Selling Options » Calls

Options Trading 101

admin — Tue, 26 Jan 2010 12:32:44 +0000

The individual investor will typically include some stocks in their investment portfolio. And whether they are a long term trader or in it for much quicker returns, many investors understand and feel somewhat comfortable with the concepts and techniques of trading stocks.
Options tend to be much less understood – and therefore avoided. But Options can form an extremely valuable part of your trading strategy as they can provide tremendous returns!
So here I will try and give you some of the fundamental concepts behind trading options.
Options are a contract conferring the right to buy (a call option) or sell (a put option) some underlying instrument, such as a stock or bond, at a predetermined price (the strike price) on or before a preset date (the expiration date). Options officially expire on the Saturday after the third Friday of the contract’s expiration month but because the markets are typically closed on Saturdays, the Friday is commonly used as the expiration date.
A key concept to grasp is that, when you buy an option, you don’t actually own the underlying security. You simply own the right to buy (or sell) at a specific point in time. But, of course, the price of the underlying instrument and the time remaing before expiration both affect the value of the option itself.
So in trading options you have two main ways to make money on them:
- You can hold to maturity and then exercise the option (with the expectation that the underlying instrument is then worth more than what you are entitled to buy it at – your “strike price”)
- You can sell the option itself prior to expiration (in the expectation that the value of the option itself has risen above what you paid for it)
A great many investors do in fact hold until maturity and then exercise the option to trade the underlying asset. Assume the buyer purchased a call option at $3 on a stock with a strike price of $30. (Typically, options contracts are on 100 share lots.) To purchase the stock the total investment is:
($3 + $30) x 100 = $3300 (Ignoring commissions.)
So if, at expiration, the stock is worth more than $33 you’ve made a profit (You can sell your 100 shares for more than $3300 right away).
Speculating on the actual value of the option itself is the second alternative.
Let’s use the same example above.
You bought your options for $3 with a strike price of $30.
If the price of the underlying stock goes above $33 at any time prior to expiration, then naturally more people will want to try and get a hold of that option you own, because they see a high likelihood of making a profit off the underlying security. With the increased demand for that option, the value of the option itself will likely go up. So you can sell the option to that higher bidder for a profit.
For example, if the price of the underlying stock rose to, say $35 then the option itself may become worth, say $4 on the open market. So you sell your options for $4 and make a nice 33% return. Without ever having owned the underlying stock itself.
Those are the kinds of returns that make options so attractive.
Many brokers offer trading accounts to individual investors that allow options trading and frequently at very competitive commision rates.
It really isn’t very difficult to get started.
Options trading is risky, so manage your risk and your assets wisely and only use a small percentage of your overall portfolio for trading options. But do consider them as an additional component of your investment strategy, as they can yield tremendous returns when traded correctly.

How To Start A Home Business With Options Trading And Credit Spreads

admin — Thu, 14 Jan 2010 01:06:07 +0000

If you are like most people, in these times of economic uncertainty you are looking for a way to earn extra money, that doesn’t take a lot of time, preferably from home and that doesn’t require a lot of capital to get started. If you fall into this category then options trading might be just what you are looking for. Although trading is a simple business to get started in, it is far from easy and be wary of anybody who tells you differently. Also you may have heard that trading options is risky, and while nothing in life is risk free, there are ways to substantially reduce the risk.

How much money do I need to start?

One of the beautiful things about options trading is it’s one of the few businesses that you can take for a free test drive to see if you can be successful at it. By trading in a simulator you can start your business with no money. Obviously you won’t be earning anything either, but you will be gaining valuable knowledge. You can find a simulator at CBOE.com. After you’ve traded in the simulator for a few months and become consistently profitable you can start with as little as $2,000.

Finding a broker

The first step in getting started in an options business is finding a broker. There are many (excuse the pun) options available, a few of the good ones include, OptionsXpress, TradeStation and Interactive Brokers. These are all members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which are two organizations that protect you against fraud from financial brokers.

Putting the Odds in your favor

While this isn’t a comprehensive list there are a few things that you can do to stack the odds in your favor when dealing in stock options. First of all rather than buying puts and calls you can use credit spreads. This method of selling a higher priced option and purchasing a lower priced option alone will stack the odds enormously in your favor simply because this method can allow you to make money whether the markets go up, down or sideways. As a matter of fact using this method can allow you to win as much as 80-90% of the time, which is why professional traders use this type of trade to generate consistent income. The next thing you want to do is a bit of technical analysis and look at the S&P stock index. If the index is moving above it’s 200 day moving average you generally want to be purchasing stocks or using bull put credit spreads. If the index is moving below it’s 200 day moving average you should short sell stocks or use bear call spreads. How much can I earn? This can fluctuate depending on market conditions but by using credit spreads you can make anywhere from 5-20% a month. So with $10,000 you can generate anywhere from $500-$2000 in extra income a month.

Reducing Your Risk

1.Start off by trading in a simulator at CBOE.com

2.Always use a stop loss or have your positions hedged.

3.Never trade with money that you need to pay for you day to day expenses with such as rent and bills. Nervous money always loses.

If you’d like to find out more about options trading and credit spreads click on the link in the resource box below and sign up for a free 10 part course.

Options Trading Is a Opportunity For The Small Investor Too

admin — Sun, 03 Jan 2010 01:24:49 +0000

The stock market appeals to people for many reasons. Some see it as a quick way to make a nice nest egg to tuck away for their eventual retirement. Some see it as a way to live out their fantasies of being a powerful, corporate type. And some are actually more logical about it, seeing the stock market as a potential way to make money, if they play their cards right. They know that there are no sure things in life and nowhere is that more clear than in the stock market. But options trading is a opportunity for the small investor too.Options trading has grown in popularity, especially with the smaller investors over the course of the past ten years. Unlike other forms of trading that can require large amounts of venture capital, options trading can be accomplished with often a very small initial outlay. Of course, because they can be easily started, it can allow the uninitiated or poorly informed to get in well over their heads in a matter of a very short time. Not allowing yourself to understand the market before you make the first trade is financially foolhardy and personally dangerous. First of all, as the name implies, option trading is not buying actual stocks, but rather busying the right to own or sell them. The options trader can make the same profit with stock options that he would make as if the owned the outright stocks, but that also means that he would face the same risks if that stock did not do well on the market. As with other forms of trading, options trading will require that you learn some facts and make some decisions before hand. Know everything you possibly can about options trading, as well as trading in general. Know how to track stocks for movement and know how to watch for trends. Know what the basic types of options trading is- and understand how each works. And, as with any other type of trading, make sure you know and adhere to your personal limits, including your absolute loss cap. Do not overextend yourself, even if you just got a tip on a great stock. Options trading can focus on stocks that are heading in one of two directions, up or down. Call options will focus on rising stocks, while Put options focus on those on the decline. Both allow you the right to buy the option on a stock at a fixed price, but do not force you to do so. Knowing how to work this system to your best advantage is key.Invest in yourself, learn the basics and expand on that to become profitable in options trading.

Fellow Options Traders, Why Aren’t You Selling Options in Your Trading Account?

admin — Thu, 03 Dec 2009 13:04:29 +0000

The only explanation which would seem acceptable is no one has shown you how to perform this marvel of printing money before, so you are a bit unsure of how to go about doing so!If this is your situation, then you are excused…But if not, you are truly missing out. Even if you are in the first situation, you are still missing out!No matter how long have you been an options trader, you will eventually find out that there is quite a bit of uncertainty involved with buying options.The Chicago Mercantile Exchange estimates over 80% of all options sold expire worthless. So why aren’t you selling them instead of buying them?An option is considered a “wasting asset.” Time value erodes as each day passes, accelerating as the option’s expiration nears. This is referred to as “time decay”.If the underlying contract does not move far enough by expiration, the option will have no value left and expire worthless and the option seller will keep the premium.When selling (or writing) an option, we get paid the premium up-front and we take advantage of “time decay”.However, it is simply not enough to know that to selling options generates significant premiums, you must also have a well throughout strategy for performing this. Along with this, you will also need to make corrections for when the market goes out of your favor.We have solved this by only selling straddles. You seasoned guys know what a straddle is. It is simply having a neutral outlook on the market, and trading it accordingly. By selling straddles, we are essentially playing both sides of the market. Stocks go up, down or stay the same. So we hedge our bets in both directions and hope that the stock remains flat.Our view stems from the fact that, a directional move will increase one side of the option play, and decrease the other side. So even if you may loose money in one position, we are gaining money in another. and by staying flat, both sides simply reduce to zero.Since we only sell out of the money positions, unless the stock breaks through the strike price, at expiration, best case scenario is we make money on both option legs. Worst case scenario is we loose on one leg, and we gain on the other, coming out with a wash.Or the more likely scenario, is both option legs are reduced to a level which we are happy to take profits.However, even though we believe selling options can potentially put the odds of success in your favor, it still requires good, solid market analysis. That’s how we, as seasoned traders arrive at our option picks!After trading options for many years with so much success, we see no reason to buy options. We have discovered, when options are sold correctly and carefully, they can generate a higher percentage return than any other option or stock trading strategy.Novice traders benefit the most from our alerts because they soon realize the difference is, selling options gives you a larger margin for error. You don’t have to be exact, only close.OPTIONXSPREADS is a group of ex-stockbrokers and investors who have developed this site to allow the ordinary investor to trade along with the pros, and have a chance to double, tripple and quadruple their investment dollar. And all you have to do is follow our trades and make money!Even if you do not follow our trades, realize that you should incorporate option selling into your trading strategy, to take advantage of the favorable odds! To see how we provide tremendous gains to our members every month, visit our website: www.optionxspreads.com