

If on the other hand we had the view that the QQQQ would go down, we would simply construct a vertical spread with Out-of-the-money Calls.

We would sell the $31 Call and buy the $32 Call for an overall credit and should the QQQQ close below $31 by the end of the month, the spread would expire worthless and we would simply keep the premium.

23 Tips For Profitable Options Trading

1. Make sure you know everything about options BEFORE putting down your first trade.

2. Completely understand your trading interface. Most beginners make their first losses through incorrect trade placement due to not being familiar with their trading interface.

3. Avoid call in brokers. Nothing is more destructive than a busy line on an urgent trade and brokers who don’t even understand the kind of order you are trying to make.

4. Use only brokers with user-friendly trading interface. The commissions saving you get from a lousy trading interface hardly offsets the single losing trade you will make because of an order mistake.

5. Make sure you are familiar with advanced orders such as contingent orders and trailing stop loss as they automate your exits, helping you avoid emotions.

6. Review your order before hitting the send button! That’s your final chance to rectify any mistakes that you may have made. Incorrect orders due to human errors contribute to about half of all the losses beginners experience.

7. Get a mentor. Nobody can learn to trade profitably on their own.

8. Profit is made only when the underlying stock performs within the specifications of the options strategy you use. It’s the movement of the stock that produces your profits, there is no magic options spread!

9. Higher Profits = Higher Risk. Understand your risk tolerance and use options strategies that conform to your risk tolerance level.

10. Be familiar with technical analysis. At the end of the day, all options trading is short term as all options have a finite life. Technical analysis helps you select the most optimized entry points so that you don’t waste that finite life.

11. Cheaper isn’t always better in options trading. Sometimes, “cheap” options can be deadly while more expensive options would be safer.

12. Trade the charts, not the news.

13. Follow a proven options trading methodology such as the Star Trading System.

14. Have plenty of rest! Nothing triggers emotions more than fatigue + options trading.

15. Make sure your family supports your decision to trade options. Family support helps overcome those tough losing sprees.

16. The aim in options trading, like in all trading, is to make more wins than losses. There is no such thing as 100% winning only. If that is the direction you are looking at, you will be disappointed and you will lose money.

17. All options strategies have limitations. There is no such thing as a 100% sure win spread. Make sure you understand the limitations of the strategy you are pursuing.

18. Trade to win, don’t trade for fun. Only trade when the chances of winning are high. Money in your account doesn’t hurt you; don’t be eager to get rid of them.

19. Wait one day before selling. More often, beginners sell too early, not too late. It is always best to wait one day from your decision to sell before actually selling.

20. Learn how to create synthetic positions in order to increase your position management flexibility.

21. Don’t monitor the market if you are not a day trader! Nothing triggers your emotions and spoils midterm to long term positions more than monitoring the market!

22. When in doubt, Stay out!

23. Options trading is exciting only when you are losing money. Making money is a repetitive, objective and boring process. When options trading is finally routine and boring to you, you would be able to make a living out of it!

Author: Jason Ng
Article Source: EzineArticles.com
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Combining Options Trading in Technical Analysis for Higher Profits

Combining technical analysis with options trading is not a typical course of study when learning how to trade options. Option traders who want to maximize the return need to understand how to combine their options analysis with certain market conditions. In this article, I will wade through the reasons why a trader would prefer to incorporate this genre of analysis into their option trading.

Certain elements of risk can be derived through an options pricing model which helps the advanced trader. But, the risks associated with options trading are sometimes mitigated by correctly determining the market?s direction. If the trader decides to use calls and his spread, the delta of the call could increase if the security makes a bullish move. So, a good understanding of technical analysis can help the trader better position himself for the current market conditions.

The type of technical analysis that a trader needs to perform when trading options usually falls under the category of chart patterns. This can sometimes include topics like wedge patterns, flags, pennants or head and shoulders patterns. Patterns like the Gartley 222 and Elliott Wave can also fall under this heading. This can genuinely grant a benefit to those involved in option trading. Because these patterns can assist the trader determined the current mode of the market they can be quite helpful.

Understanding the direction that a market may take can help the options trader in determining which strategy will be most profitable. Therefore, a bearish option strategy can be more profitable if the trader is observing a chart that has a bearish bias. But, time decay could cause the options trader to experience losses if the spread is placed for a net debit and the market does not move in his anticipated direction.

The usefulness of this type of chart formation can be derived by the fact that it helps a trader visually identify areas of support and resistance. If the trader has a spread with a break even that corresponds to an area of support or resistance, it can help the trader as he compares this spread against other candidates that might have lower or higher break even values.

When learning how to trade options effectively, traders may wish to also understand how they can effectively combine their new knowledge with technical analysis. While new traders may find this type of technical analysis to be very complex while learning to trade options, the long-term benefits of going to this exercise could help them understand why some trades are more successful than others. Trading in this way the trader may find that he is able to trade with more consistency was he is derived this level understanding about his results. In the end, the trader has a more holistic landscape which permits him to associate option stratagies with intricate aid for his option trading.

Why You Should Start with Options Trading

Getting your start with options trading, like any successful venture in life, requires a road map. How do you know where you are going and how to get there without a map? The most successful people in the world take time to plot out their major moves, including career and investments. Being a novice with options trading can be overwhelming.

There is a ton of information out there and you don’t know which ones to trust. You are also dealing with your money, and that is a scary prospect when you don’t know what you are doing. However, with time spent plotting out your road map, options trading can be a big cog in your investment wheel.

Start with a clear goal for options trading. You can use options trading to round out your portfolio, protect it if the market goes sour, or increase your income. Whatever you want to use it for it is essential that you know why you are using options trading. This will help give you clarity on trading decisions down the road.

After figuring out your goal, you will need to settle on a good strategy. Your strategy will be dependent on your goal. For instance, if you goal is to create income, your strategy will want to take advantage of upward trends in the market. There are a lot of different trading strategies and you will need to do research to settle on the one that fits your goal and your comfort level.

You need to find a brokerage firm to begin trading options. There are brokerage firms that fill almost every need. Some firms are very hands on and will help guide you as you invest. Other firms are more hands off, and this is a good option for people who are comfortable with options trading. Naturally, the more guidance a brokerage firms gives, the more expensive they will be. However, the expense may be worth the personal service that you receive.

Brokerage firms take care to keep unacknowledged investors away from certain options trading strategies. You will have to fill out an options trading agreement and this will determine your level of experience and knowledge. Not only does this agreement protect the unwise investor, it also protects the brokerage firm from any damages filed by an angry investor.

Trading options can be a good way to make money. However, when you start with options trading there are steps that you need to go through to make sure you meet with success.

Balance of Risk and Reward in Options Trading

You don’t need to be a trader or an investor to know that the higher the risk, the greater the reward. This concept is true in all aspects of life and business. The more risk you are willing to undertake in life, the more life returns to you. Indeed, risk and reward are directly proportional and often in trading and investment, the more risk your account is exposed to, the greater the return on investment when things work out as planned.

Knowing that risk and reward are proportional makes finding the correct balance of risk and reward extremely important to all kinds of traders; stock traders, futures traders, options traders etc. There is no one solution that works for everyone and the correct balance is decided upon the risk appetite and risk tolerance of the individual trader.

For stock traders, balancing risk and reward primarily involves adjusting the amount of growth stocks and defensive stocks in one’s portfolio. Generally, the more growth or speculative stocks in one’s portfolio, the greater the risk due to greater uncertainty and therefore the higher the gain when things works out as expected. The more defensive stocks in one’s portfolio, the more predictable returns become and therefore the lower the return as these stocks does not generally move a lot. This degree of risk / reward balancing is at best crude compared to the surgically fine degree of balancing you can have in options trading.

Stock options are the most versatile trading instrument in the world right now due to the wide array of options strategies that are employable. Yes, not only can risk and reward be balanced through employing different mix of strategies in your portfolio, there are also different risk and reward profiles achievable by each individual options strategy. There are options strategies that range from making over 1000% profit while risking all your money to options strategies that make a mere 0.01% return while risking nothing as well as every centimeters in between.

As long as you understand what your personal risk appetite and risk tolerance is, you will be able to find an options strategy that suits your needs 100%. Here’s a general outline of the kind of risk reward balance that can be achieved through options trading:

Highest Risk, Highest Reward – OTM Call / Put buying

This is the options strategy that produces the legendary 1000% profit that amazed so many beginners. What those ads did not tell you is that the risk is losing ALL the money that you put into the strategy. This options strategy involves buying out of the money(http://www.optiontradingpedia.com/out_of_the_money_options.htm)call options when you think a stock is going to go up or buying out of the money put options when you think a stock is going to go down. Professionals use this options strategy with only a very small portion of their money in order to place a bet on an uncertain event such as leveraged buyout. Some lucky amateurs use this options strategy with all their money and then become millionaires overnight. The downside of this strategy is the fact that if the stock did not move far enough in the direction you expected it to, you can lose all the money you put into the strategy. That is also why so many beginners break their accounts overnight in options trading.

Various Degrees of Risk and Reward – Options Spreads

There are literally hundreds of possible options spread strategies out there with various degrees of risk and reward for every market condition. There are more aggressive bullish, bearish, neutral and volatile spreads and there are more conservative ones. All of them shares the same logic of higher risk compensated with a higher profit potential.

Lowest Risk, Lowest Reward – Options Arbitrage

Yes, there are literally risk free trading opportunities in options trading which also returns very small, sometimes negligible returns. These are the legendary options arbitrage strategies. Options arbitrage strategies such as conversion/reversal aims to make a fixed return totally risk free through simultaneously buying the underlying and shorting the overpriced synthetic equal or vice versa. The problem with such strategies is that the returns are so low that most of the time, it’s even lower than the commissions you will pay for the trades made. Even if you manage to return a positive return, the return can be as low as 0.01% in percentage terms. That is why arbitrageurs aim to make an absolute return using enormous amounts of money.

With this in mind, the most conservative traders may choose to specialize totally in arbitrage strategies (http://www.optiontradingpedia.com/options_arbitrage.htm) while the most aggressive traders may choose to specialize in leveraged speculation using OTM options. Everyone else would be able to find something to suit your risk appetite in the hundreds of spread possibilities. This degree of flexibility and range of risk/reward possibilities makes stock options the most versatile trading instrument in the world today and why options trading (http://www.optiontradingpedia.com) is so popular these days.

Naked Option Writing ? the Cadillac of All Option Trading Strategies

 

Let’s be clear on this. There is no other option trading strategy that can outshine or even equal the profit generating potential of the sport of writing naked options. The term ‘sport’ is used here because those who practice this money making trading technique not only turn out fabulous profits but also have fun in the process. It is a fun, profitable but dangerous option trading sport that is mostly played by seasoned and skilled option players. That is, until the sport’s peril’s were tamed with the use of trading techniques that, while offering substantial safeguards to the player, still continued to offer high profitability ratios, albeit at slightly reduced rates. Having made it ‘investor safe’ has only slightly altered the profit potential of writing nakeds and certainly, without doubt, continues to be the premiere money making trading strategy in the options market.

 

The birth of the options market in recent decades spawned the creation of dozens of trading strategies and systems that is today being used not only by individual options traders but also by financial institutions. Stock options as an investment instrument is now widely employed as a safe and sound money strategy. The ability of options to give the investor a wide range of choices in stock market investment is what has made the options market grow by leaps and bounds over the last two or three decades. There are dozens of option trading systems being employed by individual investors as well as financial institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value, another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is now popularly known as covered call writing.

 

Trading strategies, techniques and systems available to the option trader are so numerous today that it would take a whole book to describe each and that would be just a brief description not a detailed explanation. It would be far beyond the scope of what we could cover in this short article. Most of the strategies are based on the principle of buying calls and puts or, variations of this strategy such as the use of spreads. The reason for the popularity of buying calls and puts and its variations is quite simple; limited or defined loss against the potential for unlimited and fabulous profits. This is what has driven thousands into the options trading game. But like everything else in life there is always a trade off. While the potential for fabulous profits against limited investment exists the reality of achieving such success is restricted. It’s almost like buying a lottery ticket with the potential for winning fabulous riches. Or putting it differently, it’s also akin to going to a casino and placing bets on gaming tables with the hope that at the end of the evening you will come out with more money than you came in. As we all know there are very few winners in casinos and that is why the gaming business offers tremendous profits for the operators.

 

But one can be an option trader and be in a similar position as the casino operator.  How? By being an option writer or seller instead of a buyer. For every option that is bought in the market, there must be a seller or writer of the option. These writers are the casinos in the options business. As the option seller you take the bets from the option buyers and since 75 to 80 percent of all options in the market expire worthless, you the seller pocket the premiums paid by the buyers when the options they bought expire worthless. For the benefit of those who are not familiar with gambling casinos, the winning odds of casinos over the betting player is only around 5 percent and yet they rake in profits from this business. Now imagine this, research and studies have shown that the option writer (seller) has better than 10 to 20 percent odds over the option buyer.

 

Option traders who successfully use the strategy of selling options consider themselves as having found the Holy Grail of Investments. And of all the variations in option selling strategies (just as many as there are in option buying), writing naked options is considered to be the Cadillac division. No other option selling system offers the profit potential of the naked writer.

 

So why aren’t there more option writers in the market? For two reasons:

 

There is the general belief that writing options carries the potential for unlimited losses. This has served to scare away the thousands of novice traders and those who have not been long enough traders to recognize the benefits of option writing and the many safeguards available that conquers this so-called risk.

 

 

For many, options trading has become synonymous with making big profits quickly from small investments. Option sellers on the other hand, do not have the potential for outrageous profits from any single trade, and by not being a get-rich-quick proposition it is less popular to traders who are looking for big returns on their small investments.

 

 

It must be noted however, that option writing is fast gaining popularity among serious investors looking to grow their wealth at a steady, consistent and secure manner regardless of market or economic conditions. For those willing to venture into this lucrative field for long term capital appreciation don’t let the first reason above frighten you into inaction. There are many ways one can protect himself and conquer the element of ‘unlimited loss’ in writing nakeds. The author of this article is one of many successful naked option sellers. He has put out an e-book detailing a trading system that uses a three pronged strategy that trounces the so-called risk of loss to be almost neglible. Information about his system can be found at his web site.   

 

 

 

Option Trading Strategies – If You Ever Wanted to Trade Options, Then You Need to Read This

Have you ever suggested to your stockbroker that you were interested in trading options? More than likely he (your broker) tried to talk you out of investing in options. Quite possibly, he insisted that options were high risk and only professional traders should use options in their investments.

Well, let me let you in on a little secret. The reason why your broker doesn’t want you to trade options is because your broker does not know how to trade option properly. Understand, most stockbrokers are sales people, not investors. They offer what is hot in the market and usually push you towards managed money. The reason being is because your stockbroker gets paid to direct your capital into funds where portfolio managers manage stocks and bonds in anticipation of beating the market indices.

A true investor and some very well trained stockbrokers (hard to find these brokers, but there are some out there somewhere) will tell you that option trading is a very lucrative investment and less risky than what your broker is suggesting. Option trading strategies can increase your return on your overall portfolio by leveraging and insuring the stocks in your portfolio.

Option trading strategies, range from creating income into your portfolio on a monthly basis, insuring any downside in a particular stock you may be holding in your portfolio and a way to leverage both the upside of the market and the downside, all at the same time.

Now, if you are like me and want to see your portfolio increase in value overtime, while having the opportunity for income, (which everyone reading this is probably saying no $#!t) then you need to learn all the option trading strategies that are available to you.

To give you an example of a great option trading strategy that you can implement right now is the selling of covered calls. This simple option trading strategy will allow you to take an underperforming stock in your portfolio and create a monthly income. How this option trading strategy works is as follows:

Step 1. You own a stock in your portfolio that is either stagnant in your portfolio (meaning not moving up or down), or the stock has dropped way below your purchase price.

Step 2. You sell a call option on this stock. Basically, for every 100 shares of the stock you own, you can sell 1 call option related to that stock. (Example is you own 500 shares of ABC stock, you can sell 5 ABC call option contract). This scenario is selling a covered call.

Step 3. You collect a premium from the sell of the call option. (These premiums vary depending on the volatility of the stock and the amount of time left on the option contract.

Step 4. Now you sit back and see what the market will do for you. For example, the stock may move down in value and the call option will expire worthless, meaning you keep the premium and sell new call options next month, or the stock stays stagnant and does not move during the month. Again you would keep the premium and write another call option against your stock. The last scenario is the stock starts to increase in value and you have to sell the stock for the strike price of the call option. Typically, if the stock you have has a high volatility, you probably would not use this option trading strategy. But, it is your decision.

Now, here are a few items I left out of the above scenario. You can sell your call options in the money, out of the money or at the money. We will discuss the terminology of these positions in a later article. But for now, I hope you see the value of option trading strategies in your stock portfolio.

Please come back soon to learn more about different option trading strategies to increase your overall return in your portfolio. You can also subscribe to this page and get future updates sent directly to your email box. Just click the RSS feed at the right.

Author: Alan Manns
Article Source: EzineArticles.com
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Options Trading In A Nutshell-The General Idea Behind Options Trading

Perhaps among the most difficult and maybe the riskiest type of trading is option trading. Many experienced traders realize that option trading does not suit all traders. It selects its own type of people, generally the risk takers. And the trade itself requires skills and thinking unique only to people who won’t fold under extreme risks. Most experts recommend this kind of trading only to those people who have enough risk capital as it carries with it substantial risks.

By default, it is also speculative. So if you are a person who doesn’t want to speculate too much, you might as well find another kind of security which will work better for you. However, stopping the idea of entering this trade right now is as risky as not knowing anything about it. It carries with it risks, that’s true,for sure, but it is also a very rewarding venture. You should try to understand something on it such that you would be able to decide whether to go for options trading or not.

Since it is always risky, option trading also offers advantages that may not be available with different types of trades. Among its premium advantages is the flexibility it lends its investors. Each lender has the option to trade at a specific price within a specific period.

It is also, when comparing the two, a more advantageous type of trade due to its high leverage it offers. Depending on the location, each option may cover a few underlying assets. In the U.S.A., for instace, each option may represent for 100 underlying assets. Thus, this strategy affords the holder the ability to profit from several assets within a single option.

So tell me about an option?

An option is a type of security, generally closely comparable to bonds and stocks. It is, in itself, a binding contract, that is monitored by and through strict terms and conditions. Basically, options are contracts that owners will buy or sell at a certain price prior to or on a certain date. An option is usually an additional price tag to a certain asset or item because it is a reservation for the purchase or sale of a certain asset.

Options are also occasionally called derivatives. This is because the value of an option is based from the value of the underlying asset.

To better understad this topic, lets look at the example below:

Say you have thought about purchasing a real estate property which is valued at several hundred thousand dollars. However, when you first negotiated with the owner, you did not have enough money to buy the property on the spot. So you made a deal with the owner to pay an extra $5,000 to keep the deal for you for the length of 60 days. The extra money you put in is referred to as the options. In case you don’t want to pursue with the sale, the owner of the real estate is not allowed to force you to buy the property nor can the law impose the sale on you. However, you would still have to shell out the price of the option.

In conclusion, when thinking about buying a property with an enclosed option, you will have the right to continue with the sale or to turn down the sale. You are not mandated to do either of the two. But be aware, you may lose 100% of your total investment in options trading which is the value of the option itself.

Forex Option Trading – Using Forex Option Trading Software

Forex option trading is also known by several appellations like: Forex option, FX option, options trading, and currency options. This is by far the most liquid of all the options in the financial arena; which means that the change of hands for these kind of transactions happen rather rapidly. It is a type of financial instrument that is derived directly from the value of any underlying asset that the trader or broker is putting up as security or protection for any future transactions. The owner of such option has the right to exchange a certain amount of monetary units from one currency into another at the pre-agreed exchange rate (or the strike price) at an advance time. However, the owner is not obligated to do push through with the exchange, in case the deal turns unfavorable during that time… or for any viable reason, for that matter.

This type of trading is usually done for two reasons:

One: a trader wants to magnify his or her ROI by setting a firm downside on the risk level of the transaction.

And two: this is also being used as a way of ensuring profits on the underlying Forex currency pair that is being traded by again, minimizing the risk level.

These days, more and more option trading practices are happening online, and are being done (surprisingly) by novice traders, because the potential for return of investment or ROI is great. The reason for the larger volume of ROI lies in the fact that the Forex option trading is usually considered as a risky financial maneuver. So risky in fact, that a very large volume of security or protection is needed before any such trading option can be written out. It is not uncommon to see people trading options in the field of thousands of dollars and even into the millions.

Before the onset of the Internet, only a handful of retail Forex brokers or professional traders or seasoned Forex merchants delve into this kind of trading. This kind of transaction entails a large volume of money. Additionally, keeping track of the movement of the Forex market was still a difficult process back then. But due to all the ready technology at hand now in the World Wide Web, not to mention the real time update reports on the Forex trading movement, options trading is becoming relatively easier to do.

Automated Forex software trading tools make options trading possible. At the very least, these software applications can help teach a novice trader how the trading process works, and how they can practice their trading skills without the use of any security money.

The Golden Rule Of Stock Options Trading

Have you ever lost all your money in Stock Options trading?

If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?

The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.

So, how do we avoid such a predicament?

Simply by applying the golden rule of stock options trading! That is:

Use Only Money You Could Afford To Lose!

Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.

For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!

In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!

So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!

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