Roland Watson Option trading

Two more triggers today!

2011-04-27T05:31:00.000-07:00

Hi there once again.

We have had two more triggers today in UA and NFLX. They are now very much oversold (which is great for us) due to profit taking. It is earning season, so we will watch closely to see how they recover from this, but there could really be some big bucks to me made from these two trades. They have been consistently trending higher over the last few months - and these are very tradable charts. Getting into the action just after earnings can be a very difficult thing to judge, but happily my triggers and confirmations will give us the direction to place our trade. IRM is still not tradable - yet! I am still awaiting confirmation that it is going to go in the right direction - hopefully it should be sooner rather than later, or else we will have to take it off the trigger list and wait for something else to happen!

IWM is offering an interesting scenario - It has hit resistance and rebounded... I am very nearly tempted to play a put play here over the next couple of days. There could be some cash to be had here - even if it is a modest 10-20% gain. Do I want to risk it??? The trend line is going higher, and it is not in my main strategy - however it is a strategy we could play... I think I am passing, and we will see what happens if it hits the resistance again. If it breaks through, I will probably buy because it is trending upwards. Because it is trending upwards makes me nervous about buying a put at this time.

Anyway, a couple more stocks have been added to the watch list, and it currently looks like this:

RS:

BIDU
MELI
SINA
PCLN
FOSL
ULTA
MWIV
IPGP
WLK
DECK
PII
ALB
SRCL
UA
NFLX
INFA
SFLY
TPX
CHSI
NEU
SHS
KRO
CACC
AGP

LS:

MMSI
FMCN
BJRI
IRM
SLGN
PTEN
CPHD
CEVA
IL
CROX
GIII
CPX
RES
ANN
FARO
TIBX
LTD
LXU
RAX
HS

Happy trading. Let's wait to see what happens in the next couple of days and we may have a trade.

Another day cometh!

2011-04-26T07:27:00.001-07:00

So we are in on Tuesday after a longer than usual weekend, which was also much needed.

Not much has really gone on in the market place over the last few days - with it being Easter and bank holidays and the such like, however, we have got some new stocks on our watch list. This increases the amount of stocks we are looking at to 38, and also we have our ETF's on top of this.

Our watch list is broken out like this:

RS Strategy:

LULU
BIDU
MELI
SINA
PCLN
FOSL
ULTA
MWIV
IPGP
WLK
DECK
PII
ALB
SRCL
UA
NFLX
INFA
SFLY
TPX

and LS:

MMSI
FMCN
BJRI
IRM
SLGN
PTEN
CPHD
CEVA
IL
CROX
GIII
CPX
RES
ANN
FARO
TIBX
LTD
LXU
RAX

These are all looking like bullish plays at the moment. The only one which has had a trigger for the trade is IRM (still). I am still awaiting confirmation before I enter a trade though. This will come quite soon, although I have said, that if a trade does not present itself, then I will not jump into one... That is the traders rules... and we stick by it!!!

Our ETF's are not providing any interesting trades as of yet, and as predicted, the DIA is starting to retrace a little after swinging from over sold to over bought in about a day... As I did say, not one to get into unless you were only looking for a couple of dollars gain (if you could pick the options up cheap, it might have been worth a gamble) but not for me!

ETF's:

DIA
QQQQ
IWM
XLF
XLE
SPY
SMH

Anyways, look out for tomorrows update, and we will see where the markets are taking us.

As I mentioned, we are looking at bullish plays at the moment. All the stocks are trending upwards, so we have to wait for a retracement before entering a trade with the trend. Short term trend will go down - that is fine, but we are looking at the longer term trend, and looking to trade between a day to a couple of months max (and that is only to milk the trade for as much as possible without any extra risk). So it seems like we are getting lots of potentials, but no trades- this is actually a good thing. This is because we know that the stocks being picked for our watch list are really really good potential stocks that are consistently trending upwards with steady buying. Profit taking occurs for some, so the stock dips which is where we get in. Once the selling finishes, buying starts again, with us getting on the ground floor of the move (or at least the first floor!) ready to escalate our profits higher (really could not get away from the pun!)

Due to the watch list being very new, I have not got some leaders in the market - YET! Stocks like Apple and Amazon, could easily be put on, but I want to keep the watch list 'fresh' so only approved stocks are on there... not Pre-approved if you get my meaning!

Market update:

NYSE 168 new highs 10 lows
NASDAQ 119 New highs 13 lows
AMEX 16 new highs 2 lows

You can see that the markets are pushing upwards at the moment, so these bullish potential stocks are there as a reflection of the markets themselves!!!

One more potential trade- watch this space!

2011-04-21T06:26:00.000-07:00

So, another day, another potential dollar.

The watch list is growing quite dramatically, and I am wondering whether to put some more ETF's on there, to include the gold and oil indexes. The reason being is that unless you live in a cave, you will know that they are both trending upwards, and Gold is consistently touted as being as high as it has ever been.

The ETF's are great to trade options on, because the options are both affordable, and you have strike prices that are only $1 apart. This is very important for our second strategy (LS) as it brings the tied up margin down to only $100 per contract, and your profit return is much greater. I would rather get a $20 return from $100 margin than a $40 return from $250 margin... after all I could just buy 2 contracts at the $20 giving me a $40 return from $200 (25% return for 1 contract of $100 margin, rather than a 19% return from the 1 contract of $250 margin). Any way, I digress...

The blog posts will start to get shorter as I concentrate on the good stuff... the trades and the options to be bought.

The watch list has pretty much doubled today - which is great, as it gives us far more potential trades to go through with. If we get too many trades, it means we can just pick out the really good ones. I.e the ones that we think will give the biggest returns or the ones with the least risk.

So our updated list today:

MMSI
FMCN
LULU
BIDU
BJRI
MELI
IRM
SLGN
SINA
PCLN
FOSL
ULTA
MWIV
IPGP
WLK
PTEN
CPHD
CPX
CEVA
DECK
PII
IL
CROX

Out of these we have had another trigger in IRM. This stock is now way overbought. This is on the LS strategy, so once we get confirmation that this is a viable trade (which we will probably get by today's close I predict) then we will look to do a credit spread. So this will be fixed risk, and we will be getting credited straight away with the cash!

The ETF's are:

DIA
QQQQ
IWM
XLF
XLE
SPY
SMH

The DIA finally gave us confirmation, but I am passing on this trade, as I simply do not trust it at the moment as it has swung right the way to heavily overbought... With this being the case, I predict that now is not the right time to get into this with a straight call (it being on the RS) as we are likely to lose money before it appreciates. It did take a massive gap up yesterday (which could have banked us a probably couple of dollars) but was just not worth the gamble.

The system I am using is very mechanical, and because of that, if the charts don't fit, then we do not trade. As simple as that! If anything, we have saved a couple of hundred dollars on a learning experience!

The rest of the ETF's are not really tradable at the moment... there are a couple of triggers, but the trend is not very strong, so would rather avoid it. I am in no rush to give signals out when the trends are only adequate. I want really great triggers so that we consistently MAKE money. I see no real point in using a scatter gun approach to this.

So that is the update today, have a great Easter weekend, and once we get back to the trading floor, we shall see how the stocks perform. I would not be surprised to see a reduction in the possibilities of trading (i.e. less stocks reaching new highs) over the next few weeks, but we shall see how it goes.

I have been toying with the idea of only having a set number of stocks on my watch list, but that seems counter productive. The chart dictates when these will dip presenting us an opportunity to trade, and it would be sod's law that all the ones we discount will offer the best trades in a weeks time...

Ultimately the watch list will get longer. I am having a look to see what I can do to add a watch list on the side so that you can see it at a glance. That would be very beneficial for all (so you do not have to read through all my guff to get to the good stuff!)

Happy Easter, and hope you have a good one!

Watchlist expanding

2011-04-20T04:45:00.000-07:00

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!!!

The start of something special?

2011-04-19T12:28:00.000-07:00

So, I have been away for some time now working on a couple of new strategies that I want to put out there among the people who follow my blog. Basically I plan to share with you what I am doing, and will cover everything from my watch list to my trades. I plan to actually create something that can earn everyone some cash.

I have now been in the option game for about 5 years, and in that time, I have made some good decisions, and certainly some bad ones. The great thing is that I have learnt from all these decisions, which is the best form of experience you can have! I now plan to start a fresh with 2 new strategies that everyone can benefit from. I do plan to start monetising these in the future, but I want to offer this free to the first 50 people. You will be my BETA testers, and will get everything I release for free. This includes a membership site that will be built in the next year (so you will always have access), my trading guide that I will be working on - to put it in perspective, the guide alone could be charged for up to $400. The membership site could be up to $40 per month!

SO for those that want to get in on the ground level, all I ask is that you follow me and email me to say you want in on bestoptiontrader at hotmail.co.uk. Please add your name in the email and I will make sure you get the updates when they come.

You will get EVERYTHING I release for free! I ask that you do just a couple of things. Be honest with me- what works, what does not. If you understand something, or you do not. I will originally send all things through my blog - so my updated watch list everyday, and my picks (the great thing is that these picks can be done at any time)

The way this will work is that I shall build up a fresh watch list. This will be updated on my blog daily for the coming months until everything is sorted with the website - so basically everyone can see what I am doing. The watch list will be built up from of the company fundamentals, and then a final sanity check by looking at technicals - I want 'predictable' stocks. i.e, stocks that have a strong trend.

I shall then be looking at a trigger that will signal a buy or a sell signal- This is not the last part though - I shall then be looking at confirmation that it is doing what I expect. This bit is the great bit about this method. The confirmation can have 5 days to happen. This means that if i have a confirmation on day 1, and you pick it up on day 4, the trade is still seen as active. If however, I get a confirmation on day 5, a trade will have to be placed on that day.

To manage everything effectively over the next few months I will be moving over to awebber - an automatic tool that will send emails to everyone (and mail merge it so it is personal to you!). 50 People will get this service for free. You can tell your friends and family about it (I am not expecting a huge rush, so give it some time). The reason it is free will be that a) I want people to be honest that things are working before I start charging people, and b) no one knows who I am from Adam. c) It will takes some time to build a watch list - I will be starting with only a limited amount of ETF's to begin with (actually there is a nice set up happening on one of them at the moment) and then it takes some time to get proper trade entries. SO basically, I can not charge people money for nothing. I plan to only be honest with this. I am not looking to up sell or any VIP members sites or any of that rubbish. I am not a marketeer, I am not looking to get rich from scamming people. I love doing this work and want it to be my full time occupation. To do this I need some motivation, and some consistency, and if I know I have customers who are depending on me to earn them some pocket money (an extra $50 -$10000 per month!) then I have my motivation.

With the honesty thing in mind, I shall be removing all the adverts off my site, and will only be adding things that I personally use, or have used that add value. If you like what I am doing, then I think that what I add will be good for you, and I would have already bought it and used it- There is so much rubbish that is touted out there that I think having someone who can actually vouch for a product is invaluable- however, at the same time, I am hoping not to have to put anything up there, because we are all making good money that there is no need for any extras- I want to be all you need, and my mission is to ensure that I can provide this. This is why I need your feedback.

So it's a new day, It's a new life... For me, and I am actually feeling pretty good.

The format will take some tweaking, but to start off with here is my watch list at this moment:

DIA - this is set up the best so far, and with any look a trade will be confirmed in the next couple of days.
IWM
QQQQ
XLF
XLE
SPY
SMH

These are all ETFs (Exchange traded funds) and despite only one of them being anywhere near tradable, they are great for my second strategy.

The strategies are as follows:

The 'risky strategy' (RS) will consist of straight call and put buying. This will also mean that you will require a bigger balance for a couple of different reasons. However, the fundamentals of the stock say that the price will either go up or down consistently, the technicals confirm this and trigger the trade only when everything is on our side. We look to go one better, by buying plenty of time- ideally 3 months, 2 months at the least, as we plan to sell the option with 30 days left. This way we get the maximum amount of profit without time decay eating into our profits.

The LRS' (LS) The LS is a much less risky strategy which will serve a lower account balance. The trades will be performed as a credit spread. We will be pretty confident that the stock will move in our desired direction, and we will look to take in a credit (buying and selling a call or put at a different strike price to earn our selves a tidy little credit). We will be looking to buy between 15 - 45 days worth of time, as time decay on this strategy actually works in our favour.

As we come to actually place the trades, I will explain the why's and the logistics.

I will be starting with a $5000 account balance, and looking to place 10% of my account on any one trade. This is scalable upwards. The trades I place will be a mixture of the RS and the LS strategies. If you have a large account balance, you may want to copy exactly, however with a smaller account balance, you can increase your risk to 25% of your account on any one trade (we will look at a 50% stop loss on an option price - so you would only risk 13.5% on your account excluding commissions). If you have a micro account - anything less than $500, you should be able to follow some of the LS strategies, however $500 is probably the least you want to start with as you may need to buy additional contracts, but that can be discussed later.

That is all for now. The main thing you need to look at is the watch list. Email me with 'I WANT IN' in the subject title, and I will add you to my distribution list and we will start on our money making journey together.

I will not guarantee that you will make money on every trade. Losing is part of trading, but we want to keep our losses to a minimum. I would suggest using a demo account to start with, or paper trade my trades so you can see that the trades I am making make money. Ultimately you need to decide whether you place a trade or not. The risk does lie with you, and you alone, however, it is in my interests to make sure that I give you the ability to make those decisions with the best foundation possible. My aim is to make myself money through my trading not through memberships and the like (that is why I am happy to give out freebies to start with). Anything given away freely will not have any value. I believe this does have value which is why I will charge for it. The 50 lifetime memberships are there for a demo group. They are actually servicing me and doing me a favour - one which will be paid back many times over in both value and cash!!!

Online Trading Stock and Option: The Best Way to Leverage Your Capital

2010-02-11T14:27:00.000-08:00

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.

Online Trading Stock and Option: The Best Way to Leverage Your Capital

2010-02-08T11:56:00.000-08:00

Option Credit Spreads - The New Frontier in Monthly Income Generation

2010-01-20T05:39:00.001-08:00

I remember talking to my good friend Brian last July, a few months before the "Great Crash of 2008". Brian was (and I emphasize was) a "traditional" investor. He had a diversified "portfolio" of stocks, managed by a professional "investment advisor". I, on the other hand, was then and still am a humble trader in options, with no long term holdings, who uses an online broker.

Anyway, Brian related to me that he was having a dispute with his "investment advisor". He felt the market was getting a bit turbulent, and he wanted to sell all of his positions and go to cash. His broker disagreed. She felt that it was still a good time to hold a diversified group of high quality stocks, particularly those that would not be affected by the brewing crisis with the banks.

Brian is big (or maybe, was big) on trusting his professional advisors, so he let her have her way. Four months later, his portfolio was decimated, and he went to cash with what was left of it. That's where he sits as I write this article - the bleeding is stopped but the blood loss is severe, and there's no apparent way to replenish the "blood". His retirement hopes have pretty much been dashed.

A Formulaic Approach to Trading

I've just never been much of a believer in "playing the market". Maybe the reason for that is I never figured out how to make it work. Actually, perhaps I did, although what I'm about to say is meant to be "tongue in cheek": If you want to make money watching me trade stocks, just watch what I do, and do the opposite. If I buy XYZ stock, you should short it. If I short it, you should buy it. Looking at my history in traditional stock investing, a person could have really done well following that strategy!

However, I've long been absolutely fascinated with options. The fascination was, at first, with the notion that you can buy an option for a few pennies, and a few weeks later it's worth many dollars. That actually happened quite a bit during the "dotcom" era. These days, it's mostly fantasy.

But what really fascinated me was the idea that there must be a way to, somehow, mathematically "beat the system". I mean, options have all those "Greeks"; they have spreads that vary widely with market conditions and the number of a particular option that is traded; and you can do all of those crazy combinations of buying and selling, long and short, one against the other. With stocks, you buy or sell, long or short, and that's it. With options, the combinations are limitless. Surely there's a way.

And, in fact, there are a number of "systems" you can use to make your fortune. Just go to a search engine and type in "option trading strategy" and most of them will appear before your eyes. I've subscribed to many of these systems, and I've taught the strategies. And, under the right circumstances, some of them can work well. Problem is, circumstances change, and what works well one month, or one year, can wipe you out the next while you're not looking.

However, from my first "covered call" back in the dotcom days, I've never given up on my quest for an options strategy that is formulaic in nature, and can be used consistently with minimal adjustments to market conditions, for generation of significant and steady income. And you'll never guess where I found it...

N.I.M.B.Y. (Not In My Back Yard)

Well, yes, that's where. In 2006, I was turned on to credit spreads and iron condors. If you know what they are, stay with me - I'm going to give you a twist. If you don't know what they are, stay with me - they are elegantly simple.

An option credit spread is a "new and improved" version of shorting an option. If you know anything about options, you know that it's considered exceptionally risky to "short" options, and index options in particular. Your potential risk is, for all intents and purposes, unlimited. Brokers don't like that exposure, and they make it pretty much cost prohibitive to short options.

But supposing you had a formula for shorting options that:

limits the potential risk to a specific (and not too large) amount
dramatically lowers the likelihood of any loss at all

Then, you would have a credit spread (at least, my kind of credit spread). And then, your broker would be happy with you again, and would make it cost effective to do this trade. He may not show you how to do it, or how to manage it, but he'd let you do it.

Here's an example of my kind of credit spread in its simplest form.

Say the Standard and Poors 500 Index (SPX) is trading at 770, as it is at this writing. If we were to short the 610 put for the next expiration month, we would collect about $4.45, or $445 for each contract. However, depending on the arrangements with our broker, the "maintenance" (cash they get to hold to protect against losses) can be pretty high. In this case, a standard calculation would require the premium you took in, plus $6,600 per contract; plus typically a minimum account size of $100,000. And that's just for starters - if the market crashes overnight and the cost to buy back the short option goes way up, so does your maintenance requirement.

With the credit spread, we do one simple adjustment. In addition to shorting the 610 put, we simultaneously buy the 600 put with the same expiration. Remember the 610 put we could sell for about $4.45? Well, the 600 call would cost us about $4.20 to buy. So our net credit (money which goes into our account) is $25 per contract. Our total maintenance requirement, though, goes down to only $1,000 per contract. You see, no matter how badly the market tanks, we could never possibly lose more than $1,000, including our $25 that we took in. (If you have a "portfolio margin account", it gets even better - the initial maintenance is only a portion of the $1,000.)

But wait, there's more! If you know how to negotiate, you can get something closer to about $.65, rather than $.25 when you do this as a package deal - trade the two options simultaneously. Quite an improvement, huh? You ought to see what it does to your Return on Investment. By the way, they call it a "credit spread" because the net effect of the trade is a "credit" (money in our account), and there is a spread, in this case 10 points between the two options, which quantifies our risk.

Complex? I hope not. Let's say we do 10 of these, with a month left until expiration. So our maintenance is $9,350, plus the $650 we took in (which isn't ours yet), for a total of $10,000. It's our money, in our account, earning our interest - it's just restricted until expiration.

Now, remember, the SPX index is at 770. Anything can happen, but we did this trade knowing there was only a 7% likelihood that SPX would expire in March at 610 or below. We know this by looking at the "delta" of the 610 option, which any good options broker will give you. I like those odds.

The Difference Between a Pro and an Amateur

And I use that heading with all due respect, because I've been both. But the difference between a person who consistently gains using this strategy, and one who gains a lot and then gives a chunk back, it very simple - risk management. Remember that "delta" of the short option? Well, that's a moving target. The closer the market moves to that strike price, the higher the delta (risk) goes - except that each passing day pulls that delta back down a little.

Now, we've done a credit spread that is WAY out of the money. Our goal, very simply, is for the SPX to expire above that 610 short strike - even at 611. If that happens, we keep the $650; the $9,350 is freed up to use for a new trade; and life is good. And, this will happen 93% of the time based on this trade's initial odds. It's that 7% that will kill us, because our $9,350 is then potentially at risk. If the SPX closes at 609, we will lose the $650 we took in plus $350 or our own money. But, if it closes further down, we lose more, or even all, of our $9,350. Remember, our maximum loss is at SPX 600 - anything lower than that and we still only lose our maximum - but that amount is HUGE!

So, to manage our risk, we monitor that "delta" as time passes and the market fluctuates. If the market goes way down, quickly, we'll see that delta creep up to our limit of 25%. At that time (which won't happen often, but it WILL happen), we calmly take action. We're not suddenly at risk; we've just triggered our action mechanism. We've got several choices - but it's time to take one of them. That's a subject for another article - but essentially, we want to buy back our now "challenged" position, and possibly sell a new one with around a 7% delta to offset some of the cost of buying back the old one. Wait. Did we just suffer a loss? Well, maybe. If we only do one credit spread at a time, then yes, we'll incur a loss on occasion. I do several a month, using different indexes and different strike levels. That way, I have a "bucket" of money taken in, that I can use a small amount of to offset a loss.

The Other Side of The Coin

Earlier, I mentioned Iron Condors. If you know what they are, there's still a twist. If you don't, it's a pretty cool name, isn't it?

Remember how we used puts for our SPX credit spread? Well, you can use the same process to do a call credit spread too. In the above example, with the SPX at 770, we did a put spread about 160 points out of the money, and took in about $.65. However, we can also do a call with the same expiration. To get the same probability of success, we might sell the March 930 call, and buy the March 940 call. We won't get $.65, but we might get about $.40. And guess what? No additional margin. The SPX can expire in March either way up, or way down, but not both! So now, on one contract, we will have taken in $105, and we have $935 at risk. For the one month that we have our money at risk, that's an 11% return. And if we could sustain that return for a year, without compounding, our annual return would be 136% (more than doubling our money). This ignores commissions and income taxes, both of which you have to pay. But it gives you a great illustration of the potential.

Having the put spread and the call spread about equidistant from the market price, with the same expiration, is called an Iron Condor. It gets its name from the risk profile graph that the two trades together create - at expiration, we make the same profit whether the SPX expires at 611 or 930 or anywhere in between. But, beyond either of those points, the losses can rack up quickly (if we failed to take action). The graph looks a bit like a condor, with it's wide wing span. That's where the name comes from.

The Last Thing You Need to Know

Well, two things, actually. First, I have referred to the SPX expiring at a certain level. In fact, the "expiration" is actually a calculation that takes place on the third Friday of the expiration month. It may be close to the opening price of the index that morning. But it may be different from where it closed the day before, which is when trading of the option actually stops. All the more reason for us to make our adjustments at that 25% delta level - if we simply hold on and hope we don't expire in the money, we could face a surprise when the "settlement" is calculated.

But the real last thing you need to know is, what's the catch?

This, I've learned the hard way, and I'll share it with you for free. I can envision two "catches", and they both end badly. First, a person follows this strategy for a while, and gets really good at it, which could happen quickly and last for a long time. Then, as with gambling, they go crazy and go "all in", by increasing the number of credit spread contracts they sell dramatically. THAT, my friend, will be the month that the market chooses not to cooperate. Even if they manage their risk and adjust their positions at the 25% delta, their loss for the month could be pretty large. The other case, a distant cousin, occurs during suddenly volatile times - such as the Great Crash of 2008. The trader has made a bundle of money, month after month, and doesn't want to give even a nickel of it back this month. So, as the market moves against him (either way down or way up), he just sits, watches, bites his nails, waits, and hopes. After all, those spreads were initially WAY out of the money, and they can't possibly move that far, can they? Yes, they can. And the closer the market moves to your spread, the more it costs to bail out. Seems unfair - but you've been warned! We make excellent money most months, and take a not-too-large loss on occasion. It's a cost of doing business - and the returns after factoring in the occasional poor month are still phenomenal.

Conclusion

Not to end on a sour note - this strategy can be consistently profitable, in good times and bad, if that "formulaic approach" is followed at all times. Using our version of the formula, there will occasionally be a losing month; though the losses won't be huge and the gains will more than offset them. I found this strategy in my own back yard, so to speak - buried among the "get rich quick" systems I was paying other for - but now I use it pretty much exclusively. It is boring and very predictable - but isn't that the "holy grail" of a formulaic options strategy? (Plus, at night I sleep like a baby...)

Kerry O'Hallaron is a teacher, student, and practitioner of options trading. He hosts the "Cash Flow Trading Center", a members-only site, and a trading newsletter called "The Perfect Play". Both can be found at http://www.cheatthestreet.com This article may be reprinted in full with no changes and full attribution, including this closing message.

What Online Options Trading is Not

2010-01-19T04:45:00.000-08:00

Like any other trading instruments like forex, index, futures, commodity or even shares trading, options trading involves learning specified trading skills tailored towards options. Furthermore, application of these skills in the real market using real money, patience, perseverance and control in terms of money management and trading psychology are all essential in your options trading journey. In summary, options trading demand a fair amount of hard work from you, thus it's definitely not a get-rich-quick program.

As mentioned, you could buy options as cheaply as $50 per contract or you could buy options which are as high as few thousands dollars per contract. Don’t be misled by thinking you could buy a bundle of cheap options at $50 per contract and prayed that you could strike lottery if the share moves up (or down) substantially and your options would now fetch few hundred or even few thousand percents in profit. The price of the option contract, known as the premium, is set by the market maker and if its set so cheaply, just beware that there’s a reason behind it. Cheap options could be priced that cheaply because (1) the share on which the options are traded are not or not in the habit of making a substantial move (2) the option may be expiring soon thus it’s time value is diminishing rapidly. Sorry to burst your bubble but you might end up holding a bundle of options which would expire worthless if you did not bother to do your homework to check whether the stock is going to make a substantial move in your anticipated direction in the near future, ie. earnings outcome, upcoming FDA approval for drug etc.

If you want to sustain your options trading journey from the stage where you would commit every beginner mistakes till the stage where you could cut your losses quickly and decisively and learn how to let your profits run, I believe you would require at least the following pre-requisites :

1) You are not under-capitalized

From my experiences and what I read from most options trading books, web-sites, it is advisable that you have at least a minimum capital of US$5,000 to trade options. If you could afford more, of course it's better.

In the beginning of your options trading journey, you are bound to commit trading mistakes like buying too early, exiting too late, entering the order wrongly ie. sell instead of buy, overbuying, holding on to a losing position.

Due to your inexperience, you might also end up buying options for the wrong types of stocks in the beginning. All these costly mistakes would certainly lead you to lose your capital fairly quickly. Trading losses are also known as drawdowns. Let’s say you experienced a series of losses (this COULD happen) and your capital is down 50%. If you started out with $5,000, you would still have $2,500 hopefully to turn your situation around. But if you started with $2,000 instead and after a 50% loss, you are now left with $1,000, which might not give you enough fire power to build up your trading capital especially if you still carry on losing due to your inexperience.

Thus, if you are under-capitalized, my advice is - don’t trade, unless the particular situation is extremely favourable to the options that you intend to trade eg. if you would have a high probability of winning when you buy a call in a very bullish market and likewise you would be profitable buying a put in a very bearish market.

2) You practice good money management

For instance, if you allocate only 5% of your trading capital on every trade and you happen to lose 3 trades in a row, you would have lost 15% of your capital & still have 85% of your capital left. Let’s say you started out with $5,000 trading capital and you allocate only $250 (5%) for each trade. If you encountered 3 losses in a row, you would be down $750 with a balance of $4,250 capital, still quite substantial to keep trading for a while if you continue sticking to the 5% commitment per trading rule. To recover your capital back to $5,000, you would require a 17.6% gain (750/4,250 x 100%).

Let’s say you did not practice proper money management in your options trading and you plunge $1,000 in the few 3 trades which lose money subsequently. Now you would require a 42.8 % gain (3,000/7,000 x 100%) in order to recover your capital back to $5,000.

The lower you traded down your capital, the higher the percentage of gain you have to achieve in order to recover your trading capital. Thus, it’s very important that you practice good money management in your trading right at the beginning ie. committing only 5% or less of your capital in every trade so that you could keep your trading capital for a longer period and minimize the necessity to achieve higher percentage gains in order to recover a heavily traded down account.

The following table would give you a guideline on how much percentage gains you would require to build back your starting capital.

Down % Gain Required

5% 5.3 %

10% 11.1 %

15% 17.6 %

20% 25%

30% 42.9 %

50% 100 %

75% 300 %

Hope you would bear in mind the above considerations when you trade options.

Successful Stock Option Trading With Five Key Trading Secrets

2010-01-18T02:10:00.000-08:00

Stock option trading has presented the public the opportunity greater cash windfalls by trading options than almost any other form of trading or investing in the market in history. The low level of controlled risk together with far superior leverage presents the possibility an option trader the opportunity to make a fortune trading stock options however aspiring option trader requires a level of comprehension about what really forms a reliable option trading approach to insure success with trading stock options. There are five key secrets that any option trader must use when approaching trading stock options in order to be successful.

To start, the first secret is that you must factor the affects of time into the value of the option you are choosing to trade. The two essential parts you must factor when considering time into the stock option trading process. The first essential part to be considered is the time remaining on an option till it expires. Stock options have a set time period of anywhere from 30 days up to three years in some cases till they expire worthless so you must then select the proper stock option with enough time on it in order to profit. You must be sure that you purchase the correct option containing enough time on it to insure that time decay doesn't erode your investment away before your position has enough time to be profitable.

This brings us to the second key secret of successful stock option trading as well as the second essential key in the option selection process of trading options which is factoring time into your option trading method. Trading a particular stock option and knowing the statistical factors of your option trading method and particularly, in this case, knowing the average time you hold a position once a trade has been entered. For instance, if your average holding time for an option trade is 9 days then you would avoid buying an option with three months of time premium left on it because you would be paying more for extra time with the option's purchase price. Neither would you buy an option with less than 30 days till it expires because time decay would dissipate the option's value so fast that even if the option's underlying stock moved in the direction of your trade time decay would be so great you that any gains you made would be eaten away by time decay.

The third key secret to successfully trading stock options is grasping the relationship of volatility between the general market (i.e.: S & P 500, DOW Industrials, the Nasdaq, etc.), the underlying stock or instrument that the option is based on, and the effect is has on the value of the option itself. When the general stock market an index experiences low volatility or low trading volume then the stocks that make up the market tend to trend with the general market and also begin to follow suit themselves with periods of low volatility which result with the value of stock options to becoming cheap. However if the general market's volatility begins to spike it causes individual stock option premiums to increase in value as long as the market moves in the trader's favor.

The fourth key secret to trading stock options successfully is having an option trading method that combines these key secrets into a coherent method for giving clear entry signals, clear exit signals, a system of trade management, and a profit factor greater than your average loss over a given amount of trades. Understanding all the fundamental steps of various trade setups is pointless if you don't have a trading approach that leads you through every level of the trade management process. A winning stock option system guides you thru every step and details each step towards helping you become a consistent winner in the stock option markets as well as being a profitable trader in the end.

The final key to trading stock options successfully is your trading discipline. An individual trader's discipline are vital to trading stock options successfully. It is critical that a trader approach stock option trading while factoring in their own level of trading discipline into their overall approach to trading the markets. You can give two traders the same exact profitable trading system but it's very likely that they will experience very different results. The reason for this is usually is because the one that has the ability to remain as detached from his losing trades as well as his winning trades while maintaining the discipline to follow the system's rules no matter what occurs on any one individual trade will emerge the net winner. A trader's discipline is so essential that even if a trader has the greatest stock option trading system ever devised but has no discipline he will likely turn into a losing trader so keep this in mind when devising your approach to trading stock options.

These five key secrets are a foundation to help you help you avoid the mistakes of many other individuals who come into stock option trading seeking fortune but only end up with busted trading accounts that end up being zeroes out in the end. By understanding time decay, factoring an option's time into your trading method, how volatility impacts a stock option's intrinsic value, what details a winning stock option trading system, and your own trading psychology you now have an understanding of five key secrets that help you build a successful trading approach to trading stock options in today's markets.

More on options trading strategy

2010-01-08T01:57:00.000-08:00

Do you know what an options trading strategy is? If you work with a broker and have an investment portfolio then you may want to take some time to understand this concept. Same as other areas of financial market, options trading industry mandates investors to have a concrete knowledge of its conditions, their holdings performance, and any foreseen changes that might acquire (or eliminate) income.

Indeed, for best results, trading strategy is an indispensable element. A question therefore may rise as to how to plot the said strategy? That requires clear-cut goals and plans, but options trading is such a flexible activity that it can help all kinds of investors to meet their goals.

Whether the market was in bullish, bearish, or in neutral state for a very long period of time, having a trading strategy in place for this specific market state is a good view to consider.

Perhaps it is best to first explain a bit about the various activities available to those who are interested in options trading, and how these can be strategically used towards the meeting of financial goals.

Just like in the stock market, investors in the world of options trading have the prerogative to both buy and sell. However, those who are selling and buying options actually never have own the underlying assets - this is not the case in stock market They are working instead with lawful contracts around the performance of those financial vessels and then earning or losing financially according on the terms of the said contract.

For example, an investor may believe that a particular stock (for which they do not own any shares) is going to increase dramatically in value over the course of the coming weeks. However, they do not have the income to invest in the said stocks at the existing time. A "call" option is purchased by them instead that ensures them the chance to make a purchase of the stocks at a definite price for a specific period of time. If the stock does indeed spike in value before the option expires the investor can either make the purchase at the significantly lower price, or they can sell the option for a profit instead.

The trade comes with appropriate charge, therefore, good strategy must be in place to timely identify if the "strike price", "premium" for the option, and the "expiration date" on the contract will all combine to derive the amount of profit aimed.

Having a complete understanding about options trading strategy will leverage your achievement and profitability in options trading. Have different options trading strategies in place to ensure better risk management. Visit http://www.trading-courses.org/ for more information.

Explaining online options trading

2010-01-07T02:52:00.000-08:00

Stock options are undoubtedly a smoking subject for individuals and investors who are endlessly battling just to gain positive return as far as the stock market is concern. On the contrary, option trading may not be applicable to everyone. It may not suit you. Assess your self if you really understand and can explain option trading.

If you can precisely illustrate option trading to other person, it is a clear hint that you already perfected the market's essential requisite. Various people, nevertheless, plunge into trading equipping themselves with eager broker but do not exactly have the proper knowledge in trading except "making money" in stock market. These type of people will usually come across your way six month later with frustrating stories that will make you doubt them and instead hesitate to invest your hard-earned money.

Despite complexities involved in option trading, it doesn't necessarily follow that the same is scary. Its basic principles are simple and direct, however, vernaculars that are unheard of and elaborate distinctions definitely encircles the practice. Sorting through all of this is critically important. You can avail of European option on futures contract having advantageous outlook when run through Heston model, but if you don't have any idea on what needs to be done with it before it lapse on Tuesday you may burn your money now as well.

To have a concrete familiarity with this and ensuring profitable strategies, a sound and substantial education in option trading principles and practices is a must. This will aid you in protecting not only your hard earned assets in monetary form, but also to the different stock tips and analysis by experts that would inform you its real business implications. You will be able to understand if you are getting good advice from your broker, and have better control over your portfolio's volatility.

Courses about options trading are available both online and offline which makes the study and learning of options trading both easy and accessible. Courses are offered by traders of sufficient experience, private financial educators and the boards of exchange. Chicago Board Option Exchange, main trading exchange for American options, has extensive online tutorials covering terminology and the regulations that governs domestic option trading. You can also enroll yourself in a number of specialty niche courses, such as commodities, bonds, or futures.

If you are already in trading and you are not having the success you want, it is better to step back and master the fundamentals of options trading. Your savings and your nest egg are too precious to be simply thrown away on an impulsive trade or something your broker recommends but you don't really understand. Accordingly, if you are not that confident enough to explain option trading, or you still lacks further understanding of its terms and procedure, revitalize now your portfolio as well as your confidence by an in depth study of option trading.

The start of an online option strategy

2010-01-06T01:53:00.000-08:00

23 tips on trading options. Yes this is a start to a strategy - fail to prepare, preapre to fail!

1. Make sure you know everything about options BEFORE putting down your first trade.

2. Completely understand your trading interface. Most beginners make their first losses through incorrect trade placement due to not being familiar with their trading interface.

3. Avoid call in brokers. Nothing is more destructive than a busy line on an urgent trade and brokers who don't even understand the kind of order you are trying to make.

4. Use only brokers with user-friendly trading interface. The commissions saving you get from a lousy trading interface hardly offsets the single losing trade you will make because of an order mistake.

5. Make sure you are familiar with advanced orders such as contingent orders and trailing stop loss as they automate your exits, helping you avoid emotions.

6. Review your order before hitting the send button! That's your final chance to rectify any mistakes that you may have made. Incorrect orders due to human errors contribute to about half of all the losses beginners experience.

7. Get a mentor. Nobody can learn to trade profitably on their own.

8. Profit is made only when the underlying stock performs within the specifications of the options strategy you use. It's the movement of the stock that produces your profits, there is no magic options spread!

9. Higher Profits = Higher Risk. Understand your risk tolerance and use options strategies that conform to your risk tolerance level.

10. Be familiar with technical analysis. At the end of the day, all options trading is short term as all options have a finite life. Technical analysis helps you select the most optimized entry points so that you don't waste that finite life.

11. Cheaper isn't always better in options trading. Sometimes, "cheap" options can be deadly while more expensive options would be safer.

12. Trade the charts, not the news.

13. Follow a proven options trading methodology such as the Star Trading System.

14. Have plenty of rest! Nothing triggers emotions more than fatigue + options trading.

15. Make sure your family supports your decision to trade options. Family support helps overcome those tough losing sprees.

16. The aim in options trading, like in all trading, is to make more wins than losses. There is no such thing as 100% winning only. If that is the direction you are looking at, you will be disappointed and you will lose money.

17. All options strategies have limitations. There is no such thing as a 100% sure win spread. Make sure you understand the limitations of the strategy you are pursuing.

18. Trade to win, don't trade for fun. Only trade when the chances of winning are high. Money in your account doesn't hurt you; don't be eager to get rid of them.

19. Wait one day before selling. More often, beginners sell too early, not too late. It is always best to wait one day from your decision to sell before actually selling.

20. Learn how to create synthetic positions in order to increase your position management flexibility.

21. Don't monitor the market if you are not a day trader! Nothing triggers your emotions and spoils midterm to long term positions more than monitoring the market!

22. When in doubt, Stay out!

23. Options trading is exciting only when you are losing money. Making money is a repetitive, objective and boring process. When options trading is finally routine and boring to you, you would be able to make a living out of it!

Happy trading! Learn more about Options Trading. Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management (http://www.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.

Successful online Stock Option Trading With Five Key Trading Secrets

2010-01-05T02:36:00.000-08:00

A pretty good video for beginners on options

2010-01-04T08:13:00.000-08:00

Generate Consistent Passive Income Through Credit Spread Writing

2010-01-04T07:52:00.001-08:00

Many traders and investors dream about making consistent profit on the stock market. Typically, investors would turn to fundamental analysis for medium to long term capital gains while traders would try to time the market using technical analysis to spot reversals or advantageous entry point and exit with the first sign of trouble. Unfortunately for everyone, the stock market is a zero-sum game. What this means is that for you to profit someone else would have to lose. The market exchanges acts like a distribution center of wealth. Essentially, without knowing, many novice investors and traders are actually trading against the professional and institutional traders. Who do you think will win most of the time? The answer is obvious. Credit Spread is one of the lesser known trading strategies available to the options trader. This strategy is call “credit spread” because you actually collect your target profits upfront or a credit when you enter into a credit spread position. Credit spreads are directional plays – bull or bear. The bull spread is called Bull Put Spread while the bear spread is known as the Bear Call Spread.

The Credit Spread Option Trading Strategy can be constructed to be a low risk investment vehicle. Using this strategy, we are able to use time decay in Options prices to our full benefit. Time decay works towards our advantage the closer it is to expiration. With this in mind, time can very well be our ally in our quest for profit. We just need to know how to use time to help us.

Fact - about 80% of all options expire worthless, it makes sense that serious and long term investor should only be writing credit spreads for a living.

How do we profit from Credit Spread?

Assuming that we are writing a Bull Put Spread:

If the stock moves upwards, we make money.

If the stock moves sideways, we make money.

If the stock moves lower, but is above the strike price that we sold our puts, we still make money.

I don't know about you, but any trade that lets you earn a full profit when your stock moves higher, when it moves sideways, or even when it moves lower enhance your winning probability. Credit spread writing is a powerful trading strategy because, if written correctly, it provides room for error and you would still profit even though you are wrong.

The closer it gets to expiration (most of the time 3 rd Saturday of the month), the better it is for us. We make money using the passage of time. Many seasoned credit spread traders like to view the 3rd Saturday of the month as their pay day.

The biggest problem in Stock Options Trading is the race against time. More than 80% of options expire out-of-money or, in simpler terms, expire with no value. If you bought options, this means you would have lost all your money in the trade. So with this fact in mind, use an Options Trading Strategy that would put you on the other side of the table. And that is to use a time profiting trading strategy called Credit Spread.

Copyright 2005 William Tan

CASHFLOW AVENUE is established to provide Low-Risk Options Trading Recommendations to the common traders in their pursuit of financial freedom and a better lifestyle. http://www.cashflowavenue.com

Options Trading and all things investment related

2010-01-04T07:37:00.000-08:00

Hi everyone who has just popped onto my new blog.

Hopefully i will be able to give you some pointers on how and what I trade and when. Some handy tips from friends will not go amiss, and I will be sure to post these tips and articles as and when!

The main thing i trade at the moment is option credit spreads. I will explain what this is and why it is such a brilliant trading vehicle, and this can get you making money with as little risk as possible, while at the same time bringing in plenty of returns.

This will bring in at least 10% return on investment per trade (and can be a lot more) stay tuned for more information.