December 14, 2008
Why Simple Put Options Buying Fail in Volatile Markets
The recent stock market crisis (2008) took the stock market down by more than 30% in less than a year. This has a lot of traders thinking that big money can be made simply by buying put options on stocks that will move down with the market, especially high beta ones. Nothing can be further from the truth. Most amateur options traders who did that either failed to make any money, make very little money or outright lose money even though the stock moved down a lot as predicted. Why is that so?
Volatile market conditions are especially bad for buying stock options due to 2 reasons. Firstly, the extreme volatility resulted in extremely high implied volatility which increases the extrinsic value of options dramatically, depressing its profitability. Secondly, extreme volatility leads to extreme speculation which encourages market makers to open up the bid ask spread to an unreasonably wide level in order to fill their own pockets.
Extrinsic value is the price one pays to the seller of stock options in order to justify the risk undertaken by the seller for giving such a right to the buyer. This price is arrived at in theory by options pricing models such as the Black-Scholes model. Extrinsic value directly affects the profitability of the options as the higher the extrinsic value of an option, the more the underlying stock needs to move in order to breakeven or profit. For example, if two options based on the same underlying stock, the same strike price and expiration month have different extrinsic values (of course this cannot be the case in reality), the option with the higher extrinsic value will make lesser money in profit than the option with the lower extrinsic value when the underlying stock moves by the same amount when held to expiration.
Extrinsic value is affected mainly by the level of implied volatility of the underlying stock. If the underlying stock is expected to make big moves, implied volatility goes up and the extrinsic values of its options go up as well. In times of extreme market volatility, extrinsic values go up dramatically across the board, depressing the profitability of options. In fact, one could end up losing more money than usual if the stock does not move according to expectations due to the higher extrinsic value paid. This is why a lot of amateur options traders who simply bought put options recently failed to make much money or any at all. This situation is made even worse by the wide bid ask spreads provided by the market makers.
Market makers are whom options traders really trade options with. When you buy an option, you are really buying directly from market makers who hold an inventory of those options and when you sell options, you are really selling back to these market makers who want to maintain an inventory of those options. Market makers buy and sell options in the exchange, ensuring the liquidity of all options contracts and profit primarily from the bid ask spread that they provide, buying at the bid and selling at the ask. They function exactly like used car dealers, buying at lower prices and selling at higher prices. Typically, the more actively traded the options are, the closer the bid ask spread tend to be due to competition between market makers, however, in times of extreme volatility where there are a lot more buying and selling on panic and more than enough business to go around for all market makers, they usually open up the bid ask spread in order to make even more profits. That is why we saw unusually wide bid ask spreads in this recent crisis. Wider bid ask spreads result in larger upfront losses which again depress the already depressed profitability of stock options due to the higher extrinsic values.
The higher extrinsic value and wider bid ask spread makes profiting from simple stock options buying extremely difficult and are the main reasons why amateur options traders fail to make money buying put options during the recent stock market crisis. Conversely, writing options are an extremely profitable way to trade options during a volatile market where extrinsic values are high. Naked writes and Credit Spreads are really the way to go in a volatile market condition and are what most beginner options traders do not know about. Selling options instead of buying them turns the table around and creates an extremely profitable position during times of high extrinsic value. Learn more about credit spreads at http://www.optiontradingpedia.com/free_debit_credit_spread.htm now.
By: Jason Ng
About the Author:
Volatile market conditions are especially bad for buying stock options due to 2 reasons. Firstly, the extreme volatility resulted in extremely high implied volatility which increases the extrinsic value of options dramatically, depressing its profitability. Secondly, extreme volatility leads to extreme speculation which encourages market makers to open up the bid ask spread to an unreasonably wide level in order to fill their own pockets.
Extrinsic value is the price one pays to the seller of stock options in order to justify the risk undertaken by the seller for giving such a right to the buyer. This price is arrived at in theory by options pricing models such as the Black-Scholes model. Extrinsic value directly affects the profitability of the options as the higher the extrinsic value of an option, the more the underlying stock needs to move in order to breakeven or profit. For example, if two options based on the same underlying stock, the same strike price and expiration month have different extrinsic values (of course this cannot be the case in reality), the option with the higher extrinsic value will make lesser money in profit than the option with the lower extrinsic value when the underlying stock moves by the same amount when held to expiration.
Extrinsic value is affected mainly by the level of implied volatility of the underlying stock. If the underlying stock is expected to make big moves, implied volatility goes up and the extrinsic values of its options go up as well. In times of extreme market volatility, extrinsic values go up dramatically across the board, depressing the profitability of options. In fact, one could end up losing more money than usual if the stock does not move according to expectations due to the higher extrinsic value paid. This is why a lot of amateur options traders who simply bought put options recently failed to make much money or any at all. This situation is made even worse by the wide bid ask spreads provided by the market makers.
Market makers are whom options traders really trade options with. When you buy an option, you are really buying directly from market makers who hold an inventory of those options and when you sell options, you are really selling back to these market makers who want to maintain an inventory of those options. Market makers buy and sell options in the exchange, ensuring the liquidity of all options contracts and profit primarily from the bid ask spread that they provide, buying at the bid and selling at the ask. They function exactly like used car dealers, buying at lower prices and selling at higher prices. Typically, the more actively traded the options are, the closer the bid ask spread tend to be due to competition between market makers, however, in times of extreme volatility where there are a lot more buying and selling on panic and more than enough business to go around for all market makers, they usually open up the bid ask spread in order to make even more profits. That is why we saw unusually wide bid ask spreads in this recent crisis. Wider bid ask spreads result in larger upfront losses which again depress the already depressed profitability of stock options due to the higher extrinsic values.
The higher extrinsic value and wider bid ask spread makes profiting from simple stock options buying extremely difficult and are the main reasons why amateur options traders fail to make money buying put options during the recent stock market crisis. Conversely, writing options are an extremely profitable way to trade options during a volatile market where extrinsic values are high. Naked writes and Credit Spreads are really the way to go in a volatile market condition and are what most beginner options traders do not know about. Selling options instead of buying them turns the table around and creates an extremely profitable position during times of high extrinsic value. Learn more about credit spreads at http://www.optiontradingpedia.com/free_debit_credit_spread.htm now.
By: Jason Ng
About the Author:
Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.
Filed under Finance by Administrator
December 13, 2008
Why Simple Put Options Buying Fail in Volatile Markets
The recent stock market crisis (2008) took the stock market down by more than 30% in less than a year. This has a lot of traders thinking that big money can be made simply by buying put options on stocks that will move down with the market, especially high beta ones. Nothing can be further from the truth. Most amateur options traders who did that either failed to make any money, make very little money or outright lose money even though the stock moved down a lot as predicted. Why is that so?
Volatile market conditions are especially bad for buying stock options due to 2 reasons. Firstly, the extreme volatility resulted in extremely high implied volatility which increases the extrinsic value of options dramatically, depressing its profitability. Secondly, extreme volatility leads to extreme speculation which encourages market makers to open up the bid ask spread to an unreasonably wide level in order to fill their own pockets.
Extrinsic value is the price one pays to the seller of stock options in order to justify the risk undertaken by the seller for giving such a right to the buyer. This price is arrived at in theory by options pricing models such as the Black-Scholes model. Extrinsic value directly affects the profitability of the options as the higher the extrinsic value of an option, the more the underlying stock needs to move in order to breakeven or profit. For example, if two options based on the same underlying stock, the same strike price and expiration month have different extrinsic values (of course this cannot be the case in reality), the option with the higher extrinsic value will make lesser money in profit than the option with the lower extrinsic value when the underlying stock moves by the same amount when held to expiration.
Extrinsic value is affected mainly by the level of implied volatility of the underlying stock. If the underlying stock is expected to make big moves, implied volatility goes up and the extrinsic values of its options go up as well. In times of extreme market volatility, extrinsic values go up dramatically across the board, depressing the profitability of options. In fact, one could end up losing more money than usual if the stock does not move according to expectations due to the higher extrinsic value paid. This is why a lot of amateur options traders who simply bought put options recently failed to make much money or any at all. This situation is made even worse by the wide bid ask spreads provided by the market makers.
Market makers are whom options traders really trade options with. When you buy an option, you are really buying directly from market makers who hold an inventory of those options and when you sell options, you are really selling back to these market makers who want to maintain an inventory of those options. Market makers buy and sell options in the exchange, ensuring the liquidity of all options contracts and profit primarily from the bid ask spread that they provide, buying at the bid and selling at the ask. They function exactly like used car dealers, buying at lower prices and selling at higher prices. Typically, the more actively traded the options are, the closer the bid ask spread tend to be due to competition between market makers, however, in times of extreme volatility where there are a lot more buying and selling on panic and more than enough business to go around for all market makers, they usually open up the bid ask spread in order to make even more profits. That is why we saw unusually wide bid ask spreads in this recent crisis. Wider bid ask spreads result in larger upfront losses which again depress the already depressed profitability of stock options due to the higher extrinsic values.
The higher extrinsic value and wider bid ask spread makes profiting from simple stock options buying extremely difficult and are the main reasons why amateur options traders fail to make money buying put options during the recent stock market crisis. Conversely, writing options are an extremely profitable way to trade options during a volatile market where extrinsic values are high. Naked writes and Credit Spreads are really the way to go in a volatile market condition and are what most beginner options traders do not know about. Selling options instead of buying them turns the table around and creates an extremely profitable position during times of high extrinsic value. Learn more about credit spreads at http://www.optiontradingpedia.com/free_debit_credit_spread.htm now.
By: Jason Ng
About the Author:
Volatile market conditions are especially bad for buying stock options due to 2 reasons. Firstly, the extreme volatility resulted in extremely high implied volatility which increases the extrinsic value of options dramatically, depressing its profitability. Secondly, extreme volatility leads to extreme speculation which encourages market makers to open up the bid ask spread to an unreasonably wide level in order to fill their own pockets.
Extrinsic value is the price one pays to the seller of stock options in order to justify the risk undertaken by the seller for giving such a right to the buyer. This price is arrived at in theory by options pricing models such as the Black-Scholes model. Extrinsic value directly affects the profitability of the options as the higher the extrinsic value of an option, the more the underlying stock needs to move in order to breakeven or profit. For example, if two options based on the same underlying stock, the same strike price and expiration month have different extrinsic values (of course this cannot be the case in reality), the option with the higher extrinsic value will make lesser money in profit than the option with the lower extrinsic value when the underlying stock moves by the same amount when held to expiration.
Extrinsic value is affected mainly by the level of implied volatility of the underlying stock. If the underlying stock is expected to make big moves, implied volatility goes up and the extrinsic values of its options go up as well. In times of extreme market volatility, extrinsic values go up dramatically across the board, depressing the profitability of options. In fact, one could end up losing more money than usual if the stock does not move according to expectations due to the higher extrinsic value paid. This is why a lot of amateur options traders who simply bought put options recently failed to make much money or any at all. This situation is made even worse by the wide bid ask spreads provided by the market makers.
Market makers are whom options traders really trade options with. When you buy an option, you are really buying directly from market makers who hold an inventory of those options and when you sell options, you are really selling back to these market makers who want to maintain an inventory of those options. Market makers buy and sell options in the exchange, ensuring the liquidity of all options contracts and profit primarily from the bid ask spread that they provide, buying at the bid and selling at the ask. They function exactly like used car dealers, buying at lower prices and selling at higher prices. Typically, the more actively traded the options are, the closer the bid ask spread tend to be due to competition between market makers, however, in times of extreme volatility where there are a lot more buying and selling on panic and more than enough business to go around for all market makers, they usually open up the bid ask spread in order to make even more profits. That is why we saw unusually wide bid ask spreads in this recent crisis. Wider bid ask spreads result in larger upfront losses which again depress the already depressed profitability of stock options due to the higher extrinsic values.
The higher extrinsic value and wider bid ask spread makes profiting from simple stock options buying extremely difficult and are the main reasons why amateur options traders fail to make money buying put options during the recent stock market crisis. Conversely, writing options are an extremely profitable way to trade options during a volatile market where extrinsic values are high. Naked writes and Credit Spreads are really the way to go in a volatile market condition and are what most beginner options traders do not know about. Selling options instead of buying them turns the table around and creates an extremely profitable position during times of high extrinsic value. Learn more about credit spreads at http://www.optiontradingpedia.com/free_debit_credit_spread.htm now.
By: Jason Ng
About the Author:
Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.
Filed under Finance by Administrator
November 5, 2008
Stock Trading for Bold Brave Investors
Stock trading is one of the last true meritocracies. All that matters for your investment success are your own decisions. Stock trading is a precision-based activity and one tiny mistake in judgment could send you plummeting right to the bottom and result in a huge loss.
Likewise, the opposite could happen. You may make a great buying decision that will put you on the path to riches. Traditional stock trading is done at stock exchanges, which are places where buyers and sellers meet and decide on a price, although electronic trading is gaining in popularity. Stock trading is affected by how well the economy is doing and by basic supply and demand considerations.
Stock Trading is a get rich slow process. Money can be made, but it takes time. Stock trading is something that interests many people because it offers them a chance to make money without breaking into a sweat. In addition, it has a lot of excitement attached to it especially when using short term strategies that help pit traders against the stock market.
Stock Trading is trading stocks and shares of different types of companies and organization at the stock exchange. In every country, there is a stock exchange where various companies get their shares listed, when they arrange to raise required funds by means of issuing shares.
Stock trading is a very competitive field and in order to succeed you need to FOCUS on a set of simple strategies that you can implement without hesitation. The real “secret” of the stock market game is enclosed within the trading set ups and market signals you rely on to decide when to buy or when to sell shares. Stock trading is a business (because it is done for making money).
So as in a business, in stock trading, one needs to complete solid planning before making any buy/sell/trade. Stock trading is viewed by some people as a very complicated matter. This is regarded by many as an arena better reserved for those who have extensive exposure and experience in stock trading.
Stock trading is a game in which you cannot afford to be average. Thousands of new and inexperienced traders are being charged hundreds, even thousands of dollars by scam artists and self proclaimed experts for dubious stock picking services and mechanical buy and sell signal generators.
Stock trading is a relatively simple activity compared with other professions, particularly with the tools available in today’s Internet world. It is certainly within your abilities, and as you educate yourself on and build your skills, you’ll find that your fears subside as your confidence grows.
Researching a stock and then buying online it is one part of the story. The other part being how to plan a trade with an exit strategy? You must research the risks attached to online trading to make sure you are prepared for the worst. Be determined and goal orientated.
Exchange traded funds are good to use for trading and investing. By keeping trading simple, there is less stress and more opportunity to profit. Exchange Traded Funds, also known as ETFs, are index funds traded on the major stock exchanges just like stocks. An index fund involves a collection of securities, much like mutual funds, except that ETFs differ from mutual funds in some distinctive ways.
Options are bets about the future price movement of exchange traded securities. The prospect of unusually high returns always signals unusually high risk so be careful about trading options. Timing is everything.
Options are a great way to both earn and lose a lot of money. If you’re interested in involving yourself in the more unpredictable, risky, and spontaneous part of the stock market then trading options is something you should investigate. Option strategy is about selection of the best stock opportunities and following your signals. Here, you can achieve success if you are acquainted with the correct option trading strategy .
There are online resources available that will provide you with free simulated stock and option trading. You will easily find enough information to start your trading venture. You can practice trading stocks, options, spreads, futures, short sells, and so forth. Just run a search for “demo stock trading accounts” and you will find a good list to research.
Stock and option trading is a big game in many ways. But as it is a game involving the exchange of money if you play you need to take the game seriously.
By: Gerald Greene
About the Author:
Likewise, the opposite could happen. You may make a great buying decision that will put you on the path to riches. Traditional stock trading is done at stock exchanges, which are places where buyers and sellers meet and decide on a price, although electronic trading is gaining in popularity. Stock trading is affected by how well the economy is doing and by basic supply and demand considerations.
Stock Trading is a get rich slow process. Money can be made, but it takes time. Stock trading is something that interests many people because it offers them a chance to make money without breaking into a sweat. In addition, it has a lot of excitement attached to it especially when using short term strategies that help pit traders against the stock market.
Stock Trading is trading stocks and shares of different types of companies and organization at the stock exchange. In every country, there is a stock exchange where various companies get their shares listed, when they arrange to raise required funds by means of issuing shares.
Stock trading is a very competitive field and in order to succeed you need to FOCUS on a set of simple strategies that you can implement without hesitation. The real “secret” of the stock market game is enclosed within the trading set ups and market signals you rely on to decide when to buy or when to sell shares. Stock trading is a business (because it is done for making money).
So as in a business, in stock trading, one needs to complete solid planning before making any buy/sell/trade. Stock trading is viewed by some people as a very complicated matter. This is regarded by many as an arena better reserved for those who have extensive exposure and experience in stock trading.
Stock trading is a game in which you cannot afford to be average. Thousands of new and inexperienced traders are being charged hundreds, even thousands of dollars by scam artists and self proclaimed experts for dubious stock picking services and mechanical buy and sell signal generators.
Stock trading is a relatively simple activity compared with other professions, particularly with the tools available in today’s Internet world. It is certainly within your abilities, and as you educate yourself on and build your skills, you’ll find that your fears subside as your confidence grows.
Researching a stock and then buying online it is one part of the story. The other part being how to plan a trade with an exit strategy? You must research the risks attached to online trading to make sure you are prepared for the worst. Be determined and goal orientated.
Exchange traded funds are good to use for trading and investing. By keeping trading simple, there is less stress and more opportunity to profit. Exchange Traded Funds, also known as ETFs, are index funds traded on the major stock exchanges just like stocks. An index fund involves a collection of securities, much like mutual funds, except that ETFs differ from mutual funds in some distinctive ways.
Options are bets about the future price movement of exchange traded securities. The prospect of unusually high returns always signals unusually high risk so be careful about trading options. Timing is everything.
Options are a great way to both earn and lose a lot of money. If you’re interested in involving yourself in the more unpredictable, risky, and spontaneous part of the stock market then trading options is something you should investigate. Option strategy is about selection of the best stock opportunities and following your signals. Here, you can achieve success if you are acquainted with the correct option trading strategy .
There are online resources available that will provide you with free simulated stock and option trading. You will easily find enough information to start your trading venture. You can practice trading stocks, options, spreads, futures, short sells, and so forth. Just run a search for “demo stock trading accounts” and you will find a good list to research.
Stock and option trading is a big game in many ways. But as it is a game involving the exchange of money if you play you need to take the game seriously.
By: Gerald Greene
About the Author:
Gerald “Taipan” Greene is a retired forex trader and portfolio manager who worked in Asia for over 20 years. The nickname was acquired in Hong Kong and is now used for a number of financial, political, and Internet business related blogs. One of them is at Learn to Trade Stocks
Filed under Finance by Administrator
November 4, 2008
Buying Stock versus Stock Option Trading
There is quite a difference between buying stocks outright and purchasing stock options. When you purchase an option, you are betting on the direction of the market. However, option trading has very different characteristics than purchasing shares and there is a lot of terminology and tricks of the trade that a new trader should learn in order to successfully trade options.
There are two types of options - calls and puts. Purchasing a call option means that you have the right (however, not the obligation) to purchase the stock at the strike price at any time before your option expires. When you purchase put option, you have the right (however, again not the obligation) to sell the stock at the strike price any time before the expiry date of the option. A call option is purchased when you expect the price of the stock to inflate, a put option when you expect the price to deflate.
The main difference between buying stocks compared to options is that when you purchase a stock, you own a piece of the company whereas when you purchase a stock option, you simply have a contract that allows you to buy and sell the stock at a specific price before the option expires. There are always two sides for every option transaction - a buyer and a seller so for each option, either call or put that you purchase, there is someone selling it.
Stock option trading can be compared to betting on the racetrack where you are betting against other people. Buying stocks is compared to gambling in the casino, where you bet against the house. Trading options is a ‘zero-sum game’, which means that the option buyers gain equals the sellers loss and vice versa - they are mirror images of each other so there is no positive or negative cost involved.
Stock option trading can be a very lucrative game and many traders use options as part of their larger strategy based on a selection of stocks. It’s important that if you want to begin stock option trading that you understand the ins and outs of the market, the stocks and stock option trading before leaping in head first. There’s a lot to do with option trading and you can be quite successful if you take the time to learn these skills as well as research the company and stock history of the stock and company that you are looking to purchase stock option in.
By: Sam Perdue
About the Author:
There are two types of options - calls and puts. Purchasing a call option means that you have the right (however, not the obligation) to purchase the stock at the strike price at any time before your option expires. When you purchase put option, you have the right (however, again not the obligation) to sell the stock at the strike price any time before the expiry date of the option. A call option is purchased when you expect the price of the stock to inflate, a put option when you expect the price to deflate.
The main difference between buying stocks compared to options is that when you purchase a stock, you own a piece of the company whereas when you purchase a stock option, you simply have a contract that allows you to buy and sell the stock at a specific price before the option expires. There are always two sides for every option transaction - a buyer and a seller so for each option, either call or put that you purchase, there is someone selling it.
Stock option trading can be compared to betting on the racetrack where you are betting against other people. Buying stocks is compared to gambling in the casino, where you bet against the house. Trading options is a ‘zero-sum game’, which means that the option buyers gain equals the sellers loss and vice versa - they are mirror images of each other so there is no positive or negative cost involved.
Stock option trading can be a very lucrative game and many traders use options as part of their larger strategy based on a selection of stocks. It’s important that if you want to begin stock option trading that you understand the ins and outs of the market, the stocks and stock option trading before leaping in head first. There’s a lot to do with option trading and you can be quite successful if you take the time to learn these skills as well as research the company and stock history of the stock and company that you are looking to purchase stock option in.
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
November 3, 2008
Stock Options Trading Information
Stock options trading can be ridiculously tough if you don’t know what you are doing. You can lose the whole of your capital within the first few days or even hours if you aren’t careful. The difference between the successes and those who go broke is most often in the quality of their information. Read on to see how good quality stock information can help you.
The most fundamental thing you want to understand when you are starting out is exactly what it all means. Learn as much terminology and slang or jargon as you can. Do you really want to lose money because you don’t understand what your broker is telling you? Not only will this lose your money quick time, but it will also mean your broker has less faith in you, and will be less likely to come to you with hot tips. That’s not what you want – a broker with reliable tips is worth his weight in gold, so do anything you can to stay on his good side.
Make sure you are getting into stock option trading for the right reason. There are three main kinds of trading: investing, speculation, and trading. If you are looking to invest, this is more of a long term strategy, and to be blunt, there is little point doing this with options. Why? Because options have a limited shelf life. All options contracts expire, mostly within a year, and their value gradually diminishes the closer they get to the expiry date. Not exactly an investment model to rival Warren Buffett is it?
The final piece of the puzzle for anyone looking to get involved with options is to learn the difference between them. There are two main types of options, and they are completely different. Get them confused and you will almost certainly lose everything. The two kinds of options are known as Calls, and Puts. In simple terms, holding a Call option contract gives you the option (hence the name) to buy 100 particular stocks at a set price – regardless of the market price. This means you can buy low, even if the market is flying high. Puts are the polar opposite of Calls, in that they give the option to sell 100 designated stocks at a predetermined price – very handy if the market has taken a downturn!
Hopefully there is enough information here for you to understand the basics of stock option trading.
By: Robert
About the Author:
The most fundamental thing you want to understand when you are starting out is exactly what it all means. Learn as much terminology and slang or jargon as you can. Do you really want to lose money because you don’t understand what your broker is telling you? Not only will this lose your money quick time, but it will also mean your broker has less faith in you, and will be less likely to come to you with hot tips. That’s not what you want – a broker with reliable tips is worth his weight in gold, so do anything you can to stay on his good side.
Make sure you are getting into stock option trading for the right reason. There are three main kinds of trading: investing, speculation, and trading. If you are looking to invest, this is more of a long term strategy, and to be blunt, there is little point doing this with options. Why? Because options have a limited shelf life. All options contracts expire, mostly within a year, and their value gradually diminishes the closer they get to the expiry date. Not exactly an investment model to rival Warren Buffett is it?
The final piece of the puzzle for anyone looking to get involved with options is to learn the difference between them. There are two main types of options, and they are completely different. Get them confused and you will almost certainly lose everything. The two kinds of options are known as Calls, and Puts. In simple terms, holding a Call option contract gives you the option (hence the name) to buy 100 particular stocks at a set price – regardless of the market price. This means you can buy low, even if the market is flying high. Puts are the polar opposite of Calls, in that they give the option to sell 100 designated stocks at a predetermined price – very handy if the market has taken a downturn!
Hopefully there is enough information here for you to understand the basics of stock option trading.
By: Robert
About the Author:
Filed under Finance by Administrator
Have you ever lost all your money in Stock Options trading?
If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?
The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.
So, how do we avoid such a predicament?
Simply by applying the golden rule of stock options trading! That is:
Use Only Money You Could Afford To Lose!
Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.
For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!
In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!
So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!
By: Jason Ng
About the Author:
If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?
The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.
So, how do we avoid such a predicament?
Simply by applying the golden rule of stock options trading! That is:
Use Only Money You Could Afford To Lose!
Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.
For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!
In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!
So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!
By: Jason Ng
About the Author:
Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.
Filed under Finance by Administrator
November 1, 2008
Penny Priced Stock Options
Sometimes investors feel that they do not have sufficient leverage. When this happens, they find it difficult to use the opportunities that present themselves and make a profit from them. Penny options are one good way to gain leverage and build your portfolio at the same time.
A lot of stocks are priced incrementally - for example, at five or ten cent increments. Penny stock pricing methods do not use increments but vary by pennies. Traders can increase their leverage with penny stocks because they can get into trading with less capital to start with and if their stocks should fail, they have not lost too much.
With penny options, you can make a profit in a relatively short time because you are playing in a smaller field and with less money. A lot of people like the penny stock idea because you cannot lose more than your initial investment. Options, as opposed to underlying stock, do have some drawbacks though. Penny options can change massively in a short period of time. These might be positive changes for you or negative.
It is important to find out whether a penny option would suit your requirements. A penny stock might be cheap but perhaps the liquidity does not suit your needs. You have to find out what the brokerage cancellation policy is too. Also, ask what the time decay of the options is before purchasing them. Before you buy anything, ask yourself for how long you plan to be trading the options. You should buy options that expire well after when you plan to sell, so if you want to trade an option for 10 days, choose one ending in 30 or 40 days.
If you already decided that you are going to trade for one day only, there is no need to worry about expiration dates. The front month option should work fine for you in this instance. Penny options are not actually that common these days. Traders and crafty brokerage firms use the method so others should catch up soon.
You have to be patient when trading penny stocks. The options can move quite a lot in just a few minutes so if you are too nervous, you need to relax rather than panic. If you are prone to panic and stress, maybe penny options are not a good idea for you.
If you are interested in increasing leverage but do not have enough capital to begin with blue chips, penny options are a good way to start.
By: Mark Crisp
About the Author:
A lot of stocks are priced incrementally - for example, at five or ten cent increments. Penny stock pricing methods do not use increments but vary by pennies. Traders can increase their leverage with penny stocks because they can get into trading with less capital to start with and if their stocks should fail, they have not lost too much.
With penny options, you can make a profit in a relatively short time because you are playing in a smaller field and with less money. A lot of people like the penny stock idea because you cannot lose more than your initial investment. Options, as opposed to underlying stock, do have some drawbacks though. Penny options can change massively in a short period of time. These might be positive changes for you or negative.
It is important to find out whether a penny option would suit your requirements. A penny stock might be cheap but perhaps the liquidity does not suit your needs. You have to find out what the brokerage cancellation policy is too. Also, ask what the time decay of the options is before purchasing them. Before you buy anything, ask yourself for how long you plan to be trading the options. You should buy options that expire well after when you plan to sell, so if you want to trade an option for 10 days, choose one ending in 30 or 40 days.
If you already decided that you are going to trade for one day only, there is no need to worry about expiration dates. The front month option should work fine for you in this instance. Penny options are not actually that common these days. Traders and crafty brokerage firms use the method so others should catch up soon.
You have to be patient when trading penny stocks. The options can move quite a lot in just a few minutes so if you are too nervous, you need to relax rather than panic. If you are prone to panic and stress, maybe penny options are not a good idea for you.
If you are interested in increasing leverage but do not have enough capital to begin with blue chips, penny options are a good way to start.
By: Mark Crisp
About the Author:
Mark Crisp is the Weekly Momentum Stock Trader Get your free momentum stock trading course at: http://www.stressfreetrading.com
Filed under Finance by Administrator
Trying to make money from the markets even armed with a set of rules is likely to be met with failure. Over 90% of traders fail to make consistent money in the markets because their expectations are beyond their skill levels and their resources. Ill-equipped they are easy prey for the trap that is the financial markets.
Skills include knowledge and knowledge starts with the basics, but it doesn’t end there. Knowledge means understanding how the brokerage side of things works and how your trading platform works, your legal requirements, your method of analysis and process for trading and much more.
Then there is skill level. If you’re hopeless at fixing a computer, what are you going to do if it crashes right at the point where you’ve placed a trade but haven’t put your stop loss in yet?
What about your math skills? Can you quickly determine the exchange rate between your own currency and the currency the asset you want to trade is in, and determine the effect this will have on your own account?
Do you know how to calculate percentages for risk management (do you even know what that is)? This is highly important because it determines how quickly your account diminishes with a losing streak.
What about your emotional level? Are you quick tempered or do you beat yourself up easily? Maybe you’re strong and resilient or have you come from a disciplined background. Either way, these emotions all have their place in the scheme of things.
Having a poor emotional habit (such as being impatient), doesn’t mean you won’t succeed at trading, but it does need to be addressed, however you must also look for your strengths, as these are pillars to your success.
It’s also very important you understand what your resources are. These include your capital, and how much of that can you afford to lose? Why trade a system requiring a large capital base if all you have is $10,000.
Time is also a resource. How much can you allocate to trading, learning, back-testing, managing etc? Do you honestly think trading is just placing trades? The longer you are a trader, the less learning time will be required.
Skills, as mentioned before, these are resources too. Are you good at certain things but need help with others such as using a computer? Math is an obvious one, but there is also the writing of journals and logging your trades, keeping accounts and so on.
Strengths are resources. When you are strong at something such as being disciplined this will become one of your assets and one of your edges in trading. Know what you’re strengths are.
Software and hardware are resources. Do you know how to use your trading platform? Is your internet speed and your computers processing power sufficient for your method of trading?
When you list your skills and resources, and everything you can think of that may contribute to and affect your trading business, you’ll find choosing the right style and method of trading that is going to help you achieve your goals that much easier.
You won’t spend good hard earned money on trading systems that can not possibly function with your list of resources. It is better you know yourself, your resources and what you can bring to the markets than trying to fit into something created by somebody else who has a completely different list of skills and resources.
By: Dean Whittingham
About the Author:
Skills include knowledge and knowledge starts with the basics, but it doesn’t end there. Knowledge means understanding how the brokerage side of things works and how your trading platform works, your legal requirements, your method of analysis and process for trading and much more.
Then there is skill level. If you’re hopeless at fixing a computer, what are you going to do if it crashes right at the point where you’ve placed a trade but haven’t put your stop loss in yet?
What about your math skills? Can you quickly determine the exchange rate between your own currency and the currency the asset you want to trade is in, and determine the effect this will have on your own account?
Do you know how to calculate percentages for risk management (do you even know what that is)? This is highly important because it determines how quickly your account diminishes with a losing streak.
What about your emotional level? Are you quick tempered or do you beat yourself up easily? Maybe you’re strong and resilient or have you come from a disciplined background. Either way, these emotions all have their place in the scheme of things.
Having a poor emotional habit (such as being impatient), doesn’t mean you won’t succeed at trading, but it does need to be addressed, however you must also look for your strengths, as these are pillars to your success.
It’s also very important you understand what your resources are. These include your capital, and how much of that can you afford to lose? Why trade a system requiring a large capital base if all you have is $10,000.
Time is also a resource. How much can you allocate to trading, learning, back-testing, managing etc? Do you honestly think trading is just placing trades? The longer you are a trader, the less learning time will be required.
Skills, as mentioned before, these are resources too. Are you good at certain things but need help with others such as using a computer? Math is an obvious one, but there is also the writing of journals and logging your trades, keeping accounts and so on.
Strengths are resources. When you are strong at something such as being disciplined this will become one of your assets and one of your edges in trading. Know what you’re strengths are.
Software and hardware are resources. Do you know how to use your trading platform? Is your internet speed and your computers processing power sufficient for your method of trading?
When you list your skills and resources, and everything you can think of that may contribute to and affect your trading business, you’ll find choosing the right style and method of trading that is going to help you achieve your goals that much easier.
You won’t spend good hard earned money on trading systems that can not possibly function with your list of resources. It is better you know yourself, your resources and what you can bring to the markets than trying to fit into something created by somebody else who has a completely different list of skills and resources.
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
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