October 27, 2008
Stock Option Trading Tips and Tricks
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
October 12, 2008
Keeping your Emotions at Bay When Trading Stocks, Futures or Forex
If you’ve been trading for a while, I bet you have had situations where you just felt beaten. You then either came close to quitting, or you tried to re-assure yourself with positive affirmations which at the time felt like a waste of time. If you’re a novice trader this is bound to happen, as your aim is to make money!
Feelings like this can cause you to trade impulsively, whereby you trade with too much risk at the hope of hitting a big winner. You do this because you may want that feeling of success, pride, adrenalin and so on. The problem with this is that should the trade go wrong, you can turn that beaten feeling into a more severe depressed state of mind.
Changing your mindset to become more detached is easier said than done but there are a few things you can do, and with practice and awareness, they can become a lot easier to implement.
Accept losses. You need to accept that losses will occur. Every single trader out there has to deal with losses, so thinking that you’re alone when it comes to dealing with losses is just silly. Before you set out to trade, you should remind yourself that losses occur.
Now the trick here is not to expect a loss every time you trade. This is a negative mindset and believe it or not, if you expect to have a loss every single time you trade, your mind will play tricks on you and make you do things to support your belief. The mind is a very powerful organ!
Instead, rehearse how you will respond to a loss. Before you trade next, visualize placing the trade and then seeing price go against you and actually taking out your stop. Now monitor your posture, your facial expressions, how you are around other people, especially loved ones and so on.
If you’re not happy with the way you respond, in other words you react, then visualize a different response. It will take practice but you do need to be aware of how you respond or react to losses, because once you become aware, you can prepare better and therefore practice a better way.
Once you become aware and change your response, losses won’t hurt you as much, because you’re prepared for them and you now know how you’ll respond.
Finally, be very careful how much of your capital you risk. Can you afford to lose $100 in a trade without it affecting your account balance and your emotions too much? If you answer yes, then only risk that much. Why put yourself in a state of uneasiness and stress, when you don’t need to. Rather than going with a fixed percentage of your capital in every trade, risk what you know you can handle to lose. If it’s only $50 then only risk that.
You should know by now that most of the time, if you only lose a small amount of money you can find it again from somewhere else. It’s when you go for the big home runs that you risk your capital and your emotional state. Don’t let the lure of a big home run ruin the long term rewards of becoming a disciplined, detached and unemotional trader….
By: Dean T Whittingham
About the Author:
Feelings like this can cause you to trade impulsively, whereby you trade with too much risk at the hope of hitting a big winner. You do this because you may want that feeling of success, pride, adrenalin and so on. The problem with this is that should the trade go wrong, you can turn that beaten feeling into a more severe depressed state of mind.
Changing your mindset to become more detached is easier said than done but there are a few things you can do, and with practice and awareness, they can become a lot easier to implement.
Accept losses. You need to accept that losses will occur. Every single trader out there has to deal with losses, so thinking that you’re alone when it comes to dealing with losses is just silly. Before you set out to trade, you should remind yourself that losses occur.
Now the trick here is not to expect a loss every time you trade. This is a negative mindset and believe it or not, if you expect to have a loss every single time you trade, your mind will play tricks on you and make you do things to support your belief. The mind is a very powerful organ!
Instead, rehearse how you will respond to a loss. Before you trade next, visualize placing the trade and then seeing price go against you and actually taking out your stop. Now monitor your posture, your facial expressions, how you are around other people, especially loved ones and so on.
If you’re not happy with the way you respond, in other words you react, then visualize a different response. It will take practice but you do need to be aware of how you respond or react to losses, because once you become aware, you can prepare better and therefore practice a better way.
Once you become aware and change your response, losses won’t hurt you as much, because you’re prepared for them and you now know how you’ll respond.
Finally, be very careful how much of your capital you risk. Can you afford to lose $100 in a trade without it affecting your account balance and your emotions too much? If you answer yes, then only risk that much. Why put yourself in a state of uneasiness and stress, when you don’t need to. Rather than going with a fixed percentage of your capital in every trade, risk what you know you can handle to lose. If it’s only $50 then only risk that.
You should know by now that most of the time, if you only lose a small amount of money you can find it again from somewhere else. It’s when you go for the big home runs that you risk your capital and your emotional state. Don’t let the lure of a big home run ruin the long term rewards of becoming a disciplined, detached and unemotional trader….
By: Dean T 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 eduction, 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.
Filed under Investing by Administrator