Trading Options at Expiration: Strategies and Models for Winning the Endgame

December 3, 2010 · Posted in forex trading · Comment 

  • ISBN13: 9780135058725
  • Condition: New
  • Notes: BRAND NEW FROM PUBLISHER! BUY WITH CONFIDENCE, Over one million books sold! 98% Positive feedback. Compare our books, prices and service to the competition. 100% Satisfaction Guaranteed

Product Description
“Learn and profit from Jeff Augen’s book: It clearly explains how to take advantage of market inefficiencies in collapsing implied volatility, effects of strike price, and time decay. A must-read for individuals who are options oriented.” –Ralph J. Acampora, CMT, Director of Technical Analysis Studies, New York Institute of Finance   “A fantastic, insightful book full of meticulously compiled statistics about anomalies that surround option expiration. N… More >>

Trading Options at Expiration: Strategies and Models for Winning the Endgame

Advantages & Disadvantages Of Nifty Option

November 15, 2010 · Posted in forex trading · Comment 

Nifty options are simple vanilla options. It’s mainly the European options by the nature. There are lots of nifty options available within different strikes and have a small difference of 50 points between every option.

There are some of advantages and disadvantages of nifty option. Here, I try to discuss al these briefly as an aid to the investors especially for the new comers in the option trading.
Advantages of nifty trading:

Flexibility is one of most important advantages of nifty option. It can easily be used within a wide range of strategies like very conservative to the high risk.Second one is the leverage. Nifty option facilitates an investor a fixed leverage without being committed to trade. Third one is the limited risk. The amount of risk is so small that you don’t need to worry about it at all. The last one is hedging. It allows the investors to alter or change their position to a suitable one when the stock price extensively fluctuates.

Disadvantages of nifty trading:

Nifty option has a bit higher cost in the percentage than trading the primary stock. This cost can significantly eat the profit.

Liquidity is another drawback of this option. As there is lots of array of various prices available, some investors experience low liquidity that creates complexity in the trading. Nifty options are so complex that it requires a close observation and the maintenance as well.

Time decay is another most important drawback of the nifty option. As almost all the options are time sensitive, a good number of options expire worthlessly. This only happens with the investors who like to purchase the options.

In some especial cases the investors have to take unlimited risk that is really difficult for the new investors or the people who have shortage of capital. There is not any alternate way that can lessen the risk of these options like writing uncovered options.

In some especial cases the investors have to take unlimited risk that is really difficult for the new investors or the people who have shortage of capital. There is not any alternate way that can lessen the risk of these options like writing uncovered options.

In the nifty option anyone can easily formulate any plan to take benefit of volatility of the primary stocks as well as the prices. Most of the investors take these disadvantages seriously and try their best to make their step free of any danger. There are so many sites in the online that is ready to help the investors with lots tips given by the market experts, market news and with the analytic report regarding future market situation as well.

About Author
www.calloptionputoption.com an ISO 9001-2008 CERTIFIED COMPANY, provides tips and research analysis for indian stock market, options, stock futures, commodity, midcaps and index futures. any one can join and get benefit of research.

Best Options Trading Books

August 28, 2010 · Posted in options trading · Comment 

Too many beginning traders move into options thinking of them as cheap surrogates for their underlying stock. That’s not entirely unwarranted: given the right conditions, many trading strategies translate nicely from stock trading to options.

But how is a trader to know when those conditions are right? There is only one way – you need to understand options. You need to know the function they fill in the financial markets; you need to have an idea of ‘true’ pricing, you need to have a handle on how fundamental data impacts options pricing differently than it affects the stock or ETF on which the option is based. In short, if you want to trade options the way you trade stocks, you need to know how differnet the two are. And the best way to do that is to educate yourself by reading the best options trading books available.

Here are some the best options trading books currently available:

* Options Made Easy, by Guy Cohen

* McMillan on Options, by Lawrence G. McMillan (McMillan is one of the most seasoned veterans in options trading and training – take his stuff VERY seriously)

* Trade Options Online, by George Fontanillis (another veteran – his work is very useful)

Of course, no book reading can replace trading experience. When you have read and digested these options trading books, use any paper trading functionality your broker offers to see how those lessons pan out in real life. And be sure to use your own broker for this – you want to make sure you understand their interface before diving in with real money!

Only once you’ve done both – read the best options trading books and done some serious paper trading – will you have the understanding of options to know what kind of trade will work in what sort of market environment. Should you just buy call or put options? Or do the current conditions dictate more complex spread strategies? Which spread would be best? Do you establish whole position at one time, or should you leg into it? How long can you hold the position before time decay eats away at any profits?

There are many vectors to be mindful of when trading options. These multiple considerations allow for great risk/return balances, but you MUST know what you are doing before you trade live. If you jump into trading without that education, your account won’t be live for long.

Above all, stay timid!

Timothy McCready (Timorous)

Author: Timothy McCready
Article Source: EzineArticles.com
Anti-angiogenic Food

Consistent Monthly Cash Flow Using The Iron Condor Option Trading Strategy

August 4, 2010 · Posted in options trading · Comment 

Iron Condor Spread is the combination of a Bullish Vertical Credit Spread and a Bearish Vertical Credit Spread on the same underlying asset. Depending on how the spreads are constructed, option traders will potentially be able to obtain twice the collect premium over a single spread position. Since there are bullish and bearish spreads involved in the Iron Condor Option Trading Strategy, there is an upper break even and a lower break even point. Profit is realized when the underlying asset remains above the lower break even point or below the upper break even point. In other words, as long as the price of the asset is above your bullish short strike and below the bearish short strike, the option trader will profit from both spreads through time decay. This strategy can be used regularly on a monthly basis to consistently generate a healthy cash flow in your trading business.

Time decay erodes the value of option prices. There are not many option traders who understand the benefit with trading spreads because it simply looks too complicated. Well, it is not.

Iron Condor Spreads is a market neutral strategy that has positive time decay and negative gamma with limited risk. Traders with any level of option trading experience can use this trading approach. Depending on your brokerage expertise and software, these spreads should be available electronically with single click functionality. Some brokers may even provide better leverage when you trade Iron Condor with them.

The IronCondorSpread Newsletter was designed to identify low risk option trading opportunity when an index remains in a narrow trading range during the current expiration cycle. Holding period is always not longer than 60 days.

In trading, the only objective is to make money. As a trader, you should not into big gains or excitement. Constructed correctly, the iron condor spread can be a consistent income generator. Before getting into new positions, you should look for positions that have an extremely high percentage of profitability. If you have the odds of winning in your favor. you will likely be profitable in the long run.

To do so, look specifically for options that have a relatively higher level of volatility. This means to look for positions that are over priced. Establish a trade positions that you believe that the underlying asset will not move to anywhere new your short strike.

To achieve consistent profit, our Iron Condor positions will always have a wide profit range on the underlying asset. So, in the event that the underlying moves up, down or even sideways, you will always profit with time decay. Having a large profit range is important because it will almost certainly guarantee that we will profit consistently and also it does not require us to spend a lot of time to monitor our open positions. We like the idea of trading with little stress and with little work. Our usual profit target for each Iron Condor spread is 13% to 18%. Profit is usually realized within 60 days.

Iron Condor trading is an effective trading strategy because it is a limited risk approach. You will never lose more that you have allocated for each trade. Although it comes with a high probability of winning, losses can be kept low when the trade moves against you. As rare as losing month may be for us, keeping losses low is the key to any successful trading strategy. While making money is important, capital preservation is equally or more important.

The IronCondorSpread Newsletter, http://www.ironcondorspread.com is the premier website in Credit Spread and Iron Condor Spread Option Trading strategy.

Mike Conley is the Senior Editor of the popular Option Trading Newsletter, The IronCondorSpread Newsletter. The IronCondorSpread Newsletter is the premier newsletter for Credit Spread and Iron Condor Option Trading Strategy. Our trade recommendations have consistently generated $3000 to $5000 of trading profit EVERY month in bullish, bearish and sideways market. For details, please visit www.ironcondorspread.com

Option Trading Tip – Credit Spread Cashflow

July 31, 2010 · Posted in options trading · Comment 

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.

James Thomas is a successful private option trader and creator of http://www.option-trading-tips.com – an informative resource full of useful option trading tips.

Combining Options Trading in Technical Analysis for Higher Profits

July 29, 2010 · Posted in options trading · Comment 

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.

Sam Perdue has been actively trading the markets for over 13 years. He has written a computer program that helps traders analyze the stock, Forex, commodities and options markets using Fibonacci ratios, Elliott Wave, option pricing and nonlinear programming algorithms. For more information, please see our option trading software.

Option Trading Tip – How to Leap Into Option Profits!

June 21, 2010 · Posted in options trading · Comment 

A LEAP (Long-term Equity Anticipation Product) is simply a long-dated option.

LEAP options that don’t expire upto 2 years into the future give the buyer much more time to be right about the future direction of a stock and at the same time offer tremedous leverage.

LEAP option trading has become quite popular in recent years because just like all options, LEAPs only cost a fraction of what it would cost to buy shares in the underlying stock itself, but give you the same amount of control.

As with all options though, time is the enemy (if you are a buyer) and over time options lose their value.

So how can we use LEAPS to speculate on the future direction of a stock (UP or DOWN) and at the same time reduce our risk of losing all our money on them?

Well let me share with you a couple of simple LEAP option trading strategies that have worked well for me over the years in both bull and bear markets…

TIP:

If you believe a stock will go UP over the next 1-2 years, then buy Call option LEAPs on it and at the same time sell the call options (at least one or two strike prices out of the money) that expire in the current month.

If you believe a stock will go DOWN over the next 1-2 years, then buy Put option LEAPs on it and at the same time sell the put options (at least one or two strike prices out of the money) that expire in the current month.

By doing this you will effectively be getting cash back on your investment every single month that you hold your LEAPs.

Over the long-term this will not only offset the time-decay of your LEAPs, but also offer you some downside protection, should the stock go in the opposite direction that you want it to.

This is known as a Calendar Spread and is a much more conservative way of speculating with LEAPs.

Important:

If the stock rises above your sold strike price for your current month Calls or below your sold strike price for your current month Puts, then you risk being assigned/exercised.

You should never allow this to occur because the moment you are assigned you will lose whatever time value is left on your LEAPs.

It is far better to close out the trade for a profit by buying back the sold option and selling your LEAPs for an overall profit or simply holding your LEAPs and then writing (out of the money) options against them for the next month.

James Thomas is a successful private option trader and creator of http://www.option-trading-tips.com – an informative resource full of useful option trading tips.

Making Money From Option Trading With Implied Volatility – Part 1

June 14, 2010 · Posted in options trading · Comment 

Traders who are new to option trading sometimes hear the term ‘implied volatility’ thrown around by experienced option traders. Traders who have been training for while realize the importance of implied volatility and how it can affect their profitability. In this article, I would like to give an explanation for what implied volatility is, how is derived and how traders can use it to make money.


Options prices consist of two different components. One of these components is called intrinsic value and the other is called time value. Intrinsic value is the actual quantifiable value of the option relative to the price of the underlying stock. So, if a stock is at $51.00 and the price of the 50 strike call is $3.00, the intrinsic value of the option is $1.00. The rest of the option’s price is called time value. In this case it would be $2.00.


Time value is an important concept to understand when talking about implied volatility. While the actual value of implied volatility is derived from options pricing models, options pricing models have relatively little bearing on the intrinsic value of the option. The models exist to help us understand how market changes affect the time value of the option. One of the variables in options pricing models is implied volatility.


So, in the example above, if we were to derive our greeks and implied volatility from the options price, the main portion of the options price that would be used by our model would be the $2.00 of time value in the option. This is an important concept for beginning options traders to understand because of the impact that time decay and market movement have on the time value of an option.


Market movement and time decay


Most options traders understand that options prices are affected by time decay. However, they may not be aware that as options move away from their strike price time value is also affected. This is the reason that a deep in the money option has so much intrinsic value and a far out of the money option is so cheep. They both have very little time value. As a result they also have lower implied volatility values when compared with strike prices that are closer to the money.


This can be a significant observation for novice option sellers. Since the reason for selling an option is to collect time premium, most of these beginning traders seem to think that they can only collect their time premium sold as time elapses. This is simply not the case. The seller can also collect time premium as the underlying stock moves up or down. Traders that see the strike price of the option moving deeper into the money can offset the intrinsic value of the option by selling more time premium.


Let’s consider an example of a trader who has a January 50 covered call on XYZ stock. Let’s suppose that the position was initiated when the price of the stock was $50. Let’s also suppose that the trader collected $2.00 for the option sold. Shortly after the position was initiated the company released earnings and the price rose to $55. Now the January 50 call that was sold is trading for $5.90. So, the time value of the option sold has depreciated by $1.10 based on market movement. The trader looks at the March 55 calls and notices that they are trading for $5.95. If he rolls the option that he sold to March, he will be able to sell more time value and any intrinsic increase in the option sold will be absorbed in the long stock position of the spread. Hence, he is selling an option with higher implied volatility than the one that he is covering to complete the roll to March.


If this seems a little confusing, don’t worry. Option trading can take a little time to understand. However, with the proper understanding, a trader may be able to create positions that benefit from time decay and adjust his position when the market moves against him. For many traders, the starting point for understanding how to properly trade options begins with a firm foundation and understanding of implied volatility.

Sam Perdue has been actively trading the markets for over 13 years. He has written a computer program that helps traders analyze the stock, Forex, commodities and options markets using Fibonacci ratios, Elliott Wave, option pricing and nonlinear programming algorithms. For more information, please see our option trading software.

How to Choose the Best Options Trading Strategy

April 9, 2010 · Posted in options trading · Comment 

The magic of options trading is that allows for a variety of strategies to be matched with different stock trading philosophies. Each strategy has a different profitability and risk tolerance level, and using a variety of strategies can spice up a portfolio very nicely! In this article, I will outline four different stock trading strategies, and how they can be matched with corresponding options trading strategies which you can apply to your portfolio. The main idea is to first focus on an underlying stock trading strategy, and then add significant leverage and power to the trade by using options.

The most important factor when considering each of these strategies is the concept of TIME DECAY. The value of any option declines over time, until the day the option expires. This concept can be the major enemy of any option trade, eating into its profits, or it can be the key to successful and profitable option trading.

Firstly, which Strategy?

There are generally four different strategies employed by stock traders, each of which has implications when applied to options:

(i) Position Trading

Traders buy a stock and hold it for long periods of time, based on good fundamentals of the company. They will often wait for a stock to reach really good value, and then watch for institutional or insider buying before making a move. As the stock price increases, they look out for other buyers to step in and move the price even further.

APPROPRIATE OPTION STRATEGY

Buying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which could be wiped out over time even as the stock gains in price. TIME DECAY is your enemy.

Selling covered calls each month in the option cycle on the stock you already own can significantly reduce the cost you paid for the stock in the first trade. Even if the stock goes down, you can still come out a winner!

(ii) Momentum or Trend trading

Once a stock has made clear move or breakout, the Momentum traders step in, and ride the stock up along a trend to its first major reversal. They hope to make shorter term profits from a rapid move in the price. Holding periods range from six weeks to six months.

APPROPRIATE OPTION STRATEGY

Buying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which will be wiped out over time even as the stock gains in price. TIME DECAY is your enemy with Momentum Trading, unless you have a particularly strong and fast moving trend.

Selling Credit Spreads is a good strategy, and in fact can be very profitable, because as you sell spreads on the opposite leg from the stock’s direction of momentum (e.g. selling put credit spreads in stock with a strongly bullish trend), you can repeatedly buy back the spreads for minimum cost and sell another spread closer in. This strategy can easily yield 10-15% profit per month. Time Decay is your secret weapon for trading this strategy.

Selling Naked Puts is a good strategy, and can be even more profitable than selling credit spreads. However, it leaves you a position of possibly having to buy a lot of stock if the trade goes against you, and so your broker requires you to have a lot of margin.

(iii) Swing Trading

Swing Traders buy and sell swings or oscillations within a trend. Holding times are from between 2 and ten days. This is a shorter term trading technique that is more dependent on the trend direction than it is on fundamentals or technical indicators.

APPROPRIATE OPTION STRATEGY

If you have mastered the skill of identifying reversals or swings within a trend, and know how to plan an exit strategy, you will be able to start buying calls and puts, or DITM options, which will take you to real profits! With Swing Trading, holding times are short (2-10 days) and so you minimise the effect of your arch enemy, TIME DECAY.

(iv) Day Trading

Day traders focus on the many small moves that happen during the trading day, mainly shown up by candlestick patterns. This strategy has a broker’s requirement of a minimum of $25,000 to qualify, which knocks out many beginners.

APPROPRIATE OPTION STRATEGY

Option trading is not appropriate with this strategy. Broker fees for options trading are quite high, and Day Traders end up paying vast sums to their brokers.

In Summary:

If you own at least 100 units of a stock that is not particularly trending in any particular direction, sell Covered Calls each month in the option cycle. You can reduce the net price that you originally paid for the stock by between 5-12% each month.

If you have at least $1,000 in your account, and can identify a trend, you can easily sell Credit Spreads or Sell Naked Puts each month in the option cycle.

If you have mastered Swing Trading principles, especially the idea of planning entries and exits, you can start to buy Calls and Puts, or DITM options and make phenomenal profits.

Author: Rob Forbes
Article Source: EzineArticles.com
Provided by: How Electric Pressure Cookers Work

5 Keys To Stock Option Trading

January 6, 2010 · Posted in options trading · Comment 

Stock option trading offers the skilled trader more potential for making a fortune option trading than almost any other form of online trading in today’s market. The degree of controlled risk along with superior leverage allows a knowledgeable option trader the chance to make huge profits but an aspiring option trader must have a solid foundation of education about what makes up a sound option trading method in order to have a long term success at option trading. There are five essential keys that any option trader must understand when developing a winning stock option system.

First, you must understand the degree which time affects the premium of the option you are considering trading. There are two parts you must consider when factoring time into the stock option trading decisions. The first thing that you must take into account is the intrinsic time left on an option. Since options have a limited time period of anywhere from 30 days to several year depending on the particular option that you bought you must be sure that you purchase the correct option containing enough time on it to insure that time decay doesn’t erode your investment away before your position has enough time to be profitable.

The second skill of trading options profitably is factoring time into your trading system in relation to trading a particular stock option and knowing the statistics of your option trading methodology or option trading setup by knowing the average holding period of a trade signal. If your average holding time for an option trade is seven days then you don’t want to buy an option with three months of time premium left on it because you would be paying more for the extra time with the option’s purchase price. Nor would you buy an option with less that 30 days till expiration as time decay would erode the value of option so quickly that even if the option’s underlying stock movement moved favorably to you the time decay would prevent you from realizing a gain in the option itself.

The third thing to profitable stock option trading is understanding the relation of volatility between the market, the underlying stock that underlies the stock option, and the effect is has on the value of the option itself. When the general stock market as an index goes thru periods of volatility or low trading ranges the stocks that make up the market tend to follow overall trend and also begin to experience periods of low overall volatility which in turn can cause derivative like stock options to become cheap or low premiums. But if the market’s volatility rises it is likely that individual stocks will follow the trend causing stock option premiums to increase in value given that the market moves in the trader’s favor. The next key in how to trade stock options successfully is having a stock option trading method that takes these key factors into consideration while giving clear entry signals, clear exit signals, a defined system of trade management, and a profit factor greater than your average loss over a series of trades. Knowing the ins and outs of various trade setups is useless if you don’t have a trading methodology that guides you in every step of the trade process. A solid trading method holds you by the hand and defines each step while leading you to being a consistent winner in the markets and a profitable trader when all is said and done.

Finally, the fifth and final key to successfully trading stock options is yourself, particularly your trading psychology. Human beings and there mental makeup are extremely complex so it is extremely important that stock option traders not only have a sound stock option trading methodology but the discipline to follow their trading methods. You can give two people the same exact winning trading system but it is very common for them to have different results. Invariably, the one that has the ability to remain as detached from his losing trades as well as his winning trades while maintaining the discipline to follow the system’s rules no matter the trading result will emerge the greatest winner in the end.

Using these five keys as a basis to develop your stock option trading methodology can help you avoid the mistakes and pitfalls of many beginning option traders. By understanding time decay, factoring an option’s time into your trading method, how volatility impacts a stock option’s value, what defines a reliable stock option trading methodology, and your own trading psychology you now have a foundation to develop into a winning stock option trader.

Copyright 2007 Billy Williams

Author: Billy Williams
Article Source: EzineArticles.com
Provided by: Canada duty rates

Next Page »

Powered by Yahoo! Answers