It is imperative you trade with a plan. No trader has ever successfully prospered without a trading plan or with a plan that they didnt stick to. A sound trading plan includes, but is not limited to, the following items:

1. Money management rules, i.e. acceptable profits and losses per trade, how much capital you will commit to any one trade and to the market at any one time.

It is important you identify what your stop loss margin is (as discussed last week) and even more important you stick to it. Writing this sort of information into your trading plan will help cement it in your mind. More on money management will be covered in week eight.

2. Stock and option identification rules, i.e. how you will decide which stocks to trade options on and which options you will trade.

You should figure out if you like technical analysis, fundamental anlysis or a combination of both. How big will your watch list be? What price range of stocks will you trade? Do you like trading in the money or out of the money options? What Greeks will you consider?

3. Entry and exit rules, i.e. What will make you enter and exit a trade, what length of time will you stay in the trade and how often will you trade.

Entry and exit rules will depend largely on technical analysis, write down the patterns and indicators you will look for. Deciding how often to trade will be a big factor in your success. Most people over trade, if you have a fixed profit target then once you have met it you should stop trading. Attempting to go for that little bit extra can lead to a big loss, all the more difficult to take if you had already met your profit target!

4. Your own strategy rules, i.e. which trading strategies you will use primarily and which strategies suit your risk profile.

Know thyself as the ancient Greek saying goes is critical when formulating a stock options trading plan. You will tend to trade options and you do anything else in life, for example, if you are cautious by nature you will trade cautiously, if you are impatient in everyday life you will trade impatiently. Therefore consider your unique traits and formulate your plan around them.

Once you have practiced trading options you will discover your own style of trading, and from that you will develop a plan that suits you. Once you have your plan, and you know it works, stick to it through thick and thin. That doesnt mean that a plan cant be changed but you must ensure that you give your plan a chance to work and that you dont change it the first time you take a loss.

Once you formulate and implement a good trading plan you will be well on your to trading stock options successfully. Next week we will discuss trading with the overall market and index options.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Savigs is one of the most critical parts to any successfuly financial strategy; if you spend your gains as soon as you have them you will never reach true wealth. It is only by the miracle of compound interest that your gains will truly turn into a fortune.

Compound interest is the process whereby annual returns are added to the original investment and reinvested, rather than being spent or taken out, thereby creating a larger amount to invest again, as this process is repeated the compounding exponentially increases the returns over the lifetime of the investment. For example if you invest $10,000 a 20% return increases your portfolio to $12,000. A 20% return on that increases your portfolio to $14,400, 20% on that is $17,280, 20% on that is $20,736 and 20% on that is $24,883 which is a total return of $14,883.

Now assume as soon as you made the original 20% return you took it out and spent it, your next 20% return would only be the same $2000 on your $10,000 investment. If you kept doing this 5 times your total return would only be $10,000, $4,883 or almost 50% LESS than if you left your money in your account. The longer you leave your money in your account the more pronounced your returns will be and the greater the effects of compounding will be.

Einstein once said “Compound interest is the 8th wonder of the world”. When applied to options trading we can replace the word “interest” with “return on investment”. That means if you are winning and have a good return on your investment don’t take out the profits in your account to spend on a new boat, car or house. Re-invest your profits and if you are doing everything correctly the miracle of compounding returns will exponentially increase the size of your portfolio.

This is only a short article this week. Next week we have a lot to discuss when we talk about money management.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Savigs is one of the most critical parts to any successfuly financial strategy; if you spend your gains as soon as you have them you will never reach true wealth. It is only by the miracle of compound interest that your gains will truly turn into a fortune.

Compound interest is the process whereby annual returns are added to the original investment and reinvested, rather than being spent or taken out, thereby creating a larger amount to invest again, as this process is repeated the compounding exponentially increases the returns over the lifetime of the investment. For example if you invest $10,000 a 20% return increases your portfolio to $12,000. A 20% return on that increases your portfolio to $14,400, 20% on that is $17,280, 20% on that is $20,736 and 20% on that is $24,883 which is a total return of $14,883.

Now assume as soon as you made the original 20% return you took it out and spent it, your next 20% return would only be the same $2000 on your $10,000 investment. If you kept doing this 5 times your total return would only be $10,000, $4,883 or almost 50% LESS than if you left your money in your account. The longer you leave your money in your account the more pronounced your returns will be and the greater the effects of compounding will be.

Einstein once said “Compound interest is the 8th wonder of the world”. When applied to options trading we can replace the word “interest” with “return on investment”. That means if you are winning and have a good return on your investment don’t take out the profits in your account to spend on a new boat, car or house. Re-invest your profits and if you are doing everything correctly the miracle of compounding returns will exponentially increase the size of your portfolio.

This is only a short article this week. Next week we have a lot to discuss when we talk about money management.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

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.

The financial markets are a similar system. It works best for the investor when trading practices are in balance, and Options Trading is the way to achieving balance for sustained, long-term returns.

If you have invested in the stock market for a while, you are probably pretty frustrated by wrongly guessing a stock’s move more often than not. Psychologically, most investors will bet on an upward move, and there certainly are a lot of researchers and advisors out there who will tell you things like “you can’t miss with this one – the fundamentals are just that good.” The problem is that there are so many things that can happen to a company that are simply not predictable: A product recall, an insider scandal, unexpected regulatory problems – the list goes on. Options trading takes this into account and hedges the bet.

Options trading is similar to a gambler hedging his bets on the roulette table by splitting his money between red and black, odd and even, certain series and other alternatives. Playing in this manner does not result in a sudden huge win, but rather in steady, sustained profits. That’s the difference between a novice and a professional.

The psychology of investing is similar to betting on a crap game. You can win by betting that you’ll win, or by betting that you’ll loose. There are only a few gamblers who bet on the latter, and that is similar to short-selling in the markets, i.e., betting on a stock’s downward move. If you are a more sophisticated investor, you may have tried that. How did that work out for you?

The point is, you are only betting in one direction, and that’s the problem. Options are an exciting alternative and the perfect way of hedging your bets and moving from guessing to safe investing. If you are a beginning investor when it comes to options trading, you would do well to subscribe to a reputable service that will do all the research and give you recommendations as to what moves to make and when.

Options research includes many different elements – not just “the stock will move either up or down”, but scenarios that take into consideration how long the stock may trade in a certain range, whether it will stay low for a few months but rise in the long term, whether it will trade cautiously until earnings are achieved, and then take off or fall dramatically. What’s more, with options you can always adjust your trade and change your strategy to fit the current market trend. What more can you ask for?

Options are like a balanced ecosystem that shield you from the wild up-and-down gyrations of financial markets that are so prevalent right now. If you are interested in more information, visit www.tradegreeks.com and opt in to the TradeGreeks Options Traders Newsletter. Then if you like what you see and want to participate, we invite you to become a member of TradeGreeks.

You are currently reading an article from our article series ‘Covert Life of Investment’.

Properly executed, these strategies have the advantage of minimal expenses – something everyone can appreciate during these troubled times. The following example will demonstrate how this is done.

Technical Tip: The seller of a Put Option is obligating himself to buy the stock at the striking price. For assuming this obligation, he receives the Put Option premium. For the more technical readers we have provided an in-depth article link at the bottom of this article.

On August 21, 2009, the day your August Put Option expires, two scenarios are possible: Either the stock price is greater than or equal to $50, or it is less than $50. Let’s evaluate both scenarios.

Scenario 1: The stock trades at $50 or above: in this case the Put Option will expire worthless and you get to keep the $400 that you received earlier. You can now repeat the strategy month after month. When carefully executed, you would have earned around $7,200 in 18 months without ever paying a dime and without even owning the stock.

Let’s assume the share price for the stock has gone up 41% to $72 over the course of those 18 months. If you now purchase the 100 shares of XYZ Corp., the cost of ownership to you is ZERO, as you would have offset the $7,200 required for that purchase by your strategy earnings. You are now the proud owner of 100 shares XYZ Corp. at no cost to you.

Scenario 2: The stock trades below $50, say at $48 (a drop of 11% from $54). In this case the August Put Options will be In-The-Money (ITM) and now you need to buy 100 shares of XYZ Corp. at the strike price of $50. But here is the best part: You get to keep the $400 that you earned earlier selling the Put Option. Your effective cost for this trade is $4,600 after adjusting for $400.

Compare this with someone who bought 100 shares at $54. Share traders ended up with a loss of $600 while you had a modest profit of $200 instead. Well not as good as Scenario 1, but not bad either!

The strategy acts like a low-cost replacement for actual stock ownership, BUT you must be prepared to take ownership of the shares under Scenario 2 circumstances. Keep in mind that this is a long-term strategy.

There are many different ways to construct these strategies – conservatively or aggressively. Just like regular investing, different people have different levels of risk tolerance. If you want higher profits, you’ll have to be willing to take higher risks.

At TradeGreeks we avoid high risks that MIGHT hit the big jackpot. Our focus is on conservative strategies with medium to long-term consistent, predictable returns. This will ensure great profits that beat anything else you might try in this market – sometimes well over 100% per annum. What’s even more important: Our strategies ensure peace of mind!

This is an article from the TradeGreeks’ “Tactical Series”

More in-depth explanations of this strategy can be found in our article “Uncovered Put Writing – Insider’s Guide”. We invite you to visit http://www.tradegreeks.com/ and register for free no obligation membership. This will allow you access to the article and many other educational resources regarding trading of Options.