October 31, 2008
You Will Never Make Money Trading Stocks, Futures Or Forex Part 1
You may think you know what a CFD, a currency pair, or an option is, but you probably don’t know anywhere near as much as you should. For example, trading a CFD and an option using the same outlay can result in two completely different scenarios; the CFD can take out your initial outlay, plus more sometimes resulting in a margin call (if you know what one of these are). Bad traders can have their entire capital wiped in very short time if they’re not careful.
An option on the other hand can only ever go to zero; in other words, you can only lose your initial outlay, but with options there is a thing called time decay, which simply means, the longer you hold an option, (all else being equal), the less valuable your option becomes. CFD’s don’t have time decay, but they do incur interest when bought for every 24 hours you hold the position open.
Options also have various components that go into making up their price, including time (already mentioned), and intrinsic value, not to mention a few others. A lot of newbie options traders are bewildered when they see the underlying asset go up in price yet their call option does nothing. For some reason it escapes these people that it may be a good idea to learn what an option is.
So if you decide you think the little green bar is going to keep going up, what do you buy an option, CFD or just the stock? Then there are market makers and brokers, regulators, and laws which differ greatly between just these two derivatives markets. You can’t trade CFD’s in the US, so what happens if you get sold on a real great trading system promising huge returns only to find out that the owner of the system lives in the UK and trades his system with CFD’s?
Then you have Forex, the market where people think they can start with a measly $10! Unlike all other markets, Forex has two opposing forces at play. By buying the EUR/USD, you are in fact buying the Euro currency with US Dollars, and if you live outside the US, then you’ve got to factor in the currency exchange rate between the US dollar and your own currency, otherwise you have no idea what you’re risking.
Another example; if I live in New Zealand and I decide to go short the CAD/JPY pair, how do I work out my risk for the trade? Well for starters, going short the CAD/JPY means I am buying Japanese Yen, with Canadian Dollars. How many of these Canadian Dollars am I willing to risk so I only risk ‘X’ amount New Zealand Dollars?
This is not to mention that fact that CFD and Forex markets are unregulated. If you think you’re getting the same price at any given time as someone else on the other side of the world, think again, because you aren’t!
Futures and Commodities; Ah, the big juicy bull market that no one seemed to care about when our little friend with the bow tie was singing from the rooftops to an empty street. Of course now that our favourite money channels can’t stop talking about them everyone else seems interested. Have you ever seen the little pop up ad claiming an 80% success rate trading Oil? Well that’s all good and dandy but unless you have the capital to trade Oil, it’s absolutely hopeless to you. The standard method of trading one Oil contract requires you have about a $4000 margin. Check out the margin requirements to trade all the other commodities in the news lately, Wheat, Corn, Sugar, and Gold.
Rest assured, now that we have a bull market in commodities, the ways in which one can trade these markets will explode allowing smaller margins and more retail traders to experiment (yes that’s what the majority will be doing even if they don’t know it). However, these instruments all have their own characteristics that you need to learn.
Every market is different, it has different characteristics, different laws and regulations (if at all), they act differently, and they have different driving forces fundamentally. Pick one or two markets to learn and get comfortable with them, but for goodness sake, pick the markets that will suit you and your goals and allow you to trade with the limited resources you have available.
By: Dean Whittingham
About the Author:
An option on the other hand can only ever go to zero; in other words, you can only lose your initial outlay, but with options there is a thing called time decay, which simply means, the longer you hold an option, (all else being equal), the less valuable your option becomes. CFD’s don’t have time decay, but they do incur interest when bought for every 24 hours you hold the position open.
Options also have various components that go into making up their price, including time (already mentioned), and intrinsic value, not to mention a few others. A lot of newbie options traders are bewildered when they see the underlying asset go up in price yet their call option does nothing. For some reason it escapes these people that it may be a good idea to learn what an option is.
So if you decide you think the little green bar is going to keep going up, what do you buy an option, CFD or just the stock? Then there are market makers and brokers, regulators, and laws which differ greatly between just these two derivatives markets. You can’t trade CFD’s in the US, so what happens if you get sold on a real great trading system promising huge returns only to find out that the owner of the system lives in the UK and trades his system with CFD’s?
Then you have Forex, the market where people think they can start with a measly $10! Unlike all other markets, Forex has two opposing forces at play. By buying the EUR/USD, you are in fact buying the Euro currency with US Dollars, and if you live outside the US, then you’ve got to factor in the currency exchange rate between the US dollar and your own currency, otherwise you have no idea what you’re risking.
Another example; if I live in New Zealand and I decide to go short the CAD/JPY pair, how do I work out my risk for the trade? Well for starters, going short the CAD/JPY means I am buying Japanese Yen, with Canadian Dollars. How many of these Canadian Dollars am I willing to risk so I only risk ‘X’ amount New Zealand Dollars?
This is not to mention that fact that CFD and Forex markets are unregulated. If you think you’re getting the same price at any given time as someone else on the other side of the world, think again, because you aren’t!
Futures and Commodities; Ah, the big juicy bull market that no one seemed to care about when our little friend with the bow tie was singing from the rooftops to an empty street. Of course now that our favourite money channels can’t stop talking about them everyone else seems interested. Have you ever seen the little pop up ad claiming an 80% success rate trading Oil? Well that’s all good and dandy but unless you have the capital to trade Oil, it’s absolutely hopeless to you. The standard method of trading one Oil contract requires you have about a $4000 margin. Check out the margin requirements to trade all the other commodities in the news lately, Wheat, Corn, Sugar, and Gold.
Rest assured, now that we have a bull market in commodities, the ways in which one can trade these markets will explode allowing smaller margins and more retail traders to experiment (yes that’s what the majority will be doing even if they don’t know it). However, these instruments all have their own characteristics that you need to learn.
Every market is different, it has different characteristics, different laws and regulations (if at all), they act differently, and they have different driving forces fundamentally. Pick one or two markets to learn and get comfortable with them, but for goodness sake, pick the markets that will suit you and your goals and allow you to trade with the limited resources you have available.
By: Dean Whittingham
About the Author:
Dean Whittingham created A Traders Universe – Trading System Development in 2005 as a resource site for traders of all levels, with education, courses, brokers, tips, free videos, newsletters, trading systems, simulations and a free 7 step process for building a profitable stock, futures or forex trading system. His coaching program is at Pentagonal Trading System Development
Filed under Finance by Administrator
Let’s look at the basic facts about options trading before we go any further. Like any human endeavor, options trading is best described in very careful language so that there’s no confusion about our meaning. First, let’s take a look at exactly what an “option” is. An option refers to just that, the option to purchase certain stocks or certain commodity items by a certain date. This means you do not gain controlling interest in the stock or commodity until that date. For this reason, options can, and often do, expire worthless. There are two types of options contracts:
1) Contracts to buy blocks of stocks by a certain date 2) Commodity futures which are options to buy blocks of hard goods by a certain date
If you have options on 10,000 bushels of corn, whoever sold it to you cannot sell it to someone else until the expiration date of your contract has expired. In exchange for giving you this right, they wrote the contract and took money from you. If you don’t exercise your options prior to the expiration date, they will expect full control of their corn again, and will sell it someone else. What makes options such fascinating instruments are these facts:
1) With options you can sell that which you don’t own or ever plan on buying 2) You can buy something you don’t ever plan on physically holding and sell it for a profit
Another great thing about options is their inherent flexibility: although you have the right to buy or sell a certain stock or commodity, the choice is yours. You’re not forced to exercise your options. You can always sell your options contract to someone else. Many traders of commodities and options always sell the contracts only and have never taken physical possession of any underlying asset they’ve ever traded. The leverage in options gives you a chance to earn extremely high returns. These types of options we’re describing are referred to as covered options. With covered options you actually plan on or do own the underlying asset that you purchase options contracts for. Uncovered options are the exact opposite. Like the word uncovered means exposed, uncovered or naked options are considered more dangerous, because you are merely speculating without having an ownership interest. You are exposed to the risk without the benefit of owning the asset.
Options trading involves a great deal of leverage in the form of margin loans to your trading account. All options trades are highly leveraged, so you need to add margin interest to your calculated costs when considering a career in trading options. Pricing and potential returns on options trading depend very much on real world circumstances. If you purchase corn futures, for instance, there are literally hundreds of variables that affect the price of the corn, and hence your investment. If a corn shortage is expected in a certain part of the world, your investment might hit big because the price of corn could rise dramatically. On the contrary, perhaps government subsidies have introduced a glut of corn into the world market. In that case, your investment might tumble. Futures contracts for commodities and options contracts on stocks are strictly based on guessing what events will happen in the future. Of course you’ll always attempt to make as accurate as a guess as possible, but let’s face facts: in this world unforeseen things can and do happen. For this reason, protect your downside, and only invest with money you can afford to lose. Options trading can be very profitable, but unsurpisingly it’s also very risky.
By: Darren Mclaughlin
About the Author:
1) Contracts to buy blocks of stocks by a certain date 2) Commodity futures which are options to buy blocks of hard goods by a certain date
If you have options on 10,000 bushels of corn, whoever sold it to you cannot sell it to someone else until the expiration date of your contract has expired. In exchange for giving you this right, they wrote the contract and took money from you. If you don’t exercise your options prior to the expiration date, they will expect full control of their corn again, and will sell it someone else. What makes options such fascinating instruments are these facts:
1) With options you can sell that which you don’t own or ever plan on buying 2) You can buy something you don’t ever plan on physically holding and sell it for a profit
Another great thing about options is their inherent flexibility: although you have the right to buy or sell a certain stock or commodity, the choice is yours. You’re not forced to exercise your options. You can always sell your options contract to someone else. Many traders of commodities and options always sell the contracts only and have never taken physical possession of any underlying asset they’ve ever traded. The leverage in options gives you a chance to earn extremely high returns. These types of options we’re describing are referred to as covered options. With covered options you actually plan on or do own the underlying asset that you purchase options contracts for. Uncovered options are the exact opposite. Like the word uncovered means exposed, uncovered or naked options are considered more dangerous, because you are merely speculating without having an ownership interest. You are exposed to the risk without the benefit of owning the asset.
Options trading involves a great deal of leverage in the form of margin loans to your trading account. All options trades are highly leveraged, so you need to add margin interest to your calculated costs when considering a career in trading options. Pricing and potential returns on options trading depend very much on real world circumstances. If you purchase corn futures, for instance, there are literally hundreds of variables that affect the price of the corn, and hence your investment. If a corn shortage is expected in a certain part of the world, your investment might hit big because the price of corn could rise dramatically. On the contrary, perhaps government subsidies have introduced a glut of corn into the world market. In that case, your investment might tumble. Futures contracts for commodities and options contracts on stocks are strictly based on guessing what events will happen in the future. Of course you’ll always attempt to make as accurate as a guess as possible, but let’s face facts: in this world unforeseen things can and do happen. For this reason, protect your downside, and only invest with money you can afford to lose. Options trading can be very profitable, but unsurpisingly it’s also very risky.
By: Darren Mclaughlin
About the Author:
Please visit the Options Trading Forum for more information on Trading Options
Filed under Finance by Administrator
October 30, 2008
Options Are Too Risky – Only Crazy People Invest in Stock Options
Who decided that options are too risky for the everyday investor? More importantly can somebody please explain why options are too risky? After years of research I have finally come to understand that there are 3 types of people that can be held responsible for the Myth that options are too risky. Who?
1. Financial Planners
2. Stock Brokers
3. Taxi Drivers
Is it possible for the uneducated investor to lose lots of money if they trade options? Yes of course they can, first of all the uneducated investor can lose tons of money using any trading instrument and secondly options are highly leveraged so if used incorrectly then they will increase your losses. So if this is the case then why an I saying that trading stock options isn’t risky?
The first thing that you must realize about stock options is that they were actually invested to reduce or manage risk. The whole idea of buying a put option to hedge you stocks is basically another form of insurance. When looking at your portfolio risk management options buying puts to ‘insure’ your stocks is one of the most conservative investment strategies that you can implement.
On the other hand selling call options on stocks that you already own (covered calls) is another incredibly conservative stock market strategy. This strategy actually increases your downside protection, so when used correctly the myth that options are too risky is simply not true. Of course if you start writing naked calls or naked puts then your risk levels are going to seriously increase but when used correctly options are an amazing risk reduction tool.
Let’s have a look at why financial planners, Stock Brokers, and Taxi drivers are giving Options such a bad name.
Financial Planners: If you go to your financial planner and say that you would like to include options in your trading strategies then they will almost definitely tell you that it is a very bad and risky idea. Why? Simply because 99% of financial planners wouldn’t have a clue how to use them. I recently spoke to a financial advisor who admitted that her entire financial planning degree only had one chapter on options and it was completely theoretical information. In their entire course there was not one bit of practical information about how to use options. So considering that most financial planners don’t actually know what stock options are let alone how to use them is it any wonder that their typical response is negative. Remember human’s beings fear change and looking stupid.
Stock Brokers: Surely Stock brokers don’t think that options are too risky? Aren’t they meant to be professional stock market investors? Unfortunately most stock brokers are exactly that ‘STOCK’ brokers not ‘OPTION’ brokers. To become a legal options broker there are additional courses that you need to complete so most stock brokers aren’t actually allowed to give you ‘option’ advice. Put yourself in their shoes for a minute – if a client came to you and said “What do you think of buying Options” then you are faced with two choices
1.Tell them that is a great idea but unfortunately you will need to take all of your money out of our accounts and go to another broker who is legally allowed to trade options, Good Luck with your investing.
2.Or you could tell them that options are too risky and you really should just stick to managed funds and stocks.
So what answer would you choose?
Taxi Drivers: Obviously this is a little bit of a joke but the point I am trying to make is that everybody seems to think that trading stock options is too risky. It is extremely important to remember to make up your own mind about investment strategies, whatever you do don’t take advice from a taxi driver about wealth creation.
“the most expensive advice you will ever get is free from poor people” Kurek Ashley
So are Options too risky? If used incorrectly yes but perhaps the question you should ask yourself first is ‘what are stock options’? Before you dismiss something as being too risky or scary make sure you try to understand what it actually is and how it works. There are plenty of free resources on the internet so do some research and make up your own mind about stock options. The last thing you want to do is ignore something just because that is what everybody else thinks. After all are these people achieving the results you are after or are they still driving taxis?
By: Banjo Smyth
About the Author:
1. Financial Planners
2. Stock Brokers
3. Taxi Drivers
Is it possible for the uneducated investor to lose lots of money if they trade options? Yes of course they can, first of all the uneducated investor can lose tons of money using any trading instrument and secondly options are highly leveraged so if used incorrectly then they will increase your losses. So if this is the case then why an I saying that trading stock options isn’t risky?
The first thing that you must realize about stock options is that they were actually invested to reduce or manage risk. The whole idea of buying a put option to hedge you stocks is basically another form of insurance. When looking at your portfolio risk management options buying puts to ‘insure’ your stocks is one of the most conservative investment strategies that you can implement.
On the other hand selling call options on stocks that you already own (covered calls) is another incredibly conservative stock market strategy. This strategy actually increases your downside protection, so when used correctly the myth that options are too risky is simply not true. Of course if you start writing naked calls or naked puts then your risk levels are going to seriously increase but when used correctly options are an amazing risk reduction tool.
Let’s have a look at why financial planners, Stock Brokers, and Taxi drivers are giving Options such a bad name.
Financial Planners: If you go to your financial planner and say that you would like to include options in your trading strategies then they will almost definitely tell you that it is a very bad and risky idea. Why? Simply because 99% of financial planners wouldn’t have a clue how to use them. I recently spoke to a financial advisor who admitted that her entire financial planning degree only had one chapter on options and it was completely theoretical information. In their entire course there was not one bit of practical information about how to use options. So considering that most financial planners don’t actually know what stock options are let alone how to use them is it any wonder that their typical response is negative. Remember human’s beings fear change and looking stupid.
Stock Brokers: Surely Stock brokers don’t think that options are too risky? Aren’t they meant to be professional stock market investors? Unfortunately most stock brokers are exactly that ‘STOCK’ brokers not ‘OPTION’ brokers. To become a legal options broker there are additional courses that you need to complete so most stock brokers aren’t actually allowed to give you ‘option’ advice. Put yourself in their shoes for a minute – if a client came to you and said “What do you think of buying Options” then you are faced with two choices
1.Tell them that is a great idea but unfortunately you will need to take all of your money out of our accounts and go to another broker who is legally allowed to trade options, Good Luck with your investing.
2.Or you could tell them that options are too risky and you really should just stick to managed funds and stocks.
So what answer would you choose?
Taxi Drivers: Obviously this is a little bit of a joke but the point I am trying to make is that everybody seems to think that trading stock options is too risky. It is extremely important to remember to make up your own mind about investment strategies, whatever you do don’t take advice from a taxi driver about wealth creation.
“the most expensive advice you will ever get is free from poor people” Kurek Ashley
So are Options too risky? If used incorrectly yes but perhaps the question you should ask yourself first is ‘what are stock options’? Before you dismiss something as being too risky or scary make sure you try to understand what it actually is and how it works. There are plenty of free resources on the internet so do some research and make up your own mind about stock options. The last thing you want to do is ignore something just because that is what everybody else thinks. After all are these people achieving the results you are after or are they still driving taxis?
By: Banjo Smyth
About the Author:
If you want to be rich then the easiest way to achieve this goal is to become an investor. SharesPropertyMoney.com is giving away a Free Investment DVD to the first 1000 visitors. CLICK HERE for your copy Learn an amazing Stock Market Investment Strategy that everyday people are using earn $5,000 tax free per month.
Filed under Finance by Administrator
INTRODUCTION
Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs.
I have seen paupers become millionaires overnight…
And
I have seen millionaires become paupers overnight…
One story told to me by my mentor is still etched in my mind:
“Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock market’s direction. When they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He said, ‘One said BULLISH and the other said BEARISH!’”
The point of this illustration is that it was the trader who was wrong. In today’s stock and option market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategy and in the mental attitude and discipline one uses in implementing that strategy.
I share here the basic stock and option trading principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you are doing right and what you may be doing wrong.
You may have read ideas similar to these before. I and others use them because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your stock and options trading.
PRINCIPLE 1
SIMPLICITY IS MASTERY
When you feel that the stock and options trading method that you are following is too complex even for simple understanding, it is probably not the best.
In all aspects of successful stock and options trading, the simplest approaches often emerge victorious. In the heat of a trade, it is easy for our brains to become emotionally overloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.
PRINCIPLE 2
NOBODY IS OBJECTIVE ENOUGH
If you feel that you have absolute control over your emotions and can be objective in the heat of a stock or options trade, you are either a dangerous species or you are an inexperienced trader.
No trader can be absolutely objective, especially when market action is unusual or wildly erratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors, the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as many critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.
PRINCIPLE 3
HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES
This is the most important principle.
Most stock and options traders do the opposite…
They hold on to their losses way too long and watch their equity sink and sink and sink, or they get out of their gains too soon only to see the price go up and up and up. Over time, their gains never cover their losses.
This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have been undisciplined, you will see its truth.
PRINCIPLE 4
BE AFRAID TO LOSE MONEY
Are you like most beginners who can’t wait to jump right into the stock and options market with your money hoping to trade as soon as possible?
On this point, I have found that most unprincipled traders are more afraid of missing out on “the next big trade” than they are afraid of losing money! The key here is STICK TO YOUR STRATEGY! Take stock and options trades when your strategy signals to do so and avoid taking trades when the conditions are not met. Exit trades when your strategy says to do so and leave them alone when the exit conditions are not in place.
The point here is to be afraid to throw away your money because you traded needlessly and without following your stock and options strategy.
PRINCIPLE 5
YOUR NEXT TRADE COULD BE A LOSING TRADE
Do you absolutely believe that your next stock or options trade is going to be such a big winner that you break your own money management rules and put in everything you have? Do you remember what usually happens after that? It isn’t pretty, is it?
No matter how confident you may be when entering a trade, the stock and options market has a way of doing the unexpected. Therefore, always stick to your portfolio management system. Do not compound your anticipated wins because you may end up compounding your very real losses.
PRINCIPLE 6
GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY
You know by now how different paper trading and real stock and options trading is, don’t you?
In the very same way, after you get used to trading real money consistently, you find it extremely different when you increase your capital by ten fold, don’t you?
What, then, is the difference? The difference is in the emotional burden that comes with the possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after some successes.
After a while, most traders realize their maximum capacity in both dollars and emotion. Are you comfortable trading up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.
PRINCIPLE 7
YOU ARE A NOVICE AT EVERY TRADE
Ever felt like an expert after a few wins and then lose a lot on the next stock or options trade?
Overconfidence and the false sense of invincibility based on past wins is a recipe for disaster. All professionals respect their next trade and go through all the proper steps of their stock or options strategy before entry. Treat every trade as the first trade you have ever made in your life. Never deviate from your stock or options strategy. Never.
PRINCIPLE 8
YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE
Ever followed a successful stock or options strategy only to fail badly?
You are the one who determines whether a strategy succeeds or fails. Your personality and your discipline make or break the strategy that you use not vice versa. Like Robert Kiyosaki says, “The investor is the asset or the liability, not the investment.”
Understanding yourself first will lead to eventual success.
PRINCIPLE 9
CONSISTENCY
Have you ever changed your mind about how to implement a strategy? When you make changes day after day, you end up catching nothing but the wind.
Stock market fluctuations have more variables than can be mathematically formulated. By following a proven strategy, we are assured that someone successful has stacked the odds in our favour. When you review both winning and losing trades, determine whether the entry, management, and exit met every criteria in the strategy and whether you have followed it precisely before changing anything.
In conclusion…
I hope these simple guidelines that have led my ship out of the harshest of seas and into the best harvests of my life will guide you too. Good Luck.
By: Jason Ng
About the Author:
Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs.
I have seen paupers become millionaires overnight…
And
I have seen millionaires become paupers overnight…
One story told to me by my mentor is still etched in my mind:
“Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock market’s direction. When they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He said, ‘One said BULLISH and the other said BEARISH!’”
The point of this illustration is that it was the trader who was wrong. In today’s stock and option market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategy and in the mental attitude and discipline one uses in implementing that strategy.
I share here the basic stock and option trading principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you are doing right and what you may be doing wrong.
You may have read ideas similar to these before. I and others use them because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your stock and options trading.
PRINCIPLE 1
SIMPLICITY IS MASTERY
When you feel that the stock and options trading method that you are following is too complex even for simple understanding, it is probably not the best.
In all aspects of successful stock and options trading, the simplest approaches often emerge victorious. In the heat of a trade, it is easy for our brains to become emotionally overloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.
PRINCIPLE 2
NOBODY IS OBJECTIVE ENOUGH
If you feel that you have absolute control over your emotions and can be objective in the heat of a stock or options trade, you are either a dangerous species or you are an inexperienced trader.
No trader can be absolutely objective, especially when market action is unusual or wildly erratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors, the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as many critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.
PRINCIPLE 3
HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES
This is the most important principle.
Most stock and options traders do the opposite…
They hold on to their losses way too long and watch their equity sink and sink and sink, or they get out of their gains too soon only to see the price go up and up and up. Over time, their gains never cover their losses.
This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have been undisciplined, you will see its truth.
PRINCIPLE 4
BE AFRAID TO LOSE MONEY
Are you like most beginners who can’t wait to jump right into the stock and options market with your money hoping to trade as soon as possible?
On this point, I have found that most unprincipled traders are more afraid of missing out on “the next big trade” than they are afraid of losing money! The key here is STICK TO YOUR STRATEGY! Take stock and options trades when your strategy signals to do so and avoid taking trades when the conditions are not met. Exit trades when your strategy says to do so and leave them alone when the exit conditions are not in place.
The point here is to be afraid to throw away your money because you traded needlessly and without following your stock and options strategy.
PRINCIPLE 5
YOUR NEXT TRADE COULD BE A LOSING TRADE
Do you absolutely believe that your next stock or options trade is going to be such a big winner that you break your own money management rules and put in everything you have? Do you remember what usually happens after that? It isn’t pretty, is it?
No matter how confident you may be when entering a trade, the stock and options market has a way of doing the unexpected. Therefore, always stick to your portfolio management system. Do not compound your anticipated wins because you may end up compounding your very real losses.
PRINCIPLE 6
GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY
You know by now how different paper trading and real stock and options trading is, don’t you?
In the very same way, after you get used to trading real money consistently, you find it extremely different when you increase your capital by ten fold, don’t you?
What, then, is the difference? The difference is in the emotional burden that comes with the possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after some successes.
After a while, most traders realize their maximum capacity in both dollars and emotion. Are you comfortable trading up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.
PRINCIPLE 7
YOU ARE A NOVICE AT EVERY TRADE
Ever felt like an expert after a few wins and then lose a lot on the next stock or options trade?
Overconfidence and the false sense of invincibility based on past wins is a recipe for disaster. All professionals respect their next trade and go through all the proper steps of their stock or options strategy before entry. Treat every trade as the first trade you have ever made in your life. Never deviate from your stock or options strategy. Never.
PRINCIPLE 8
YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE
Ever followed a successful stock or options strategy only to fail badly?
You are the one who determines whether a strategy succeeds or fails. Your personality and your discipline make or break the strategy that you use not vice versa. Like Robert Kiyosaki says, “The investor is the asset or the liability, not the investment.”
Understanding yourself first will lead to eventual success.
PRINCIPLE 9
CONSISTENCY
Have you ever changed your mind about how to implement a strategy? When you make changes day after day, you end up catching nothing but the wind.
Stock market fluctuations have more variables than can be mathematically formulated. By following a proven strategy, we are assured that someone successful has stacked the odds in our favour. When you review both winning and losing trades, determine whether the entry, management, and exit met every criteria in the strategy and whether you have followed it precisely before changing anything.
In conclusion…
I hope these simple guidelines that have led my ship out of the harshest of seas and into the best harvests of my life will guide you too. Good Luck.
By: Jason Ng
About the Author:
Jason Ng is the Founder of Masters ‘O’ Equity. He is a fund manager specialising in options trading and his Star Trading System has helped thousands of traders worldwide achieve financial freedom. Please visit Masters ‘O’ Equity’s Website.
Filed under Finance by Administrator
October 29, 2008
Option Trading Explained – In Layman Terms
Robert Kiyosaki says that Option Trading is the investment of the rich.
Indeed, option trading is the most versatile form of investment in the world today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.
Option Trading Explained – Simply put, it is the trading of option contracts on a particular stock.
Options Explained – A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.
There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!
Option Trading Explained – What Can Stock Options Do?
Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.
Stock Options are:
Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.
Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.
Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.
Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.
Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.
And the Negative Effects are:
No value beyond expiration. You can potentially lose all your money along with the expiration of the option.
Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.
Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.
Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.
Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.
Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.
Using options creatively even allows us to structure investment positions to reap a fixed monthly return that beats the market regardless of which way the market goes! Just like in the Ride the Flow System offered at http://www.mastersoequity.com/MOE_ridetheflow.htm . Where your capital can be fully protected no even if the market enters a severe drop. Sounds amazing?
Option Trading Explained – Conclusion
I hope this “Option Trading Explained” has given you a good overview of the effects of options.
For a full and complete education in option trading, please visit http://www.mastersoequity.com/OptionUni.htm
By: Jason Ng
About the Author:
Indeed, option trading is the most versatile form of investment in the world today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.
Option Trading Explained – Simply put, it is the trading of option contracts on a particular stock.
Options Explained – A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.
There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!
Option Trading Explained – What Can Stock Options Do?
Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.
Stock Options are:
Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.
Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.
Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.
Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.
Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.
And the Negative Effects are:
No value beyond expiration. You can potentially lose all your money along with the expiration of the option.
Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.
Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.
Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.
Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.
Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.
Using options creatively even allows us to structure investment positions to reap a fixed monthly return that beats the market regardless of which way the market goes! Just like in the Ride the Flow System offered at http://www.mastersoequity.com/MOE_ridetheflow.htm . Where your capital can be fully protected no even if the market enters a severe drop. Sounds amazing?
Option Trading Explained – Conclusion
I hope this “Option Trading Explained” has given you a good overview of the effects of options.
For a full and complete education in option trading, please visit http://www.mastersoequity.com/OptionUni.htm
By: Jason Ng
About the Author:
Jason Ng is the Founder of Masters ‘O’ Equity international. He is a fund manager specialising in options trading and his Star Trading System has helped thousands of traders worldwide. Please visit www.MastersoEquity.com .
Filed under Finance by Administrator
October 28, 2008
How to Get Started in Stock Option Trading
The first thing that you have to do when you are looking to begin trading in stock options is to read everything that you can find on the topic. Stock options are not stocks, and trading in stocks does not qualify you to trade in options by default. If you want to be successful, see what others have to say about the subject and learn as much as you can from as many diverse sources as you can.
This means doing internet research, talking to people who trade in stock options, reading books on the topic, and possibly even buying software that is designed for stock options traders to see what they are using and what they need to know. Next you will want to build up your experience by ‘trading on paper’ for a while.
Go through the motions of making trades without actually doing so and see if you are making money or if you are losing out. If you have been losing out on your imaginary deals, you will not do much better in the real market. Get a feel for how things move before you jump in with both feet. Once you feel like you have a good background in information, you can set up an options account.
Contact a broker or discount broker who specializes in stock options, and set up an account with him or her. You will do your trading through your broker, at least at first, so make sure that you are comfortable with the broker, what he or she has to offer, what that broker does not offer, and what their requirements for opening an account are.
Invest a small amount of money to begin with, and focus on safe trades and following recommendations to keep the risks low. Once you have really started to get into things, you can ease your investments and your risks up a little higher in the quest for greater profits, but starting small will help keep you from digging yourself into a hole too early in the game.
Stock option trading can be a fun and profitable adventure, but you should go into it fully prepared and with the knowledge that you could lose money just as easily as you can make it, especially at first. Keep that in mind and study hard, though, and you will soon be trading options like a pro on the market.
By: Sam Perdue
About the Author:
This means doing internet research, talking to people who trade in stock options, reading books on the topic, and possibly even buying software that is designed for stock options traders to see what they are using and what they need to know. Next you will want to build up your experience by ‘trading on paper’ for a while.
Go through the motions of making trades without actually doing so and see if you are making money or if you are losing out. If you have been losing out on your imaginary deals, you will not do much better in the real market. Get a feel for how things move before you jump in with both feet. Once you feel like you have a good background in information, you can set up an options account.
Contact a broker or discount broker who specializes in stock options, and set up an account with him or her. You will do your trading through your broker, at least at first, so make sure that you are comfortable with the broker, what he or she has to offer, what that broker does not offer, and what their requirements for opening an account are.
Invest a small amount of money to begin with, and focus on safe trades and following recommendations to keep the risks low. Once you have really started to get into things, you can ease your investments and your risks up a little higher in the quest for greater profits, but starting small will help keep you from digging yourself into a hole too early in the game.
Stock option trading can be a fun and profitable adventure, but you should go into it fully prepared and with the knowledge that you could lose money just as easily as you can make it, especially at first. Keep that in mind and study hard, though, and you will soon be trading options like a pro on the market.
By: Sam Perdue
About the Author:
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.
Filed under Finance by Administrator
Call and What?
An option is a “legal financial contract”. The holder has the right, but is under no obligation, to accrue or sell a predetermined number of stock shares. This is to be done at a price that has been predetermined which is called a strike price. It is also to be accomplished on or before a specific date.
There are just two basic types of stock options, the European and the American. An American stock option is a contract that can be exercised between the purchase date and the expiration date.
Each stock option is designated by the following:
• Name of the stock
• Strike price
• Expiration date
• The premium that was paid for the option plus the broker’s commission
Two of the most popular types of stock options are Calls and Puts. If you own a call you have the right but are not obliged to buy a stock at the strike price at any time before the stock option expires. If an option expires, it is useless and worthless.
The other most common stock option is the PUT. This is almost the exact opposite of a Call. If you own a put you have the right, but are not obliged, to sell a stock at the strike price any time before the expiration date of the option.
How in the world do people trade these stock options? Stock options traders will rarely exercise their option and purchase (or sell) the underlying security. Instead, they will buy back or sell the option. This saves on commissions.
Options officially expire on Saturday following the third Friday of the month in which the option expires. Shares of stock have a 3-day settlement interval but option settle the very next day. The option has to be traded by Friday in order to settle on Saturday.
Another thing you may hear about with regards to stock options is volume and open interest. Volume is the number of contracts that are traded on any given day. The open interest figure is the number of contracts that are outstanding at any given time.
For those who are curious, a Put-Call theorem has been formulated which defines the following relationship for the price of puts and calls:
P=C-S+E+D
• P= the price of the put
• C= the price of the call
• S= the stock price
• E= the present value of the exercise price
• D= the present value of the dividends
An ordinary investor will see a violation of the put-call parity from time to time. This is not a time to instantly buy, but it is a reason for you to check your quotations for timeliness because as you will probably see at least one of them has expired.
If you want to get into the stock option trading business, then you should probably start by writing covered call option for stocks that are currently trading below the strike price of the stock option.
There are many places on the Internet if you do a search for stock options where you can set up an account for just a small amount of money. My advice to you is to do your research well and only put up as much money as you are willing to part with.
By: Benjamin Wise
About the Author:
An option is a “legal financial contract”. The holder has the right, but is under no obligation, to accrue or sell a predetermined number of stock shares. This is to be done at a price that has been predetermined which is called a strike price. It is also to be accomplished on or before a specific date.
There are just two basic types of stock options, the European and the American. An American stock option is a contract that can be exercised between the purchase date and the expiration date.
Each stock option is designated by the following:
• Name of the stock
• Strike price
• Expiration date
• The premium that was paid for the option plus the broker’s commission
Two of the most popular types of stock options are Calls and Puts. If you own a call you have the right but are not obliged to buy a stock at the strike price at any time before the stock option expires. If an option expires, it is useless and worthless.
The other most common stock option is the PUT. This is almost the exact opposite of a Call. If you own a put you have the right, but are not obliged, to sell a stock at the strike price any time before the expiration date of the option.
How in the world do people trade these stock options? Stock options traders will rarely exercise their option and purchase (or sell) the underlying security. Instead, they will buy back or sell the option. This saves on commissions.
Options officially expire on Saturday following the third Friday of the month in which the option expires. Shares of stock have a 3-day settlement interval but option settle the very next day. The option has to be traded by Friday in order to settle on Saturday.
Another thing you may hear about with regards to stock options is volume and open interest. Volume is the number of contracts that are traded on any given day. The open interest figure is the number of contracts that are outstanding at any given time.
For those who are curious, a Put-Call theorem has been formulated which defines the following relationship for the price of puts and calls:
P=C-S+E+D
• P= the price of the put
• C= the price of the call
• S= the stock price
• E= the present value of the exercise price
• D= the present value of the dividends
An ordinary investor will see a violation of the put-call parity from time to time. This is not a time to instantly buy, but it is a reason for you to check your quotations for timeliness because as you will probably see at least one of them has expired.
If you want to get into the stock option trading business, then you should probably start by writing covered call option for stocks that are currently trading below the strike price of the stock option.
There are many places on the Internet if you do a search for stock options where you can set up an account for just a small amount of money. My advice to you is to do your research well and only put up as much money as you are willing to part with.
By: Benjamin Wise
About the Author:
Stocks Explained If you want to discover your pot of gold in the stock market, then you have to know it inside out. And for all the inside-out information on the stock market explained in simple, concise, layman terms, all you need to do is click on this link: Stock options.
Filed under Finance by Administrator
It is a well known fact that serious investors seeking long term growth of capital have as their main objectives the two most basic goals in investing:
• to find an investment vehicle that would effectively preserve capital and minimize risk in the face of a fluctuating and constantly flexing economy
• the investment vehicle must provide better than decent yields in all economic conditions to promote constant growth of capital value.
With the stock market as the premiere choice due to its historical record of outperforming all other investments over time, people are increasingly turning to the stock market as their main investment vehicle for future capital growth. It is here where much higher rates of return can be made with a relatively small increase in risk to capital.
With thousands of books, manuals, internet sites, seminars and courses offering investment strategies and trading systems in the stock market and its derivatives, there are few, if any, that deliver the ideal investment vehicle sought by the long term investor in search of safety and high returns. Not only is there a near total absence of an ideal investment system but there are many that promise eye popping, mind boggling returns and, they are exactly that; mere promises.
Most of the trading systems offered are structured on strategies or activities that work when conditions are ideally suited to the program being peddled. Most of their successes are highly dependent on picking the right stocks at the right time. In other words you must be a good stock picker or use a stock picking service (for a high monthly fee) to select the right ones for you. Market timing is also an important factor in their systems. Again, you must be a good market timer or depend on a service that provides market timing signals (also for a high monthly fee). These supposedly high yield investment programs don’t say anything about how bad things can be when conditions go against their predictions. These programs do exactly as promised: great when the going is good but disastrous when the going is bad. Without doubt many have been taken by these so-called services and while an investor/trader may be successful for a while, the end result over a long period of time is always the same – no better than if you had done the selections yourself.
While there is no one investment system or vehicle that can be an answer-all to the various goals of various investors, there are some investment alternatives that can come close to satisfying the two basic needs of safety and decent returns. Diversified mutual funds have been touted as the answer to these basic needs. But over the years these funds have shown that during downturns in the economy they perform just as badly as the whole investment market in general. And, over the long term, many of these diversified funds have failed to even match market performance in general, much less outperform it.
Enter market derivatives with emphasis options.
Trading in stock options has become very popular with institutional investors as well as private individuals as a sound money management system supplementing their investment portfolios. The ability of stock options to give the investor a wide range of choices is what has made the options market grow considerably over the last two decades. To quote one options expert: “Stock options are the greatest wealth producing tool ever invented on this planet. . . . if you know how to use them”.
The key element of this statement is: . . . if you know how to use them.
For many people the mere mention of stock options, sends shivers up their spine. They look at options as synonymous with great risk. But isn’t driving a car very dangerous for one who doesn’t know how to drive? The ability of stock options to give the investor a wide range of choices in stock market investments is what has made the options market grow by leaps and bounds over the last twenty years. Statistics compiled by the Options Industry Council, a group that educates investors about options, show that volume in options trading has risen tremendously in recent years. Further, studies show that individual investors make up 60% of the market.
For the individual who has sufficient funds and is looking for more than a decent return on his capital and with controllable risk, stock options may be the answer.
There are dozens of option trading systems being employed by individual investors and 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 popularly known as covered call writing.
Of the dozens of option trading systems there is one that can be carried out as a long term investment program offering a fair degree of safety and consistent high returns over time, thus satisfying the investor’s two basic needs of safety and return.
This is the selling of uncovered or naked options.
But wait! Is it not said that selling naked options carries the risk of unlimited losses? Isn’t this a contradiction?
Indeed selling naked options when done carelessly and without a disciplined strategic program is extremely risky!
But by using a carefully planned and disciplined system of trading, the so-called “unlimited risk” factor in selling options can easily be conquered. There is a three-pronged trading strategy being used by one successful options trader that is proving to be a consistent winner in all market conditions. It is a trading technique that couples naked option selling with a modified ratio credit spread and the use of the roll over feature. While naked option selling has acquired a bad rap of being highly risky, this three-pronged trading strategy allows the trader to defeat the risk. Not only is the system able to substantially reduce the risk, it also offers one the ability to become a savvy investor/trader without having to depend on picking the right stocks or timing the market.
It involves utilizing the system in any market condition using only one or a few stocks, ETFs or indexes (the latter two are more effective). One need not worry about finding the right stocks or timing the trades. The fact remains that stocks behave, more often than not, in crazy and irrational ways so that one can almost say that consistently choosing winning stocks is as good as a random walk down Wall Street. Rather than be proactive and try to predict and time the market, as many try to do, this three-pronged investment system is reactive. The prescribed trades are done in reaction to how the market has moved, not in anticipation of its future behavior.
This three-pronged trading system does not promise quick profits or mind boggling yields but steady annual returns in excess of 30%. Many are averaging returns of 50% to 60%. It would be prudent to say that in times of deep downturns the system may not deliver the promised returns but it will hold its own and will definitely outperform the market.
One options trader that has mastered this three-pronged trading technique has decided to share his knowledge of the system by writing an e-book on its methodology. Borrowing from that quote about options being a great wealth producing tool he has aptly titled his work: STOCK OPTIONS: THE GREATEST WEALTH BUILDING TOOL EVER INVENTED. In it he details the step by step methodology of this trading technique and gives an exhaustive series of sample trades covering several months of transactions. It shows the effectiveness of the system in an up market, down market and horizontal market using only one ETF stock. To this day the writer continues to use only one or two ETFs in all his options trades and he includes a web page that shows his current and actual trading results month by month on an ongoing frequency.
By: Daniel Mollat
About the Author:
• to find an investment vehicle that would effectively preserve capital and minimize risk in the face of a fluctuating and constantly flexing economy
• the investment vehicle must provide better than decent yields in all economic conditions to promote constant growth of capital value.
With the stock market as the premiere choice due to its historical record of outperforming all other investments over time, people are increasingly turning to the stock market as their main investment vehicle for future capital growth. It is here where much higher rates of return can be made with a relatively small increase in risk to capital.
With thousands of books, manuals, internet sites, seminars and courses offering investment strategies and trading systems in the stock market and its derivatives, there are few, if any, that deliver the ideal investment vehicle sought by the long term investor in search of safety and high returns. Not only is there a near total absence of an ideal investment system but there are many that promise eye popping, mind boggling returns and, they are exactly that; mere promises.
Most of the trading systems offered are structured on strategies or activities that work when conditions are ideally suited to the program being peddled. Most of their successes are highly dependent on picking the right stocks at the right time. In other words you must be a good stock picker or use a stock picking service (for a high monthly fee) to select the right ones for you. Market timing is also an important factor in their systems. Again, you must be a good market timer or depend on a service that provides market timing signals (also for a high monthly fee). These supposedly high yield investment programs don’t say anything about how bad things can be when conditions go against their predictions. These programs do exactly as promised: great when the going is good but disastrous when the going is bad. Without doubt many have been taken by these so-called services and while an investor/trader may be successful for a while, the end result over a long period of time is always the same – no better than if you had done the selections yourself.
While there is no one investment system or vehicle that can be an answer-all to the various goals of various investors, there are some investment alternatives that can come close to satisfying the two basic needs of safety and decent returns. Diversified mutual funds have been touted as the answer to these basic needs. But over the years these funds have shown that during downturns in the economy they perform just as badly as the whole investment market in general. And, over the long term, many of these diversified funds have failed to even match market performance in general, much less outperform it.
Enter market derivatives with emphasis options.
Trading in stock options has become very popular with institutional investors as well as private individuals as a sound money management system supplementing their investment portfolios. The ability of stock options to give the investor a wide range of choices is what has made the options market grow considerably over the last two decades. To quote one options expert: “Stock options are the greatest wealth producing tool ever invented on this planet. . . . if you know how to use them”.
The key element of this statement is: . . . if you know how to use them.
For many people the mere mention of stock options, sends shivers up their spine. They look at options as synonymous with great risk. But isn’t driving a car very dangerous for one who doesn’t know how to drive? The ability of stock options to give the investor a wide range of choices in stock market investments is what has made the options market grow by leaps and bounds over the last twenty years. Statistics compiled by the Options Industry Council, a group that educates investors about options, show that volume in options trading has risen tremendously in recent years. Further, studies show that individual investors make up 60% of the market.
For the individual who has sufficient funds and is looking for more than a decent return on his capital and with controllable risk, stock options may be the answer.
There are dozens of option trading systems being employed by individual investors and 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 popularly known as covered call writing.
Of the dozens of option trading systems there is one that can be carried out as a long term investment program offering a fair degree of safety and consistent high returns over time, thus satisfying the investor’s two basic needs of safety and return.
This is the selling of uncovered or naked options.
But wait! Is it not said that selling naked options carries the risk of unlimited losses? Isn’t this a contradiction?
Indeed selling naked options when done carelessly and without a disciplined strategic program is extremely risky!
But by using a carefully planned and disciplined system of trading, the so-called “unlimited risk” factor in selling options can easily be conquered. There is a three-pronged trading strategy being used by one successful options trader that is proving to be a consistent winner in all market conditions. It is a trading technique that couples naked option selling with a modified ratio credit spread and the use of the roll over feature. While naked option selling has acquired a bad rap of being highly risky, this three-pronged trading strategy allows the trader to defeat the risk. Not only is the system able to substantially reduce the risk, it also offers one the ability to become a savvy investor/trader without having to depend on picking the right stocks or timing the market.
It involves utilizing the system in any market condition using only one or a few stocks, ETFs or indexes (the latter two are more effective). One need not worry about finding the right stocks or timing the trades. The fact remains that stocks behave, more often than not, in crazy and irrational ways so that one can almost say that consistently choosing winning stocks is as good as a random walk down Wall Street. Rather than be proactive and try to predict and time the market, as many try to do, this three-pronged investment system is reactive. The prescribed trades are done in reaction to how the market has moved, not in anticipation of its future behavior.
This three-pronged trading system does not promise quick profits or mind boggling yields but steady annual returns in excess of 30%. Many are averaging returns of 50% to 60%. It would be prudent to say that in times of deep downturns the system may not deliver the promised returns but it will hold its own and will definitely outperform the market.
One options trader that has mastered this three-pronged trading technique has decided to share his knowledge of the system by writing an e-book on its methodology. Borrowing from that quote about options being a great wealth producing tool he has aptly titled his work: STOCK OPTIONS: THE GREATEST WEALTH BUILDING TOOL EVER INVENTED. In it he details the step by step methodology of this trading technique and gives an exhaustive series of sample trades covering several months of transactions. It shows the effectiveness of the system in an up market, down market and horizontal market using only one ETF stock. To this day the writer continues to use only one or two ETFs in all his options trades and he includes a web page that shows his current and actual trading results month by month on an ongoing frequency.
By: Daniel Mollat
About the Author:
The author is a semi-retired business executive who now dedicates time to trading stock options. His stock and options trading experience spans nearly 30 years. He has been specializing in selling naked options for the past several years and has written a ‘how to’ ebook about his successful trading system.
For more information: http://www.theoptionseller.com
Filed under Investing by Administrator
Online trading stock and option is happening in a big way. First with the introduction of the internet trading in stocks online became a rage with the people. After having understood that, now the next in course is option trading. Trading in option is different from stocks and it is a test both for new investors as well as experts. Option trading provide a big opportunity for making money but having said that you have to be very cautious while doing it as it can go as easily as it comes.
The risk involved in options trading is very high. You require large sums to deal in options and the also have to be quick in making your choices. It is more for the experienced people to trade in these as compared to the new investors. The risk involved in option trading is very high but on the other hand the return that one gets if the right choice is made is also as large. The large sum that can be made in option trading tends to tempt a lot of new investors but this is one area where one needs to be very cautious so it is best left to the seasoned players. The chance of losing is so high that even the experienced lot end up losing big money at times.
A lot has been said about the negative aspect of option trading now let us look at the positives of the same. The risk involved need not be as high, as the traders can cut down the risk by keeping a check on a section of stocks. The option has a time period after which they will expire. If the expiry date is at the end of the trading week then the trader will have to close the deal within the said period. The deadline is crucial in this case.
Option trading is quite risky as said before and you should have a substantial amount kept aside for this purpose if you want to deal in option trading. It is a game where you win all or lose all. If the choice made by you is right then you can either choose to buy it or else redeem the same for a confirmed price. But unfortunately if luck does not favor you and you end up with the wrong selection then all the money is lost.
Online trading stock and option is good provided you have that kind of a financial back up in case you end up losing a large sum of money. The people who end up making money in this are those who have taken calculated risks and have studied the stocks well. A thorough study of put and call options would have to be made before investing in option trading.
Option traders unlike stock traders can make money regardless of the movement of the stock prices. The research, study and news gathered remaining the same a stock trader can become an option trader and increase his returns by increasing the risk element simultaneously. But a little adventurous stock trader can possibly turn into a good option trader.
By: Wincent Loh
About the Author:
The risk involved in options trading is very high. You require large sums to deal in options and the also have to be quick in making your choices. It is more for the experienced people to trade in these as compared to the new investors. The risk involved in option trading is very high but on the other hand the return that one gets if the right choice is made is also as large. The large sum that can be made in option trading tends to tempt a lot of new investors but this is one area where one needs to be very cautious so it is best left to the seasoned players. The chance of losing is so high that even the experienced lot end up losing big money at times.
A lot has been said about the negative aspect of option trading now let us look at the positives of the same. The risk involved need not be as high, as the traders can cut down the risk by keeping a check on a section of stocks. The option has a time period after which they will expire. If the expiry date is at the end of the trading week then the trader will have to close the deal within the said period. The deadline is crucial in this case.
Option trading is quite risky as said before and you should have a substantial amount kept aside for this purpose if you want to deal in option trading. It is a game where you win all or lose all. If the choice made by you is right then you can either choose to buy it or else redeem the same for a confirmed price. But unfortunately if luck does not favor you and you end up with the wrong selection then all the money is lost.
Online trading stock and option is good provided you have that kind of a financial back up in case you end up losing a large sum of money. The people who end up making money in this are those who have taken calculated risks and have studied the stocks well. A thorough study of put and call options would have to be made before investing in option trading.
Option traders unlike stock traders can make money regardless of the movement of the stock prices. The research, study and news gathered remaining the same a stock trader can become an option trader and increase his returns by increasing the risk element simultaneously. But a little adventurous stock trader can possibly turn into a good option trader.
By: Wincent Loh
About the Author:
Learn how to leverage your capital by using online trading stock and options at options university trading course center
Filed under Finance by Administrator
Option trading provides a really awesome opportunity for you to make a profit in the stock market. The use of stock options in the market is quite often misunderstood and is not as difficult as many people would like you to believe it is. Some of the basics of trading should be known by you so that you can be on the road to trading successfully.
There are different levels of risk associated with trading and the level of risk comes with different types of positions. There are basically two risks – the amount in capital (money) that you are risking in a particular trade and the probability of obtaining a profit from the trade.
When choosing stock options to trade, you should make the choice provided you have leverage and limited risk. If you purchase a debit spread for $1,000 then no matter what you do or what the stock market does, you can only lose the $1,000 in capital that you invested. Options are known as a decaying asset, which means that the it has an expiry date, or time value. The time value lessens as the option moves closer to it’s expiry date – and it is because of this time value that many of them expire worthless (and you’ve lost your $1,000). These are examples of the two types of risk associated with this type of trading – the capital that you have invested ($1,000) and the time value of your stock options expiring worthless (choosing the probability of profit within a time frame).
The time value and expiry date of an option means that you have to be accurate when you are choosing a direction for your position instead of just purchasing stock. If you purchase a call with a four month expiry date, you are limiting yourself to make a profit in only four months whereas if you owned the stock itself, you have ‘limitless’ time to turn a profit unless the company itself goes obsolete.
While it may seem more risky to purchase an option that simply the stock itself, you can gain quite a bit more money in less time with this type of trading. It allows you to control 100 shares for a fraction of the price, less out of pocket money for you and the chance for better profit per dollar for you. However the amount of money that you can make in profit is more limited than if you owned the stock outright. You can increase your level of profitability by researching the stock, the company and the flow of the stock in the market.
By: Sam Perdue
About the Author:
There are different levels of risk associated with trading and the level of risk comes with different types of positions. There are basically two risks – the amount in capital (money) that you are risking in a particular trade and the probability of obtaining a profit from the trade.
When choosing stock options to trade, you should make the choice provided you have leverage and limited risk. If you purchase a debit spread for $1,000 then no matter what you do or what the stock market does, you can only lose the $1,000 in capital that you invested. Options are known as a decaying asset, which means that the it has an expiry date, or time value. The time value lessens as the option moves closer to it’s expiry date – and it is because of this time value that many of them expire worthless (and you’ve lost your $1,000). These are examples of the two types of risk associated with this type of trading – the capital that you have invested ($1,000) and the time value of your stock options expiring worthless (choosing the probability of profit within a time frame).
The time value and expiry date of an option means that you have to be accurate when you are choosing a direction for your position instead of just purchasing stock. If you purchase a call with a four month expiry date, you are limiting yourself to make a profit in only four months whereas if you owned the stock itself, you have ‘limitless’ time to turn a profit unless the company itself goes obsolete.
While it may seem more risky to purchase an option that simply the stock itself, you can gain quite a bit more money in less time with this type of trading. It allows you to control 100 shares for a fraction of the price, less out of pocket money for you and the chance for better profit per dollar for you. However the amount of money that you can make in profit is more limited than if you owned the stock outright. You can increase your level of profitability by researching the stock, the company and the flow of the stock in the market.
By: Sam Perdue
About the Author:
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.
Filed under Finance by Administrator