Watchlist expanding

The daily watch list is growing, and along with the ETF's I have also got some great stocks to look at as well.
 
These are split into the Risky strategy (RS), and the Low risk Strategy (LS).  When a trade becomes viable, I will give you more details as to what they are.  Better to try to get the watch list functioning properly first.  At the moment all of these are potentials on a watch list, and certainly not something you should look at investing yet.
 
They are broken out as follows:
 
RS:
 
LULU
BIDU
MELI
SINA
 
LS:
MMSI
FMCN
BJRI
IRM
SLGN
 
All these are trending upwards, and I am awaiting a trigger that signifies a pull back which will give us an opportunity to enter a trade on the bullish side.  The RS strategy will take advantage of this with a straight Call (a bullish trade), and the the LS strategy will take advantage of this with a put credit spread.  The credit spread is a slightly more complicated trade to put together, but when the opportunity arises I will guide you through exactly what options you may choose to pick. The concept - once you get your head around it is pretty easy.  We buy puts as a credit because if the price of the stock at expiration is above both puts, we earn money.  As I said, when we get to the trade, all will be explained.
 
On our ETF watch list we have some good potential trades coming up in the next few weeks.  Our watch list looks like this at the moment:
 
DIA
QQQQ
IWM
XLF
XLE
SPY
SMH
 
Of these, only the DIA is trending upwards, and we have had a trigger - although due to my rules, we only have one day left for the trade to go our way. This is still a potential bullish play, but I will be waiting this one out.
 
IWM, XLE, and SPY are all flat at the moment, so these are effectively off the radar for any sort of trades until we know which way they will take off.  If it goes flat for the next week, I do have one more play that will benefit in a sideways market, but the sideways market needs to be well established too ensure that the trade does not go awry.
 
The Q's and SMH are both down trending and I am keeping my eyes open for a trigger to look for trades with them.
 
I would envisage that within the next couple of weeks we will have a trade opportunity, but the main thing is too not jump into a trade for the sheer impatience of it.  That is a sure way to lose money on options.
 
A little bit more about my strategy would be useful so that people can have a little more confidence in the system that I have:
 
First and foremost it is about picking good strong stocks that are leading their way in their respective markets.  I intend to choose stocks that are expensive - over $50 for the RS as these will give us the biggest returns (for every $1 the stock moves, the option price should increase by $1 for in the money options.  Think about this for a second.  If you bought 100 shares of company X for $50 and it moves up to $55 - you would be pretty pleased.  A 10% increase in a stock is a great investment. However, to have those 100 shares you would need to have $5000 free - or if you were properly using money management - you would need an account size of roughly $166,666 to place a trade with only 3% of your account used.  You can start to see that to make that cash, you are not using it very efficiently.
 
Think of an option where you pay $2 per option.  Each option contract has control over 100 shares, so you pay $200 total for 100 shares.
 
If that same stock goes up $5, you could have an option contract that is now worth $7.  A whopping 350% return.
 
If you had that same $5000 invested in that option contract, you could look at 350% return.
 
The lower the price of stocks means that this increase will not be as vast.  After all, a $50 or a $100 stock has more chance of moving $1 than a $15 stock.
 
So why have I included stocks on here that are under $50?
 
For the very reason that they are going to have small changes in value.  Calls and Puts are straight forward to buy.  The stock goes up with a call,  you earn money, if a stock goes down, you lose money (only up to your initial investment though - you can not lose anymore). So it stands to reason on the basis of the above explanation that the more money a stock costs, the bigger potential returns are for your option.  The converse is also true with low valued stocks.  Your straight calls and puts stand to gain the least amount of money... unless you move to a seller instead of a buyer.  This is where a credit spread play comes into force.
 
A credit spread is basically this (for a bullish play)
 
You sell one put and you buy a put on the same stock but at different strike prices.
 
So you have stock X that is trading at $100
 
The strike prices you look at (for example) are at 99, and 98
 
Put 99 is being sold for $2
Put 98 is being sold for $1.5
 
In this example, you would sell the $2, but buy the $1.5 giving you a credit of $0.5 per option- so a profit of $50 per contract.
 
If everything goes against you, your maximum risk is the difference in strike prices ($1 x 100 in this case) minus your credit (as this is your cash).  SO the most you could lose with the above example would be $50.  You know before hand how mush you are set to lose, and how much you are set to gain.  It is a very strange fact, that the more credit you gain, the less risk you have.  If you took on a credit of $0.7, you could only lose $0.3 in total.  How cool is that???!!!
 
The reason you have that liability is down to the strike prices.  If you are called out on your sold put, you would automatically execute your call options - meaning that you would lose out $100 per contract.  Because you have your credit already, you minus that from the $100
 
In the case above your ideal is that both puts finish out of the money - so the stock stays above the 99 put.  You lose your $1.5 on your bought put, but gain $2 on your sold, so you have a net profit.  This is why the put credit spread is a bullish play.
 
ON these credit spreads we will look to buy as little time as possible, but ensure we have enough premium to make it worth while.  Because time does not decay in a straight line, we can buy about 30 days time, and from there, time decay eats into both options until they reach zero worth.

So the less value the underlying stock has - say $30, the less the movement of the stock will be, so the more chance we have that the strike price will be hit, the more chance the options end up with zero value which makes us winners!
 
I shall go over this with really examples on the trades we make, but it really is quite simple.  They are also set and forget systems, with automatic rules.  I will also use graphical representations to show profit and loss on these when it arises to give you a clearer view of what happens.  Needless to say these have a maximum upside, but also a known risk - a trade off that is well worth it considering the stocks we pick will have a very high chance of going in the correct direction.  We can also dictate what strike prices to pick, so if we want to be ultra conservative, we can pick a strike price further away.  Again, a full analysis of the trade will give you more 'options' (no pun intended) for how you want to trade.
 
These are low risk strategies (hence LS!) so all the LS stocks as categorised above will fall into the credit spread trade to minimise our risk.

This is also the reason why a small account is better suited to the LS picks.  Simply because as a maximum you need $100 in your account for 1 contract if the strikes are $1 apart (such as the ETF option chains), although most stocks are at the 2.5 strike price intervals (so $250 minimum in your account).  The strike minus your credit is the absolute minimum (plus your trade charge).
 
Happy trading, and I hope you enjoyed today's blog - albeit very long!!!