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’.

How do you keep track of your profits (and losses)? How do you pick your next investment, or decide to get out of a position? Pencil and paper? A spreadsheet? Your online trading account? There may be a better way – using special-purpose software for all of these tasks.

What could this software to do for you? Here’s 10 things I would want from my software package:

1. Historical reports of the status of the stocks I am interested in – if I trade stocks this is obviously important. If I trade options, it’s just as important to know the progress of the underlying stocks before making buy/sell decisions.2. Automatically show trends, resistance levels, support levels – turning points are very significant in options trading.3. Allow manual creation of trend lines, projections, my own selection of resistance and support levels.4. Technical analysis of market data – e.g. showing candlesticks and other more complex analyses.5. Real-time trading data – what is happening right now in the market, showing current trading price ranges, trading volumes.6. Real time market news – prices can react rapidly to market news, both up and down, so it’s important to know what is happening to the companies you are investing in or planning to invest in.7. Automatic recognition of potential patterns, such as double tops, double bottoms, head-and-shoulders etc. It would be useful to have your attention drawn to the occurrence of these well-known patterns, so you can then make your judgement as to the future movement of the price.8. Price movement alerts – the ability to specify price levels that you want to reach to trigger selling, moving up or down. These alerts would indicate you had reached your target profit level (hopefully) or your maximum acceptable loss level.9. Automated trade submissions – the ability to specify conditions under which you want to submit a buy or sell trade, depending on the price of stocks or options you specify, or even depending on price movements. For instance, you might submit your call options for sale once they have passed above a set value, if they subsequently fall by an amount you specify.10. Accounting – a continuous valuation of your portfolio, and also a historical report of cash in and out of your account, and purchases and sales of stocks and options showing profits and losses per trade, per day/week/month.

A fundamental part of what you need for trading is actually the source of information, not just the means to make trades. In my list above I mentioned numerous data requirements – real time market data, real-time news etc. Your choice of trading software must take into account the availability of this data and the cost of providing it. If you are going to trade seriously, you will need real-time data with no time delay, whereas many of the ‘free’ data streams are actually delayed by 15 minutes or more. In fact, you might get your Stock Option Trading Software included in the account for the provision of the real-time data.

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.

Options trading actually act as a best means to earn money. It is more like giving out cash in exchange for potential profit. You buy assets or things of value, with hopes of producing income in the end. It is available as either a Call or a Put, depending upon whether they give the right to buy, or the right to sell. The Call options give you the right as a holder to buy the underlying commodity, and Put options provide you the right to sell the underlying commodity. However, be it a call or put option, it can be bought or sold on registered exchanges. You deal with buyers and sellers of options/stocks, hoping to bring in more profits.

The best part about Options Trading is that you can have a better control on both the probability of risk and the consequence of risk. In stock trading, you cannot actually control the prospect of loss because you win only if the stock goes up. But option trading reduces the probability of danger as there are options strategies that profit when the stock goes up, down and sideways all at once. Besides this, it also reduces the consequence of risk through leverage.

Today, certainly the success in options trading is determined by price movements and investor’s attention to either volatile or commodity stocks. Proper control using bear market options trading strategies can certainly put extra cash in your pockets. Moreover, it can further give you the edge when the next bull market occurs.

This is a cash generating strategy that not only offers downside protection that you otherwise wouldn’t enjoy if you just bought the stock, but also gives you the ability to generate a consistent monthly income, for only minutes of your time.

However as with all option trading strategies, there are pitfalls that you will need to avoid if you are to be consistently profitable.

Here are a few tips that may help you write covered calls successfully.

Always check the fundamentals of the underlying stock and make sure that you would be happy to own even if options didn’t exist.

A great resource for viewing fundamental ‘ratings’ for stocks is at http://www.morningstar.com

Don’t enter a Covered Call trade just because the option premium looks attractive. Higher option premiums (10-15% or more) often mean that the stock is more volatile i.e. prone to huge price swings and therefore greater risk.

I personally target the larger, more liquid and stable companies with monthly call option premiums between the 3-6% range.

One of my personal favorites and a stock that I have had considerable success writing covered calls on over the years is Oracle (ORCL).

I’ve also had consistent success with Intel (INTC) and Nokia (NOK). At times the Nasdaq Tracking Unit (QQQQ) is also attractive (a 3% yield is the highest I’ve ever seen it though).

Don’t hold stocks at least 2 days either side of earnings announcements. Much of the time expectations of good and even great earnings are already priced into the stock and should the stock fall short of expectations or even worse disappoint, a virtual bloodbath can follow. I’ve experienced declines of 30-50% in just a few days by holding my covered call stocks over earnings announcements.

Don’t get me wrong, it can also be good time to be a stockholder if the earnings numbers are really great, but I’m a little more conservative and to me it’s just not worth the risk. You can always buy back in afterwards anyway!

Always take a look at stock charts when choosing a stock to write covered calls on. There are 3 general patterns that I look for:

1) A moderate uptrend.

2) A sideways trend.

However the most conservative/safe chart pattern for covered call writing (in my experience) appears after a stock has had a steep sell off and has begun to move sideways for a couple of months.

This is a type of ‘bottoming’ pattern where much of the downside risk has already been ’sold’ out of the stock.

As covered call writers it’s always important to remember that our risk lies if the stock falls sharply, so we want to do our best to reduce the risk as best we can. This is just one way that I have found to be effective.

If you go to http://www.stockcharts.com and pull up the chart for the QQQQ during the early part of 2003, you’ll see this exact pattern. I successfully wrote covered calls on the QQQQ for about 4 months during this time before I allowed myself to be assigned and moved onto another opportunity.

There you have it. Hopefully these tips help you on your way to consistent profits and monthly cashflow writing covered calls.

Oh, it also goes without saying but I’ll say it anyway, “Don’t put all your eggs in one basket!”

Happy option trading and investing!

They are a cashflow generating strategy that involves both the buying and selling of either calls or puts of different strike prices but same expiration date to establish an overall ‘credit’ i.e. spendable cash.

It is a great option trading strategy for taking advantage of the ‘time decay’ that option selling provides, but with limited risk.

The amount of potential profit of course is limited to the credit received when the trade is first made.

Let me give you an example of this powerful, yet underutilized option trading strategy.

Let’s say that the QQQQ (The Nasdaq 100 tracking unit) is trading at $30.50 and we believe that it will continue to go up in price.

To create a vertical credit spread using puts (selling puts is profitable if the market rises), we could do the following:

1) Sell the $30 put (expiring this month).

and

2) Buy the $29 put (expiring this month).

TIP:

In my experience, it’s always best to sell short-term, ‘Out-of-the-money’ option premium for 3 main reasons:

1) Out of the money options have lower deltas, meaning the stock has to move further before the value of our sold option increases (remember we want it to decrease).

2) Selling ‘current month’ options (30 days or less to expiry) is when time decay is at it’s most rapid and the value of our sold option is eroding away with each day.

3) Contrary to buying options, if the stock does moves very little or not at all, we win!

Let’s say we received $0.90 cents per contract for selling the $30 puts and we paid $0.40 cents per contract by buying the $29 puts.

This transaction gives us an overall credit of $0.50 cents per contract ($0.90-$0.40).

If we sold 20 contracts of the $30 Put and bought 20 contracts of the $29 Put, this would give us a total credit of $1,000 (2000 shares x $0.50 cents).

So basically, if QQQQ expires at any price above $30 we will make our maximum profit, which is the initial credit we received ($0.50 cents).

On the other hand if QQQQ expires at any price below our breakeven point of $28.50, we will be facing a loss.

Let’s look at all the possibilities.

Once we have entered the trade the QQQQ can either:

1)Go up a little bit.

2)Go up a lot.

3)Go sideways.

4)Go down a little bit.

5)Go down a lot.

The beauty of this style of trading is that we will win in four out of five of these situations, and in many instances we can even win in all five!

Let me demonstrate how.

The QQQQ is trading at 30.50, if it moves up a little bit to say $30.80, our sold option ($30 Put) will expire worthless and we will keep all of the premium.

If the QQQQ moves up a lot to say $32, the same will occur and we will get to keep the premium.

If the QQQQ moves sideways and stays around $30.50, again the ($30 Put) will expire worthless and we will get to keep the premium.

If the QQQQ goes down a little bit to say $30.15, the same will occur and we will keep the premium.

OK, so far so good!

The only way we can LOSE in this trade is if the QQQQ goes down a lot to below $29.50 (which is the higher strike price minus the premium).

If it were the end of the month of expiry and the QQQQ was trading below $30 (our sold option strike price) we would be exercised and our total loss would be the difference between the sold option strike price and the current stock price less the total credit we received.

Our maximum loss will be realized at any price at or below our bought option strike price.

$30 – $29 = $1, less the premium of $0.50 cents = a maximum loss of $0.50 cents per contract or $1000 (20 contracts – 200 shares x $0.50 cents)

However, before it gets to this point, we would intervene. If the QQQQ is falling strongly then we were obviously wrong in our initial analysis.

Before we entered the trade though, we decided that if the QQQQ fell through support at $30 (which it does) we would move to plan B.

At this point we can do a little ‘magic’.

With the click of a mouse through our online broker, we can instantly jump from the bullish camp to the bearish camp!

We do this by buying back the options that we sold which in this case is the $30 puts, and this removes all of our obligation.

At this point though, we have taken a loss BUT, we are still long the $29 puts which would have already increased in value.

If the QQQQ wants to go down, then we are going to let it and just ride the $29 puts as far as they will go.

The more the QQQQ falls in price, the more our option will increase in value.

If it falls far enough, which in this case it does, (falling to $28.50) then we will not only make all our money back, we will start to move into a profitable position.

With credit spreads, we give ourselves the flexibility to change our position mid stream, and the chance to not only recoup some of our losses (if we get it wrong), but to possibly move from a loss into a PROFIT!

And this is just the plan B if things go wrong. Plan A, on it’s own, has statistically, a very high probability of success.

If on the other hand we had the view that the QQQQ would go down, we would simply construct a vertical spread with Out-of-the-money Calls.

We would sell the $31 Call and buy the $32 Call for an overall credit and should the QQQQ close below $31 by the end of the month, the spread would expire worthless and we would simply keep the premium.