Selling Options » Stock Options http://sellingoptions.net Take the income up front Fri, 19 Mar 2010 18:08:37 +0000 http://wordpress.org/?v=2.8.5 en hourly 1 How to Trade Stock Options http://sellingoptions.net/how-to-trade-stock-options http://sellingoptions.net/how-to-trade-stock-options#comments Wed, 13 Jan 2010 00:15:21 +0000 admin http://sellingoptions.net/how-to-trade-stock-options Stock options are rights that a stockholder is entitled to as far as his investment is concerned. The rights give him a choice to sell or buy some particular securities underlying that stock at a given price on a given date if he so wishes. However, let it be noted that, there is quite a difference between stocks and options as two different entities.  Stocks, as they are well known are types of securities that an investor can buy, just like bonds, shares or treasury bills. Options on the other hand are options that are placed on all the different types of securities there are, but again depending on the policies and the laid down regulations of the issuing company. Just like stocks, options also come in different types. However, unlike stocks, options have got an expiry date, upon which the right to sell or buy should have been exercised or the buyer just forgoes the right. The two options that a buyer has on his stocks are either a call or a put option. A call option is the right to buy or purchase a stock at the strike price but one is not obligated to do so. A put option is the right, but not the obligation to sell your stocks at the determined price, on or before the expiry date. During the trading of the options, it is worth noting that if an investor decides to sell the option, he is creating a security that did not exist before. This is what is commonly known as writing an option. If one decides to sell their rights, they become obligated to sell the stocks that were under the option, way before the expiry date. Since an option gives time for speculation, when they are traded way before expiry date, the chances for losing are high because then the stocks may not have hit the targeted price.

]]> http://sellingoptions.net/how-to-trade-stock-options/feed 0 Stock Options Trading: the ‘lean’ http://sellingoptions.net/stock-options-trading-the-lean-2 http://sellingoptions.net/stock-options-trading-the-lean-2#comments Thu, 03 Dec 2009 00:55:50 +0000 admin http://sellingoptions.net/stock-options-trading-the-lean-2 Professional traders use the term “lean” to refer to one’s perception about the directional strength of the stock. When you own a stock and intend to hold it for a period of time, you are aware that you will probably be holding it while it goes up and while it goes down.

This means that at any given moment in time, you might have a different opinion of the potential movement of that stock. Knowing this, there is a way to address your present level of confidence or “lean.” You do this by your choice of which option you sell.

While it is true that the at-the-money option has the most amount of extrinsic value, it might not always be the ideal option to sell in every situation.

For instance, if you feel that the stock itself has a very high chance of producing capital appreciation above the potential amount of premium you could receive from selling an at-the-money call, then sell an out-of-the-money-call so you can allow yourself a little more room to the upside on the stock.

For example, let’s say the stock is trading at $27.00. Normally, you would sell the 27.5 calls at say $1.00. If the stock were to rise quickly and eclipse the $28.50 mark, then with the buy-write strategy, your position would have maxed out at $28.50, and you would have a $1.50 one month gain. Not bad, but if the stock went to $29.50 then you would have missed out on another $1.00 profit. However, if we had sold the 30 calls for $.30 then we would have another outcome. You bought the stock at $27.00 and sold the 30 calls for $.30 and the stock goes to $29.50.

You would have made $2.50 in capital appreciation and $.30 in option premium for a total of a $2.80 return.

So, if you feel the stock has a real good shot at taking a run up, you can lean your position long by selling an out-of-the-money call.

If you have a more neutral view on your stock you would sell an at-the-money-call in order to receive a bigger premium which allows for greater downside protection if the stock trades down and higher potential profit if the stock becomes stagnant.

This strategy also works on the downside. If, by chance, you feel that the stock may trade down a bit during the life of the option, then you can sell an in-the-money-call. The effect of this would be to provide you with a little extra premium to cover more downside risk.

Remember when you sell an option you seek to capture extrinsic value. An in-the-money option not only has extrinsic value but also some intrinsic value.

When you feel that you want to lean your covered call strategy (buy-write) a little short, choose to sell an in-the-money call so you can also have some intrinsic value to cover your downside.

As an example, say your stock is trading at $29.00 and you feel that your stock may trade down a little but still remain in an uptrend cycle. You don’t want to get rid of the stock but you also don’t want to lose any money so you sell the 27.5 call at $2.00.

The stock starts to trade down and finishes at $26.00. If you had owned the stock naked, then you would have lost three dollars since you owned the stock at $29.00 and it closed at $26.00 on expiration.

However, because you sold the 27.5 calls at $2.00, you would only realize a $1.00 loss in the stock. The premium received will offset the loss due to the fact that you identified and adjusted for a likely move.

As you can see, the buy-write strategy can be altered to fit any directional view you have on your selected stock.

Finally, if you intend to use the buy-write strategy successfully, you generally need to sell the calls against your stock on a consistent, recurring interval, over a period of time.

This means that you will have to be prepared to “roll” your calls out to the next month come expiration. Sometimes, all you’ll need to do is to sell the next month out call.

]]> http://sellingoptions.net/stock-options-trading-the-lean-2/feed 0 Learning to Trade Stock Options Could Enhance Your Ability to Make and Keep Money from the Markets http://sellingoptions.net/learning-to-trade-stock-options-could-enhance-your-ability-to-make-and-keep-money-from-the-markets http://sellingoptions.net/learning-to-trade-stock-options-could-enhance-your-ability-to-make-and-keep-money-from-the-markets#comments Thu, 03 Dec 2009 00:55:49 +0000 admin http://sellingoptions.net/learning-to-trade-stock-options-could-enhance-your-ability-to-make-and-keep-money-from-the-markets Stock options trading can be dangerous business–very dangerous. Of course, folk get entangled with it because it can also be very , very rewarding. With options, you leverage underlying assets for a certain time period. You don’t have to buy the assets, just pay a premium up front in order to have control over them during the specified time. But , as with all investments, the more that you stand to potentially make, the more that you stand to possibly lose. So. You want to know what you’re doing for stock options to work for you. First, you have to have a strategic plan in mind up front. There are many stock options secrets that different financiers use. You need to study them and select those that you think are best suited to your risk toleration and your objectives. Never enter into a trade without knowing ahead why you are taking that approach and what you may do under certain circumstances, no matter how you’re feeling about them. In line with this, you have to select a good stock options broker. Find those online who are renowned for good reputations and good experience, and then compare their fee structures and what you get for your money. A good broker will be a good guide, but won’t try to tell you what to do. Another aspect of preparing your strategy is knowing the market. This means that you can understand the fundamental assets of the stock options you select. Follow online stock charts and economics reports concerning those assets so that you can make informed decisions and anticipate wisely, not shooting from your hip. And yet more preparation for the arena of stock options trading will entail good money management. You will keep your investment money budgeted and separated from the money that you require to live on and cannot risk. If you run out of that money, stop investing till you have reconstructed your bank account thru careful savings and even handed spending. However–don’t get out of a choice contract too shortly. You will take losses, especially when you’re getting your first experiences. You may expect to always take some losses, but the way to success is reasonably simply to make more than you lose over a period. Never give up too easily. At the same time, with stock options, you don’t want to hold it too long. Know when it’s time to sell a choice so that you can lessen your losses. But when it does come to your earning profits, don’t blow it by taking a heavy loss shortly after. That’s the worst experience in the world. Instead, understand how to use trailing stops. You must also be well informed in the easiest way to figure out a break-even point. Study both of these basic and obligatory stock options trading techniques before you dig into this world. But in the end, success in stocks options all boils down to ceaseless research. Again, know the market, know the stocks, know the corporations, know the basics, and know what methods to use when. And how can you be most guaranteed of keeping up with all this? Thru reading a high quality options newsletter. An options newsletter written by experienced, successful options trading professionals can be like gold itself to you. So, let your research start with finding such a service.

]]> http://sellingoptions.net/learning-to-trade-stock-options-could-enhance-your-ability-to-make-and-keep-money-from-the-markets/feed 0 Naked Option Writing – the Cadillac of All Option Trading Strategies http://sellingoptions.net/naked-option-writing-a%c2%80%c2%93-the-cadillac-of-all-option-trading-strategies http://sellingoptions.net/naked-option-writing-a%c2%80%c2%93-the-cadillac-of-all-option-trading-strategies#comments Sat, 28 Nov 2009 12:58:24 +0000 admin http://sellingoptions.net/naked-option-writing-a%c2%80%c2%93-the-cadillac-of-all-option-trading-strategies  

Let’s be clear on this. There is no other option trading strategy that can outshine or even equal the profit generating potential of the sport of writing naked options. The term ‘sport’ is used here because those who practice this money making trading technique not only turn out fabulous profits but also have fun in the process. It is a fun, profitable but dangerous option trading sport that is mostly played by seasoned and skilled option players. That is, until the sport’s peril’s were tamed with the use of trading techniques that, while offering substantial safeguards to the player, still continued to offer high profitability ratios, albeit at slightly reduced rates. Having made it ‘investor safe’ has only slightly altered the profit potential of writing nakeds and certainly, without doubt, continues to be the premiere money making trading strategy in the options market.

 

The birth of the options market in recent decades spawned the creation of dozens of trading strategies and systems that is today being used not only by individual options traders but also by financial institutions. Stock options as an investment instrument is now widely employed as a safe and sound money strategy. The ability of options to give the investor a wide range of choices in stock market investment is what has made the options market grow by leaps and bounds over the last two or three decades. There are dozens of option trading systems being employed by individual investors as well as financial institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value, another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is now popularly known as covered call writing.

 

Trading strategies, techniques and systems available to the option trader are so numerous today that it would take a whole book to describe each and that would be just a brief description not a detailed explanation. It would be far beyond the scope of what we could cover in this short article. Most of the strategies are based on the principle of buying calls and puts or, variations of this strategy such as the use of spreads. The reason for the popularity of buying calls and puts and its variations is quite simple; limited or defined loss against the potential for unlimited and fabulous profits. This is what has driven thousands into the options trading game. But like everything else in life there is always a trade off. While the potential for fabulous profits against limited investment exists the reality of achieving such success is restricted. It’s almost like buying a lottery ticket with the potential for winning fabulous riches. Or putting it differently, it’s also akin to going to a casino and placing bets on gaming tables with the hope that at the end of the evening you will come out with more money than you came in. As we all know there are very few winners in casinos and that is why the gaming business offers tremendous profits for the operators.

 

But one can be an option trader and be in a similar position as the casino operator.  How? By being an option writer or seller instead of a buyer. For every option that is bought in the market, there must be a seller or writer of the option. These writers are the casinos in the options business. As the option seller you take the bets from the option buyers and since 75 to 80 percent of all options in the market expire worthless, you the seller pocket the premiums paid by the buyers when the options they bought expire worthless. For the benefit of those who are not familiar with gambling casinos, the winning odds of casinos over the betting player is only around 5 percent and yet they rake in profits from this business. Now imagine this, research and studies have shown that the option writer (seller) has better than 10 to 20 percent odds over the option buyer.

 

Option traders who successfully use the strategy of selling options consider themselves as having found the Holy Grail of Investments. And of all the variations in option selling strategies (just as many as there are in option buying), writing naked options is considered to be the Cadillac division. No other option selling system offers the profit potential of the naked writer.

 

So why aren’t there more option writers in the market? For two reasons:

 

 

 

 

 

It must be noted however, that option writing is fast gaining popularity among serious investors looking to grow their wealth at a steady, consistent and secure manner regardless of market or economic conditions. For those willing to venture into this lucrative field for long term capital appreciation don’t let the first reason above frighten you into inaction. There are many ways one can protect himself and conquer the element of ‘unlimited loss’ in writing nakeds. The author of this article is one of many successful naked option sellers. He has put out an e-book detailing a trading system that uses a three pronged strategy that trounces the so-called risk of loss to be almost neglible. Information about his system can be found at his web site.   

 

 

 

]]> http://sellingoptions.net/naked-option-writing-a%c2%80%c2%93-the-cadillac-of-all-option-trading-strategies/feed 0 Stock Options Trading: the ‘lean’ http://sellingoptions.net/stock-options-trading-the-lean http://sellingoptions.net/stock-options-trading-the-lean#comments Sat, 28 Nov 2009 12:58:23 +0000 admin http://sellingoptions.net/stock-options-trading-the-lean Professional traders use the term “lean” to refer to one’s perception about the directional strength of the stock. When you own a stock and intend to hold it for a period of time, you are aware that you will probably be holding it while it goes up and while it goes down.

This means that at any given moment in time, you might have a different opinion of the potential movement of that stock. Knowing this, there is a way to address your present level of confidence or “lean.” You do this by your choice of which option you sell.

While it is true that the at-the-money option has the most amount of extrinsic value, it might not always be the ideal option to sell in every situation.

For instance, if you feel that the stock itself has a very high chance of producing capital appreciation above the potential amount of premium you could receive from selling an at-the-money call, then sell an out-of-the-money-call so you can allow yourself a little more room to the upside on the stock.

For example, let’s say the stock is trading at $27.00. Normally, you would sell the 27.5 calls at say $1.00. If the stock were to rise quickly and eclipse the $28.50 mark, then with the buy-write strategy, your position would have maxed out at $28.50, and you would have a $1.50 one month gain. Not bad, but if the stock went to $29.50 then you would have missed out on another $1.00 profit. However, if we had sold the 30 calls for $.30 then we would have another outcome. You bought the stock at $27.00 and sold the 30 calls for $.30 and the stock goes to $29.50.

You would have made $2.50 in capital appreciation and $.30 in option premium for a total of a $2.80 return.

So, if you feel the stock has a real good shot at taking a run up, you can lean your position long by selling an out-of-the-money call.

If you have a more neutral view on your stock you would sell an at-the-money-call in order to receive a bigger premium which allows for greater downside protection if the stock trades down and higher potential profit if the stock becomes stagnant.

This strategy also works on the downside. If, by chance, you feel that the stock may trade down a bit during the life of the option, then you can sell an in-the-money-call. The effect of this would be to provide you with a little extra premium to cover more downside risk.

Remember when you sell an option you seek to capture extrinsic value. An in-the-money option not only has extrinsic value but also some intrinsic value.

When you feel that you want to lean your covered call strategy (buy-write) a little short, choose to sell an in-the-money call so you can also have some intrinsic value to cover your downside.

As an example, say your stock is trading at $29.00 and you feel that your stock may trade down a little but still remain in an uptrend cycle. You don’t want to get rid of the stock but you also don’t want to lose any money so you sell the 27.5 call at $2.00.

The stock starts to trade down and finishes at $26.00. If you had owned the stock naked, then you would have lost three dollars since you owned the stock at $29.00 and it closed at $26.00 on expiration.

However, because you sold the 27.5 calls at $2.00, you would only realize a $1.00 loss in the stock. The premium received will offset the loss due to the fact that you identified and adjusted for a likely move.

As you can see, the buy-write strategy can be altered to fit any directional view you have on your selected stock.

Finally, if you intend to use the buy-write strategy successfully, you generally need to sell the calls against your stock on a consistent, recurring interval, over a period of time.

This means that you will have to be prepared to “roll” your calls out to the next month come expiration. Sometimes, all you’ll need to do is to sell the next month out call.

]]> http://sellingoptions.net/stock-options-trading-the-lean/feed 0 What Is Options Trading? http://sellingoptions.net/what-is-options-trading http://sellingoptions.net/what-is-options-trading#comments Fri, 27 Nov 2009 12:09:11 +0000 admin http://sellingoptions.net/what-is-options-trading An option contract is an agreement between two parties to buy/sell an asset (In this case, the asset refers to stock) at a certain price and specific date.
It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.
There are two types of option contracts – Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.
A simple example: Peter buys a Call option contract from Sarah. The contract states that Peter will buy 100 Microsoft shares from Sarah on the 5th May for $25. The current share price for Microsoft is $30.
Note: this is an example of a Call option as it gives Peter the right to buy the underlying asset.
If the share price of Microsoft is trading above $25 on the 5th May, then Peter will exercise the option and Sarah will have to sell him Microsoft shares for $25. With Microsoft trading anywhere above $25 Peter can make an instant profit by taking the shares from Sarah at the agreed price of $25 and then selling the shares on the open market for whatever the current share price is and making a profit.
The $25 value, which is stated in the agreement, is referred to as the Exercise (or Strike) Price. This is the price at which the asset will be exchanged.
The date (in this case 5th May) is known as the Expiry (or Maturity) Date. This date is the deadline for the option contract. At this date, the option buyer is to decide if a transaction of the underlying asset is to occur.
Outcomes: Let’s imagine that at the expiration date, Microsoft is trading at $30, then Peter will buy the shares from Sarah at the agreed $25 and then he can sell them back on the open market for $30 and make an instant $5.
Alternatively, if Microsoft is trading at $20, then buying the shares from Sarah at $25 is too expensive as he can buy them on the open market for $20 and save $5. In this situation, Peter would choose not to exercise his right to buy the shares and let the options contract expire worthless. His only loss would be the amount that he paid to Sarah when he bought the contract, which is called the Option Premium – more on that a little later. Sarah would, however, keep the option premium received from Peter as her profit.
All in all, there are more than 50 strategies you can deploy in options trading by combining many different strike prices and expiration. But do you need to know all?
The good news is you do not have to!In fact, most of them allow you to make money very slowly or limited.

]]> http://sellingoptions.net/what-is-options-trading/feed 0 Why Trading Stock Options is Better in a Recession http://sellingoptions.net/why-trading-stock-options-is-better-in-a-recession http://sellingoptions.net/why-trading-stock-options-is-better-in-a-recession#comments Wed, 25 Nov 2009 13:41:27 +0000 admin http://sellingoptions.net/why-trading-stock-options-is-better-in-a-recession The 2008 recession and stock market crash is the worst financial and economic crisis since the great depression. By Feb 2009, the Dow has dropped almost 50%, erasing all its gains since 1998. In terms of absolute points, the Dow has dropped over 7000 points, which is more than the entire Dow index before 1998. Without doubt, this stock market crash has rendered many traders and investors helpless in search for profit.
Even though profiting during such market condition is a really tough thing to do, traders and investors still bought stocks in hope of a recovery only to be disappointed again and again leaving a bunch of stocks in deep losses in their account. When money is used this way, what it really does is to rob investors and traders of cash for investing when the real recovery starts.
So, is there a way to place those bets with very little money and limit your losses to negligible amounts if your bet is wrong as it had been so many times in this stock market crash so far? Yes, the answer can be found in stock options trading (http://www.optiontradingpedia.com).
Everyone knows that stock options trading is risky and that you could potentially lose all your money. What everyone failed to recognize is the fact that stock options trading is also a risk limited way of trading for big profits while controlling potential losses to negligible amounts!
Stock options (http://www.optiontradingpedia.com/stock_options.htm) are contracts that allow you to buy a stock at a specific price no matter how high the price of that stock is in the future (Call Options (http://www.optiontradingpedia.com/call_options.htm)) or sell the stock at a specific price no matter how low the price of the stock is in the future (Put Options).
By replacing the buying of the stock with buying its call options, you will be able to control the profits on a stock using just a small amount of money. If the stock goes up, you simply sell the call options for the same profit as you would as if you bought the stocks. If the stock goes down, you lose nothing more than the small amount of money you paid for the call option contract. See where I am going with this? If you had bought only the call options of those stocks that you have bought all of last year, you would have lost only a small fraction of the losses that you would already have incurred through buying the stocks.
Let’s look at an example.
John and Peter have $15000 to invest with each and they both decided to buy shares of Apple Inc, AAPL, after it has dropped to $141 in October 2008, expecting a rebound. Peter decided to buy 100 shares with $14,100 and John decided to play it conservative and bought 1 contract of AAPL’s call options with strike price of $140 which was asking at $10.20 for a total price of $1020. 1 contract of call options allows you to control the profit of 100 shares of the underlying stock. In this case, John totally replaced the buying of 100 shares of AAPL with buying 1 contract of its call options. 2 weeks later, AAPL fell all the way to $85 as the recession deepened. Peter lost over $5600 while John lost only the $1020 that he spent buying the call options.
Assuming both Peter and John were right about AAPL and the stock rallies to $200. Peter would have made $5900 in profit while John would have made the same $5900 less the amount of $1020 that he paid for the call options.
See how buying stock options rather than the stock itself in this volatile condition allow you to make a few bets for a rebound without risking all your money? In the above example, Peter would only be able to make one bet once on AAPL with $15,000 while John would have been able to make those same bets more than 10 times at strategic support levels. Who would have a better chance of winning?
By replacing the purchase of stocks with controlling the same number of shares of that stock through its call options, you would definitely have a better chance of survival in this recessionary market condition. Be warned however, that you fully expect to lose the entire amount of money paid on the call options should the stock continue to go down, which is why you NEVER use all your money in a single trade.

]]> http://sellingoptions.net/why-trading-stock-options-is-better-in-a-recession/feed 0 One Simple Tip to Improve Your Options Trading http://sellingoptions.net/one-simple-tip-to-improve-your-options-trading http://sellingoptions.net/one-simple-tip-to-improve-your-options-trading#comments Mon, 23 Nov 2009 01:14:54 +0000 admin http://sellingoptions.net/one-simple-tip-to-improve-your-options-trading Options trading is risky. This is what you hear about all the time. However, above all, Options Trading is STRESSFUL! Yes, most beginners lose money in options trading not because they cannot choose the correct stocks (most professionals cannot consistently get the correct stocks too!) but because they cannot handle the stress that comes with options trading and then crack and make all the wrong moves.
Are you one of them?
Have you ever bought a bunch of call options for a few stocks and then have your account value go down 30% to 40% overnight just because the stock vibrated in the wrong direction? What did you do? Your emotions got fired up and you decided to do the clever thing and executed your stop loss policy just to see the stock go back in the expected direction a few days later, denying you hundreds of percent in profit.
Yes, options trading (http://www.optiontradingpedia.com) is leverage and therefore is volatile! It is not strange to see your account value go down drastically especially during the first couple of days due to the often much wider bid ask spread of options and time decay should the stock move against you. Too many beginners embark on options trading dreaming only of the extremely high profit without realizing that leverage is a double edged sword; It cuts both ways! In fact, if you merely went long on call options, you will find that in the first few days, the options value goes down much faster than it goes up due to decay of extrinsic value! So, how can anyone make money through directional trades?
One simple tip: Watch the Price Action of the stock and not your account value!
Price action means the change in price of your stock and whether or not its chart formation still conforms to your initial expectation. Watching the price action of the stock and not your account value keeps you objective when trading options. In the example above, when your account value go down 30% or 40%, you would instantly panic if you are going by nothing but your account value. However, if you are going by the Price Action of the stock, you might see that this small pullback does not compromise the initial setup of the stock and that its trend is still stable and decide to hold on. You will identify areas of support and resistance on the stock’s price chart itself in order to determine when to sell the stock options (http://www.optiontradingpedia.com/stock_options.htm). By doing so, you will be able to make more winning trades than losing ones over time if your entry setup is reliable.
Yes, directional options trading for leverage is all about the Price Action of the stock! If the stock moves, the options will too and you will make money. If you allow the volatility of your options position and its impact on your account value hit your emotional buttons, you will always find yourself selling out of winning trades with a loss. Adhere to this one simple tip and you will improve your options trading performance!

]]> http://sellingoptions.net/one-simple-tip-to-improve-your-options-trading/feed 0 Option Trading Explained – In Layman Terms http://sellingoptions.net/option-trading-explained-in-layman-terms http://sellingoptions.net/option-trading-explained-in-layman-terms#comments Mon, 16 Nov 2009 12:37:15 +0000 admin http://sellingoptions.net/option-trading-explained-in-layman-terms Robert Kiyosaki says that Option Trading is the investment of the rich.
Indeed, option trading is the most versatile form of investment in the world today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.
Option Trading Explained – Simply put, it is the trading of option contracts on a particular stock.
Options Explained – A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.
There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!
Option Trading Explained – What Can Stock Options Do?
Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.
Stock Options are:
Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.
Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.
Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.
Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.
Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.
And the Negative Effects are:
No value beyond expiration. You can potentially lose all your money along with the expiration of the option.
Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.
Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.
Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.
Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.
Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.
Using options creatively even allows us to structure investment positions to reap a fixed monthly return that beats the market regardless of which way the market goes! Just like in the Ride the Flow System offered at http://www.mastersoequity.com/MOE_ridetheflow.htm . Where your capital can be fully protected no even if the market enters a severe drop. Sounds amazing?
Option Trading Explained – Conclusion
I hope this “Option Trading Explained” has given you a good overview of the effects of options.
For a full and complete education in option trading, please visit http://www.mastersoequity.com/OptionUni.htm

]]> http://sellingoptions.net/option-trading-explained-in-layman-terms/feed 0 Stock Option Trading – New Options Clearing Corporation Rule http://sellingoptions.net/stock-option-trading-new-options-clearing-corporation-rule http://sellingoptions.net/stock-option-trading-new-options-clearing-corporation-rule#comments Sun, 15 Nov 2009 00:27:23 +0000 admin http://sellingoptions.net/stock-option-trading-new-options-clearing-corporation-rule A few years ago on a Monday morning, I checked my brokerage account and to my surprise it showed that I had purchased 1,000 shares of AMD for a total cost of $15,000. The payment for this purchase was taken out of my brokerage money market account.
Why surprised you may ask. I had not put an order for this purchase nor did I really intend to buy AMD. I get to this in a little bit.
Had I wanted to sell the stock on that day, I would have received around $14,500, a loss of $500 in just a few hours. In the end it worked out and I sold that particular stock a few months later for a handsome profit.
But on that day I had a paper loss of $500 and if I didn’t have enough money to pay for the purchase, the $500 loss would have been the least of my worries.
So, how did I end up with a stock that I did not necessarily want or order?
Automatic exercise threshold for equity options is the reason.
Today, I received the following message from two of my brokerage firms that reminded me of that day.
“Beginning October 2006, the Options Clearing Corporation (OCC) will implement a change to reduce the automatic exercise threshold for equity options. The current threshold of $0.25 will be set at $0.05 for expiring options that are automatically exercised by the OCC. The threshold for index options will remain at $0.01.”
Who cares about a measly $0.20? You can’t even buy a stick of gum with that.
For options traders this could mean a huge potential loss, margin calls and a whole lot of trouble.
Let’s go over a few simple reminders about options trading. Options are contracts that allow a person to buy or sell securities, for example stocks, at a predetermined price called option exercise price and on/or before a predetermined date in the future called option expiration date.
Options represent a reserved right but not an obligation. In other words, the holder of this right, that is to say the buyer, can exercise this right or not.
For example if you own a Microsoft January 25 Call Option, it gives you the right to buy Microsoft for $25.00 on or before third Friday in January. It is obvious that you would not exercise your option if Microsoft is at $20.00. In that case, if you really like Microsoft, you just go to open market and buy it for $20.00.
However, if Microsoft soars to $40, then you want to exercise your right (option) and buy the stock at $25 and turn around and sell it at $40 or keep it for further potential increase.
To exercise your options you need enough money to pay for buying the stock. Each option contract represents 100 shares of stocks, so 10 contracts represent 1000 shares of stocks. In our Microsoft example, for you to exercise 10 options contracts at the price of $25.00 requires $25,000 to be in your account.
If you don’t have that money, well, you may face margin calls and some other not so pleasant consequence. This is where the new change can cause some serious damage.
Options are a right and not an obligation except that you have to deal with automatic exercise threshold. This is the threshold the Options Clearing Corporation (OCC) uses to determine if they should exercise your right on your behalf.
In the letter I received from my brokerage firm, they informed me that if the price of the stock is only a nickel ($.05) above the exercise price, that would mean they will automatically buy the stock for me according to this new rule.
So what can options traders do not to deal with unwanted stocks?
First, they can and should watch the stock price and be proactive in the process especially on the option expiration date. Option trading is not by any stretch of imagination a passive approach. They can also call their brokerage firm and find out what other alternatives are available to them.
Seasoned options traders know what they should do and the aim of this article is to bring some facts to the attention of those who are just getting started.
In investing and in life I remember what Robert Grant said, “Men and women everywhere must exercise deliberate selection to live wisely.”
* DISCLAIMER: Vishy Dadsetan, http:/www.MyPersonalFinance.com or My Favorite Shop, Inc. do not endorse any product or company. This article does not provide investment, legal, insurance, or other professional services. If investment or other expert assistance is required, the services of a competent professional should be sought. Although Vishy Dadsetan has made every effort to ensure the accuracy and completeness of the information contained in this site, it assumes no responsibility for errors, omissions, inaccuracies, or inconsistencies.
© Vishy Dadsetan

]]> http://sellingoptions.net/stock-option-trading-new-options-clearing-corporation-rule/feed 0