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For beginning option traders I recommend you read this book first “Beginning Investors Bible” by Doug Sutton. I’ll give you a little introduction here in case you’re totally unfamiliar with them. Also, for a detailed description of the techniques available:
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What is an option?
Well essentially, in our case, it is a contract you enter that gives you the right, but not the obligation, to purchase or sell a stock at a given price. It’s called a derivative contract because it is based on the movement of an underlying financial instrument such as a stock or index. Options that give you the right to buy a stock are called CALL options; options that give you the right to sell a stock are called PUT options.
An options price is calculated by a number of different factors including time until expiration, volatility, strike price, the underlying stock price and the risk free interest rate. All of these factors come together in a formula called the Black Scholes formula, which is just one mathematical model for option pricing.
An (in-the-money) option, in the case of a CALL option is one whose underlying stock price is above the strike price or the reverse for a PUT option.
An (At the money) option is one in which the stock price is the same as the strike price. True for both CALL and PUT options.
An (Out-of-money) option is, in the case of a CALL option one who’s underlying is below the strike price and again the reverse for a PUT option.
In order to properly place these types of trades you must have some type of software program to graph the interaction of all these factors over time. Many brokerage websites have such software but you must learn how to use them.
An option contract is sold in groups of 100, which means that 1 contract represents 100 shares of the underlying stock. For example, you may pay $100.00 for one contract but if the underlying stock moves just ten cents your contract could change as much as ten dollars. All of the various types of spread names such as “Bull Put” are derived from techniques using combinations of these options. So you see the option gives you leverage, the ability to control more of the security than you could by simply buying one hundred dollars worth of stock. I.E. (If the underlying stock price was $33.33 you could only buy 3 shares.) This can be good or bad of course depending upon how you set up your trade. This is why risk management is so important.
I can think of many things in this world that are timeless, even priceless– but options are perishable and must be traded at an equitable price to be useful. They are subject to volatility, market sentiment and eventually expire worthless.
Never forget this!
I recommend you keep to these trading patterns based on your available capital:
Remember always follow your money management/ probabilities parameters. Each level builds upon the last.
This will make more sense to you after reading through the entire piece. Due to commissions & slippage, typical market movements and diversification requirements a minimum funding of 18K is recommended. If you are trading with under 8K then have more of an investors mindset (Long Term 1year +) for your trades. Most people will need at least 18-25K, with a portion of their portfolio in good dividend yielding stocks or other fixed income investments to maintain consistent income with reasonable risk. Take your time learning, paper trading is OK but it’s a one dimensional experience until you’re working with real money. A unique combination of art and science. Don’t get discouraged if you’re not proficient in the beginning. It can take a couple years before your comfortable and several more before you get your techniques down. I recommend a backup work station computer just in case your primary craps out.
Addendum 2021 In recent years daily, bi-daily and weekly option expirations have made it much easier to make money with limited funds, In todays environment, one can start a lucrative trading business on as little as a few thousand dollars.
FUNDING YOUR ACCOUNT
>8k
Long Term (1 year +) Bull Call & Bear Put spreads, LT Ratio back spreads, Iron butterflies on index options and Outright ETF ownership, mutual funds, CD’s and bonds.
>18K
Short Term (< 6-12 months) Credit Calendar spreads, strangles, straddles, butterflies on stocks.
>25k
Short Term (< 3 months) Credit Condor spreads, butterfly spreads on stocks and sectors, bull put and bear call spreads, direct stock ownership using collars.
>50k
Day trading ( <1 day), futures trading, commodity trading, naked put writing, sizzlers(<3day option trades)
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Poorly funded accounts and/or negative cash flow in your budget will cause the following problems:
You will be unable to take advantage of opportunities when they happen .
You will not have enough funding to utilize multiple trades when necessary (I.E.) sizzlers.
You will not be able to meet margin calls when needed.
You will not be able to play in-money long or short positions with high volatility.
You will not be able to effectively play iron butfly, calendars when needed.
You will not be able to morph your trades in a timely fashion to gain advantage.
You will not have enough play in your option positions to effectively utilize stops.
You will not be able to work with expensive stocks/options that offer greater risk/opportunity.
You will not be able to afford to squeeze out profits of a dieing position while putting on new positions, such as buying more on the way down.
You will trade too often and will take unnecessary risks out of need, fear & desperation.
Out of the money Bull put credit spreads as well as Bear Call credit spreads might be impossible.
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Many Option strategies work well for trend trading. For tight range trading consider Collars (With stock ownership), calendars and butterfly techniques.
In the beginning stick to long term positions when buying options.
When using triggers keep in mind that you must be willing to loose everything up to the trigger point. Obviously if you don’t have a large enough position to account for normal standard deviation fluctuations then you must be willing to get called out. DO NOT use triggers in a volatile market OR to change a positions orientation.
If a trade is going to go right it will usually do so from the start. Use the stomach test on all of your trades, if you’re anxious after placing the trade, no matter what strategy or techniques you use, you’re doing something wrong when designing it.
Buy way-out money options if you expect a relatively quick move into intrinsic value on the option. It is also a valuable strategy to get a piece of the action with minimal financial layout on expensive options. On the other hand if you expect a relatively small move and you have large cash reserves OR very little time left before expiration then purchase way-in-money options.
Puts hold their time value better when Out-of-The-Money. Calls hold their time value when in-the-money. Subsequently one can buy out-of-money puts on a reverse ETF fund to leverage your interest in an upward movement while maintaining the benefit of preserving time value that out-of-money puts offer.
Under normal circumstances buy Puts a little bit In-The-Money and buy Calls a little bit Out-Of-Money that way if the market reverses a little bit your capital will be preserved. LT trades only.
Because of the above characteristics of options- Bull Put spreads and straight calls tend to work best for Advancing markets while buying straight puts work best for Declining markets.
Trademiner: Through Artificial Intelligence
CONTRAIRAN INDICATORS
Three very important contrarian indicators are:
1) Investors Intelligence.
2) CBOE Equity Put/Call Ratio
3) Rydex Nova/Ursa Ratio. 4) Margin debt 5) Money Flows
They can be found, among other places at the Schaffer’s Investment Research website.
Some other indicators and sites
4) Baltic trade freight index
5) Advance Decline Index
6) VIX Index
7) Libor
8) trade swaps
HEAT MAPS
9) FINVIZ.COM
10) Insider-monitor.com
{b}Tracking Sites{/b}
11) Census.gov
12) Russell.com
13) Sectorspdr.com
14) Moneycentral.msn.com
15) 1option.com
NOTE: {I}Keep in mind that at any given time the usefulness of indicators will change. Watch closely which indicators give you useful information and those that don’t.{I}
INDICATONS OF A TREND CHANGE
1) A major milestone is reached within the index. (I.E.) 10000 for the DOW.
2) Wide ranging day that stands out over a 6-12 month period.
3) Moving average crossovers.
4) A week over week trend of increasing “UP” days in the market.
5) A major socioeconomic event such as the start or finish of a great war.
6) A top official within a company or country is fired, hired, elected or impeached.
7) A major lawsuit is filed against a company or a new product is introduced.
8) Selling by insiders (institutional selling)
9) P/E ratios become unusually low.
10) Lower dividend yields.
11) Interest rates get lower.
12) A period of Quantitative easing comes to an end
MARKET TOPS
1) When all the bear market pundits disappear.
2) When pundits all say buy, buy, buy.
3) A sector top can often be predicted when new competition arises.
4)Over expansion and unmanageable
5) Massive acquisitions, especially in retail
6) New government regulation or action
MARKET BOTTOMS
1) Market sentiment is very high.
2) Bears exceed bulls in the investment intelligence survey. Less than 40% Bulls.
3) Mutual funds bailing out.
4) An uncommon Crescendo sell off.
5) A bottom in 1/3 of the sectors in short <1week time frame.
6) VIX reading above 40 indicates pure panic.
7) extreme instability in the markets.
8) VIX stops its upward movement even when S&P continues downward.
STOCK BOTTOMS
1) All sponsorship is lost. Multiple downgrades.
2) More and More bad news but the stock no longer decreases.
3) Consistent large insider bottoms.
4) Very bad rumors and allegations but stock remains stable with no decrease.
STOCK TOPS
1) New competition
2) Vagueness at conference calls
3) Blindsided by Government via new law or discount.
4) Accounting Mayhem
5) More than 50% bullish in market.
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Here is a commentary from Mark Hulbart of Market Watch on a recent market rally
History suggests rally will continue for at least a few more days
It would appear that the stock market has built up enough momentum to keep the rally going for a while longer.
By rising for six straight sessions, in fact, the market possesses significantly above-average prospects of continuing to perform well over the next couple of weeks.
That at least is the conclusion I drew after analyzing all past instances in which the Dow was able to rise for six days in a row. It turns out that, since the Dow Jones Industrial Average (NYSE: ^DJI – News) was created in the late 1800s, there have been more than 600 instances in which the Dow’s wining streak lasted at least six days. That’s more than a big enough sample to support some interesting statistical tests.
Dow’s average gain over subsequent…
If the market has risen six sessions in a row…
If the market has NOT risen six straight sessions…
Week
0.4%
0.1%
Month
1.2%
0.5%
On average whenever the market rose for six straight days, the Dow gained an additional 0.4% over the subsequent five trading sessions, in contrast to an average of just 0.1% over all other five-day periods. Over the subsequent month, the margin was 1.2% to 0.5%. These differences are significant at the 95% confidence level that statisticians often use to determine whether a pattern is most likely genuine.
Another indication of the stock market’s recent momentum: Two of the last six trading sessions have been so-called “9-to-1 up days.” These are sessions in which the ratio of the trading volume of rising issues to that of declining issues on the New York Stock Exchange is at least 9 to 1. The volume ratio for July 7 was an impressive 21 to 1, while Tuesday’s ratio was 12 to 1.
To be sure, there have been lots of other “9-to-1 up days” in recent months — so many, in fact, that they appear to have lost some of the bullish significance that they used to carry. There were five such days, for example, over the month ending June 10, and yet the stock market was nevertheless weak over the subsequent three weeks.
Furthermore, as Dan Sullivan, editor of The Chartist, pointed out Tuesday evening, the stock market is now overbought. So we should by no means expect the market not to face headwinds in coming sessions.
In fact, in only 10 of the more than 600 cases over the last 114 years in which the Dow rose for six straight sessions did it proceed to rise for six additional sessions as well.
Still, the market doesn’t need to rise in every session to have a positive overall bias. Betting on the stock market is a matter of playing the odds, and the odds favor the bulls for the next couple of weeks.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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Don’t ever Ignore Volatility
-When placing a trade. You can loose money quick when using out-of-money options that are too expensive. Option or stockVolitility can be found on various financial web sites. Unusually high option prices or volume (3 to 5 x normal) for the near month can indicate that a move is brewing, especially if the underlying has been flat. Don’t use trade triggers during volatile market periods In addition- It is safer to liquidate the short end of a spread to adjust your position rather than buying overpriced options on the long end. If implied volatility is far in excess (more than 1.5X) that of historical volatility then don’t trade it.
Weekend Jeopardy–Prepare your portfolio for unexpected weekend events by ensuring your portfolio is completely balanced. I.E. The recent takeover of Fannie May and Freddi Mac by U.S. government on Sunday September 7 caused stock market futures to soar for Monday’s opening.
Morning Mayhem– Wait until 8:30 ( Mountain time) for market to stabilize. You should use only limit orders to get into a position. If necessary It’s O.K. to use market orders to get out of a position in a hurry.
Closing Bell Madness– Markets can be very volatile the last 20-30 minutes. Plan your trades accordingly.
Desperation & Fear -Have a reasonable living budget in place and live within your means. If you have to dip into your trading account to pay bills you will never get ahead.
Market conditions will change, don’t let fear drive your trading decisions, look forward not backward.
Keep tabs on VIX readings Increasing VIX readings signal an impending move on the index’s.
Watch your moving averages Sometimes you can find repeatable patterns in the 10 day cycle. I use the 10, 35 and 50 day.
Earnings Releases -Don’t do calendar spreads or butterflies on months when earnings are released. surprises can cause the stock to behave unpredictably thus ruining your calendar spread profits
Always Scale Into your trades –
Buy incrementally, (start with small blocks of stock and buy larger and larger blocks) as the stock decreases and sell incrementally (again start with small blocks and sell larger and larger blocks) as the stock begins to increases.
Keep in mind commission costs, try to keep total commission costs for each cycle no more than 10% of the total profit or scaling will become an ineffective strategy. If you can’t make a reasonable profit within these parameters then your positions need better funding
Set loss limits and Exit strategy – Have a plan in place in advance to either morph the trade or take profits before the trade is put on. Know what you’re going to do ahead of time if the market corrects. Emotions can kill your portfolio. Scale out slowly by 1st creating a neutral position if necessary. In volatile situations you can engineer your trade to profit in more than one direction or at least profit in one direction while neutralizing itself in the other. Begin EVERY TRADE CAUTIOUSLY- remember , there is never a sure thing, if the position or the trade itself doesn’t protect you from loss then use trade triggers and limit orders. Never go above your risk parameters unless you’re so far ahead that you can afford to loose it if the market goes against you.
Some ideas when calendar spreads go upside down:
In a stable environment resell at original strike.
In a volatile market Purchase a long IN-MONEY on the opposite side OR
Sell an IN-MONEY to profit from the trend.
If you feel you totally miss-judged you must liquidate the entire position when your MAX loss is incurred. (Even on the same day if necessary)
Be Care full when listening to Analysts – Use proper judgment when following analysts. Remember their not fortune tellers. Track the success of the people you would like to follow. If someone’s name is not behind the recommendation watch out. A listing of some analysts and guru’s who, for the most part, have excellent track records:
Market timer Bob Brinker
Options expert Bernie Schaffer
Economist Andrew Smithers
Bond investor El-Erian of Pimco
Stock Expert Jim Cramer of Mad Money
Es Ponzi (Kudlow)
Squawk on the Street
FBN (FOX business news)
Trade Balancing– Keep your portfolio balanced albeit skewed in the overall market direction. Base all positions on overall market direction
Impatience -Impatience will loose you money every time. Wait for proper R/R ratio on your strategies, wait for account to achieve incremental profits, Wait for good prices on your options, Wait for technical indicators to come in line. I’ll say it again: Success may be a marathon but making excellent returns can often happen in sprints.
Make use of option Expiration week by utilizing quick gain/ low risk trades. During the last 3 days before expiration you can make quite a bit with virtually no risk by selling options (using using bull put or bear call strategies but you must accurately predict if and by how much the underlying stock will move during that short time. I call these trades’ sizzlers. These trades work best in groups. Playing only 1 underlying at a time is too risky.
Have a repeatable plan and use it, it’s too much aggravation and work to try to profit from every single swing or opportunity. get comfortable with certain stocks, indexes and/or strategies and do regular study on them. Keep a basket of stocks on the back burner (so to speak) to pull up and use if necessary. 20 or more is a good number. But never work with more than 5-8 simultaneously.
Current Events – Don’t base trades on future market events. News is often already built into the stock price so be careful. However, one can often use news as an indicator of market strength; when weak or lame positive news is given on a day to day basis to justify small positive moves in the market, especially during a correction or in a bear environment, it can be an indication of a faultering market. The reverse is also true.
Living under your means– This is the only way to get ahead financially especially if you’re trading. After all, how can you ever increase your nest egg if you’re consistently adding more bills and obligations as your means increase.
Trying new techniques -Although admirable-be prepared for unexpected surprises and possible losses- It seems to happen every time.
Play the right options – If you can’t get a good price on your options then forgo the trade. They’ll be other opportunities. Regardless of what the underlying stock is doing place your limit order between the bid and ask, in very volatile conditions you can even place your limit order up to 2% under the going price.
Get out of stagnant trades that are not making money –You be judge of how long you’re willing to wait. Ignoring opportunity costs will put a dent in your portfolio. If you’re utilizing options that expire way out into the future be prepared to wait, if necessary, for the trade to pan out, especially if it’s been morphed. In some cases you can even buy more of the position on the way down, that is- if you’re expecting it to start upward before the positions expiration. Reevaluate your portfolio strategy every 3-4 months, if you haven’t been making a profit change your strategy.
Option Price ,Volume, Open interest and Spread Anomalies – Unusually high option price and/or volume for the near term AT-MONEY- options can be indicative of an impending move. Another indication of a potential market change of venue –so to speak– if out-of-money options suddenly begin increasing in price with little if any changes in the underlying OR if the spread between the bid and ask increases more than usual, OR if the stock backtracks significantly but the out of the money options loose little if any value.; all of these conditions can be indicative of a fast moving stock. If open interest is twice the trading volume of the underlying stock (multiply OI by 100) don’ trade it.
Always Consider the Market Trading Environment: During very high market volatility periods option prices will be very, very high. This can be an opportune time to play out-of-money strangles >6months. Trading periods need to be short and profits need to be taken quickly since the market will be bouncing but not trending. Trending strategies don’t work well during these periods. Unfortunately making good returns with straddles/strangles requires a much higher portfolio balance, so if you’re short on funds its best to simply stay out during these times. One example of this is the sub-prime fallout period that begin 10/30/07.
- During strong market trending periods, especially upward, option prices will be on the low side. This is a good time to play bull put spreads and other long option positions. Calendar spreads work especially well for big slow growth blue chip stocks in advancing markets – they can assure you of steady growth even in lag periods and give you excellent leverage on your money as well. A good example is the stock market between the years 2003 and 2004.
During very stable flat market periods you can either play calendar spreads, butterfly type spreads and/or seek out up and coming new companies with cheap options that have very strong technicals,fundamentals and accompanying sector strength. An example would be the period between 2004 and mid 2005.
Recessions usually last between 6 – 8 months and are often “called” after they occur.
Once you become experienced shoot for no more than 10-20% per month on your money –this is the target the Pros’s recommend. any more and you will be taking unnecessary risks and open yourself up to greater losses. If you can’t live with those returns than you must either enrich your trading account or find alternate sources of income for yourself.
If you have a large enough portfolio to buy stocks outright then Collars work well to achieve downside protection on your holdings and enable you to make incremental profits using delta neutral strategies, especially if the stock is stable or making or slight increases. In this case think of puts as insurance.
Buy only as much time as you need (for the trade to work itself out). For very short periods <1 month, buy significantly in -the-money to insulate yourself from Time Value deterioration. For long period trades buy out-of-money to keep your costs low and increase your leverage.
You can measure profits from options liquidated. Close out as many of the positive options as necessary – you can sometimes liquidate negative legs when the position is positive. Try to get a collection of securities together that you get to know well and use them over and over.
MULTIPLE TIME FRAMES
Use multiple time frames and choose the strategies your most comfortable with. Here are some recommendations:
For trend trading I use the monthly time frame with the daily indicator and the 10 day time frame with the hourly indicator to help me make decisions of when to get in and out. In general a 3 to 1 time frame is used. If my trading is for a longer duration, yearly for example, then I would use the yearly time frame with the weekly indicator against the 3 month time frame with the weekly indicator.
Butterfly, Iron Botfly and Calendar Spreads – S.T. for stagnant or tight ranging market periods. Must have large contract size to overcome commissions and the possibility of minuscule gains. If you’re working with stocks you must use multiple trades to increase success. If working with an index you must offset with directional trades on individual securities. 1 Month (Short leg)
In-Money Long or Short straight options – Used for tight S.T. range trading during very high volatility periods when the market or index is moving in a tight range area. 1 Month
Ratio Back spreads, Bull call, Bear put and leaps – Used for L.T. trend trading. Trade in market direction. Utilize trades in 4-8 sectors simultaneously to increase chances of success. 1 Year
Strangle/Straddle – Used for medium term trend trading during very high volatility periods when the stock or index is capable of large swings. When working with stocks use with multiple securities to increase chances of success.
3 Months.
Sizzler – used for very, very S.T. spike trading 3 days before option expiration. Must have multiple trades on simultaneously to increase success.
3 Days
Bull Put – Used for medium term trend trading for up periods. .Bear Call- Used for medium term trend trading for down periods. Must have multiple trades on simultaneously to increase success.
3 – 6 Months.
Embedded Trades – Put a calendar spread inside a long option position. 1yr long/1 month calendar. Put a short term Bull Put credit spread inside a Long Term Bear Call credit spread to make profit in the event of a stagnant underlying or visa versa. Bull Puts, Bear Call credit spreads can be designed to make money either thru time erosion (by staying out of a given range) or by movement ( by traveling thru a given range) It simply depends on how you design it. The latter can be used to buffer a Long Term spread by making money in the event the L.T. goes upside down while only limiting the gain in the event the Long Term trade goes in its planned direction
Prep Trades – Trades that are ripe for morphing in the event the market forms a direction. I.E. A strangle or straddle trade that is played at-the-money but can be easily morphed to a bull put or bear call spread. .
Index Sector Tracking stocks – You can work with specific sectors within the S&P index to take advantage of areas of strength in the economy without the added work and risk of working with individual stocks if you so choose. These Index groups are also available as ETF’s.
ECONOMIC SECTORS:
1.Capital Goods
2.Energy
3.Technology
4.Health care
5.Communications
6.Transportation
7.Basic materials
8.Consumer cyclical
9.Financial
The Following is a list of SPDR index sector tracking stocks that have options trading capability:
Consumer Staples XLP
Energy XLE
Financial XLF
Health care XLV
Industrial XLI
Materials XLB
Technology XLK
Utilities XLU
Consumer XLY
Oil & Gas Explore XOP
Consumer Cyclical XLP
Technical XLK
Homebuilders XHB
The following is a list of the major index Tracking ETF Stocks:
DIA (Largest 50)
QQQQ (Nas 100)
SPY (500)
IVV (S+P 500 Large Cap))
MDY (Mid-Cap) 2 Billion- 10 Billion
IWM (Small-Mid)
EFA (Foreign)
VTI (Wilshire 5000 super broad market index)
IJR (Small Cap)
Note: There are various ways to create the same spread to accomplish different objectives, for example, a Bull Call spread can be designed to act as a TE (Time Erosion) trade or a long position.
Morphing Trades or Turning Losers into Winners
Long (Call or Put) -> Bear call, Bull Put
Strangle/Straddle -> RBS, Bull Put, Bear Call or Long
Calendar -> Bull Put or Bear Call
Bull Put/Bear Call -> Calendar
Bull Call or Bear Put -> RBS or long (Call or Put)
Iron Butterfly -> In-Money Bull put or Bear call
Straight Butterfly and Sizzler –> Let them burn out.
DO NOT MORPH Butterflies and Sizzler trades. Rather let them both burn out. As indicated, Iron Butterfly trades can be morphed. Have loss limit exit points for way-in-money options.
Butterflies, sizzlers and strangles/straddles must be done in groups and used simultaneously with other strategies. They must all be done in a 3up 1 down risk/reward ratio if possible. Index spreads can be done alone. 3 legged calendar spreads can also be done alone as long as you’re playing them in groups.
DO not morph or skim L.T. >1.5 year trades, rather set 4-8 trades (with proper allocation) and leave them all on. In some cases you may want to have loss limit exit points.
SKIMMING profits on the other strategies is advantageous, but you must research or developer rules for doing this.
A good hierarchy of approach when setting stops, preparing and recognizing reversals and breakouts as well as confirming trend or range changes:
Current events and seasonal considerations,
Overall market direction,
Specific Mutual fund performance.
Specific sector performance,
Specific stock performance,
Original tenor of trade,
Distance in or out of the money,
Current trend or range conditions,
Chart patterns & reversals, technicals,
When building up my portfolio I like to add new positions into market strength.
Remember to implement a (money management) failsafe after considerable profits are made, especially if they are 2-3% and made within 1-3 days. Keep an eye on the VIX, this is a good predictor of future volatility. When using Moving Averages make sure you examine the 30minute denomination for the 10 day graph and compare it with the 60 day and yearly graph. Before adjusting your position for a change make sure all the graphs are telling you the same thing.
Sometimes after a period of 1-2 months of tight range trading (in an upward market) you will see a breakout to the downside – don’t hesitate to play this even though it is against the prevalent trend. Don’t be afraid to play this trend – just slowly adjust your position. Don’t worry about liquidating loosing legs as the lost monies is more than made up for within the intact leg. Make sure you use all 5 of the above methods when gauging the direction of a trade.
A good Hierarchy to keep in mind (in order of risk & funding requirements):
Day trading
Commodity Futures
Option Trading
Stock Ownership
Exchange Traded funds
Mutual funds
CD’s
Money Markets
Corporate Bonds
Municipal Bonds
U.S. Treasury Bonds
There are varying philosophies and methodologies
You can search for the big movers and put on 5 to six of those trades. With this method you may receive a negative income for a 4 to 6 month period or even longer. However if you are making good choices you will end up positive for the year.
You can restrict your choices to stable stocks in which you can earn a stable but restricted income using techniques such as calendar spreads or time erosion bull or bear put spreads.
You can use a balanced strategy as I have described at the end of this paper.
You can work with the major sector or index options to take advantage of the overall market conditions without the work of searching individual stocks.
You can scalp using day trading techniques. This is where you go in and out on a daily basis. Usually requires a large account balance. >50K. You own the shares outright for very short periods.
Day trading
Trend trading
Positional trading
LT investment
.REMEMBER, Wait as long as necessary to make a good trade. Watch-Watch-Watch then Wait and wait some more. Only then should you place your trade….. Always Keep the big picture in mind then work out the details down the line. Although you may make money in the short run — ignoring any of this information will open you up to serious losses in the long run. I.E. Wait for tops and bottoms, not just major ones but minor ones as well before putting on your trades. Always Get into your trades with limit orders and out with stop-loss orders.
Hedge VS. Diversification – A hedge is a position that helps when the rest of your portfolio does poorly. I.E. An oil sector hedge (positive play) can do well when the rest of your portfolio is tanking but can also do well ( in the case when your hedge is relatively overpriced and you position yourself negatively) when the rest of your portfolio is doing well. Diversification is when you have positions geared in the same direction but within different sectors of the economy OR within different companies within the same sector.
Binary Options– One of the latest type of options now available. Essentially there are two types with some variations. Cash or nothing and Asset or nothing. Cash or nothing pays a fixed amount at expiration regardless of how much or how little the stock increases. Asset or nothing pays the price of the stock at expiration, you will gain more profit if the stock keeps increasing. However, you cannot trade the option in the middle of the contract nor do you have the right to purchase or sell the underlying as you do in a conventional American option. You are working strictly on a monetary basis.
These options typically have a life of between 5 minutes and 1 day. In the past financial institutions and other entities have used these options to make quick “bets” if you would as to the outcome of weather events especially in areas that are easily affected such as agriculture and transportation, or anything else in the economy that can move quickly on events such as foreign currencies, consumer price index etc.
With these options you either make a solid profit or loose the majority of the investment. Variations include range options which payout if the options expires within a certain range, Touch options which payout if the option touches a particular price point, high options in which the option must expire above a strike price and low options which must expire below a strike price.
Since these types of vehicles are not subject to the rigors of Longer term investing such as overall market movements, diversification requirements, high commissions and slippage as we mentioned earlier they have much lower funding requirements. However, that doesn’t mean there any less risky.
Binary Options Trading Solution
TIPS
Analysts downgrades based on valuation alone can be misleading.
A short market rally is a great time to pick out losers or at least stocks that are putting a drag on your portfolio. Trim back your portfolio using with these securities as the first to go..
If you’re profiting too much during these times (above 5% on the markets average) you may have to much risk on the table. This is usually due to concentrating too much on one sector – a lack of diversification. Don’t chase the market during these times by buying into more positions, this is the time to slowly take your profits.
4/20/13 A couple of ETF funds I discovered that are options tradable include the TNA ( Direx Daily Small Cap Bull 3x shares) It seeks to replicate 300% of the performance of the Russell 2000 index, representing approximately 10% of the total market capitalization of that index. The second is the TZA, same as above but it reflects the reverse 300% of the performance. Both of these ETF options have expiration dates less than 1 week which make them very attractive for ST profits via synthetic stock ownership (Buying a call and selling a put) as well as covered strategies. Experiment with them. The risk is minimal since an index is safer than working with individual stock derivative’s and the profit is quick since you can place them every week.
In addition check out the VXX. This ETF represents the volatility of the stock market. You can use it to hedge losses in your portfolio as well as profit from ST gyrations in the market. Options for this ETF are also issued in periods less than 1 week.
– PLEASE –
Make sure your properly capitilized!
Make sure you have enough cash to make trade adjustments when/where necessary.
Make sure you have enough cash to put on a balance of trades.
Make sure you have adequate monthly cash flow to meet all monthly obligations without any trade income.
Make sure you have adequate discipline to follow all of your trade rules even after continued success or failure.
If your working with limited capital then concentrate on LT trades and don’t expect any windfalls.
If at all possible adjust your loss potential to no more than the monthly cash infusion of your account.
It is more difficult to make money during a correction and during volitile periods. In such times it is wise to have a cushion fund to draw on. .
You can usually expect 5% – 10% annually if your holding a generalized portfolio of stocks and mutual funds.
10% – 15% with ETF holdings.
24% and up with successful option trading.
?? with day trading
Possible Setbacks:
Sudden Market Crash.
S.E.C. Investigation
Trade execution error.
Sudden extreme volitality.
Earnings surprise.
Federal Policy changes.
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References:
“McMillan On Options” by Lawrence G. McMillan
“Options as a Strategic Investment” by Lawrence G. McMillan
“High Probability Trading” by Marcel Link
“Real Money” by Jim Cramer
