Advanced Option Strategies » Option Trading

Why to choose the wizard

admin — Sat, 23 Jan 2010 20:02:42 +0000

Are you interested in trading in stock market? The wizard is solution to your problem. We provide conviction and discipline methods to become successful share trader in the stock market. Investing in share market is excellent way to build wealth. If you are willing to do the same then first you must understand how the stock market works. The cycle of increasing decreasing stock price can hurt you if you are not aware of it. However, if you become member of the Wizard, we will let you know which share to buy at what price to sell.

The wizard provides you comprehensive virtual stock exchange simulator. We allow you to practice online stock trading with at most securities. We provide you exact entry and exit points that will have most controlled risk for each transaction you make. The procedure is very simple and easy to use. You can browser our site to know the latest stock investment tips. You can even become a part of webinar that will help you to make maximum use of the Wizard. Once you become member of webinar we will show you most profitable and easiest ways to use different functionalities of the Wizard. In very short period, you will learn what things you need to do to become a winner in the stock market. You will be able to judge the mindset and techniques.

With Internet and discounted fees, the wizard will create gold rush trading online among stock investors. The wizard will let you know what things you need to do for ruling the stock market. All this will be available with comfort at your own home. Moreover, our webinars will introduce you advanced strategies that are available to use free of charge to general public. There are basic and advanced webinar’s documents that will be loaded on the website soon.

The Wizard feels pride of being leaders in stock trading. Whether you want traditional or exotic market trading methods, we provide you trading platform that is available in the market. So, where ever you are in the world, just pull a chair, kick of your shoes and get going with the wizard.

Option Trading Tip – Credit Spread Cashflow

admin — Mon, 18 Jan 2010 19:31:03 +0000

You may or may not have heard of credit spread option trading but they can be used to profit in bullish, neutral or bearish conditions.

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.

Backspreads (Reverse Ratio Spreads)

admin — Sun, 17 Jan 2010 07:22:17 +0000

Backspreads, also known as reverse ratio spreads, are an option strategy utilized when you believe there will be much volatility in the stock but are not 100% sure whether it will go up or down. If the stock moves a lot in the predicted direction, you will earn a tidy profit. If the stock moves a lot, but in the opposite direction, you will earn a small profit. However, if the stock doesn’t move much and is stuck in a trading range, you will experience a loss.The backspread position used when you are bullish on the stock is known as a Call Backspread, since call options are used to create this position. The call backspread is created by buying a certain number of Out-of-The-Money (OTM) call options (i.e. call options whose strike price is higher than the current stock price), and selling a lesser number of In-The-Money (ITM) call options (i.e. call options whose strike price is lower than the current stock price). You can create a call backspread by buying and selling any number of call options, but for the purposes of this article, we will talk about buying 2 OTM call options and selling 1 ITM call option.Because you are selling a call option that is ITM and buying 2 call options that are OTM, this position should be a credit position, that is you will earn a premium by opening a call backspread. However, because you are selling an option, you are not able to allow this position to expire. You will need to buy back the option before expiration date, which brings us to the risks involved with this position.If the stock price goes below the strike price of the call option that was sold (the ITM price), you can allow the position to expire since the calls at both strike prices are now worthless. Your profit in this case would be the initial premium made when the position was opened. If the stock moves above that ITM strike price but is still below the strike of the 2 calls that you bought (the OTM price), you will be in trouble. The 2 calls with the OTM strike price would still be worthless, but the call you sold at the ITM strike price would be worth something and will need to be bought back before expiration. Once the stock moves above the OTM strike price, your profits are limitless. The ITM call will still increase in value (and must still be bought back), but that cost is negated by the fact that you now have the 2 calls (bought at the OTM strike price) gaining value just as quickly and can be sold for profit.A Put Backspread functions in the same way but in the opposite direction, and is a bearish position. You would use this position on a stock that you expect to move a lot, with a high likelihood that it will go down in price. The reason it is known as a put backspread is because it is created by buying and selling put options.The put backspread is opened by buying any number of out-of-the-money (OTM) put options (i.e. put options whose strike price is below the current stock price, and selling a smaller number of in-the-money (ITM) put options (i.e. put options whose strike price is above the current stock price). Doing this should give you a net credit premium. Similar to the call backspread, a put backspread can be created by buying and selling any number of put options, but for this article we will talk about the simplest case, which is selling 1 ITM put option and buying 2 OTM put options.If the stock moves above the strike price of the ITM put option you sold, you can allow the position to expire and keep your original credit premium, since all 3 put options will be worthless. If the stock price ends up between that ITM strike price and the strike price of the 2 OTM put options you bought, then you will incur a loss, since you will need to buy back the ITM put option which is now worth something, but the 2 OTM put options are still worthless. Once the stock price drops below the strike price of the OTM put options, you will start to see unlimited profit since the cost of buying back the ITM put option is more than offset by the profits from selling the 2 OTM put options.Do bear in mind that you cannot allow a backspread position to expire, since you have sold options that need to be bought back to prevent them being exercised. As such, you will need to make sure you have enough funds to buy back those options in case the stock price doesn’t move.For a more detail and illustrations on backspreads, please visit: http://www.option-trading-guide.com/backspreads.html

So You Think You Know Option Trading?

admin — Wed, 23 Dec 2009 07:39:23 +0000

We all know that many opportunities exist in Option Trading today. Wherever you turn, someone is waiting to inform you of the tremendous profits to be realized within the stock and the futures markets. Nevertheless, many people are unaware of the derivative trading possibilities that are available within and across several different markets.
Option Trading is just one of the leading many ways to participate in such type of secondary markets. And in contrast to the popular belief, this potential trading arena is not limited strictly to the practice of selling or writing options.
Option Trading is an important element of investing in markets, serving a function of managing risk and generating income too.
Contrasting to most other types of investments today, Option Trading provides a unique set of benefits to its clients. Not only does Option Trading provide an economical and effective means of hedging one’s portfolio against adverse and unexpected price fluctuations, but it also offers a tremendous exploratory dimension to trading.
One of the foremost primary conveniences of Option Trading is that an option contracts enable a trade to be leveraged, allowing the trader to control the full value of an asset for a fraction of the actual cost.
Then since an option’s price mirrors that of the underlying asset at the very least, any constructive return element within the asset will be met with a greater percentage return resource within the option provides limited risk and unlimited reward.
With Option Trading the buyer can only lose what was paid for the option contract, and not a penny more, which is a fraction of what the actual cost of the asset would be. However, the profit potential is unlimited because in Option Trading the option holder possesses a contract that performs in sync with the asset itself.
If the outlook turns out to be positive for the security, so too will the outlook be for that asset’s underlying options. Option Trading also provides their owners with numerous trading alternatives. Option Trading can be customized and combined with other options and even other investments to gain the benefits of any possible price dislocation within the market.
Option Trading enables the trader or investor to acquire a position that is pertinent for any sort of market outlook that he or she can have, and then be it bullish, bearish, choppy, or silent. It doesn’t matter at all.
Risks Involved In Option Trading
While there is no disputing that Option Trading offers many investment benefits, it also involves risk and is not for everyone. For the same reason that one’s returns can be large, so too can the losses.
Also, while the potential for financial success does exist in Option Trading, the means of realizing such opportunities are often difficult to create and to identify. With dozens of variables, several pricing models, and hundreds of different strategies to choose from, it is no wonder that Option Trading and its pricing have been a mystery to the majority of the trading public.
Quite often, in Option Trading a wonderful deal of information must be processed before a knowledgeable trading decision can be reached. Computers and sophisticated trading models are often relied upon to select trading candidates.
However, as humans, we like things to be as simple as possible in Option Trading. This often creates a conflict when deciding what, when, and how to trade a particular investment. It is much more easier to buy or sell an asset outright than to challenge with the many extraneous factors of these derivative markets.
If an investor thinks an asset’s value will appreciate, he or she can simply buy the security; but if an investor thinks an asset’s value will depreciate, he or she can simply sell the security. In such scenarios, the only thing an investor must worry about is the value of the investment relative to the value of the prevailing market. If only Option Trading were that easy!
Generally, Option Trading is more awkward and complicated than stock trading because here the traders must consider many variables aside from the direction they believe the market will move.
The effects of the passage of time, variables and delta, and the underlying market volatility on the splendid price of the Option Trading are just some of the many items that traders need to gauge in order to make informed decisions. If one is not prudent in one’s investment decisions, one could potentially lose an enormous number of money trading options.
Those who actually ignore cautious and sound money management techniques often find out the hard way that these factors can promptly and easily grind down the value of their Option Trading portfolios.
Due to the risks and benefits, Option Trading offers tremendous profit potential above and beyond trading in any other device, including the underlying security itself. This is the moment at which theoreticians enter the picture. Once the benefits have been defined, it is then just a matter of determining how to matchlessly attain them.
Up till now, the vast majority of Option Trading techniques have been elaborate mathematical models designed to help identify when option writing or selling opportunities exist.
On the other hand, we hope to break used ground by introducing simple market-timing techniques to Option Trading that will enable the traders to buy options with greater confidence and with greater success in Option Trading.

Buying Stock versus Stock Option Trading

admin — Mon, 21 Dec 2009 20:14:03 +0000

There is quite a difference between buying stocks outright and purchasing stock options. When you purchase an option, you are betting on the direction of the market. However, option trading has very different characteristics than purchasing shares and there is a lot of terminology and tricks of the trade that a new trader should learn in order to successfully trade options.
There are two types of options – calls and puts. Purchasing a call option means that you have the right (however, not the obligation) to purchase the stock at the strike price at any time before your option expires. When you purchase put option, you have the right (however, again not the obligation) to sell the stock at the strike price any time before the expiry date of the option. A call option is purchased when you expect the price of the stock to inflate, a put option when you expect the price to deflate.
The main difference between buying stocks compared to options is that when you purchase a stock, you own a piece of the company whereas when you purchase a stock option, you simply have a contract that allows you to buy and sell the stock at a specific price before the option expires. There are always two sides for every option transaction – a buyer and a seller so for each option, either call or put that you purchase, there is someone selling it.
Stock option trading can be compared to betting on the racetrack where you are betting against other people. Buying stocks is compared to gambling in the casino, where you bet against the house. Trading options is a ‘zero-sum game’, which means that the option buyers gain equals the sellers loss and vice versa – they are mirror images of each other so there is no positive or negative cost involved.
Stock option trading can be a very lucrative game and many traders use options as part of their larger strategy based on a selection of stocks. It’s important that if you want to begin stock option trading that you understand the ins and outs of the market, the stocks and stock option trading before leaping in head first. There’s a lot to do with option trading and you can be quite successful if you take the time to learn these skills as well as research the company and stock history of the stock and company that you are looking to purchase stock option in.

Option Trading for the Beginner

admin — Wed, 16 Dec 2009 19:53:16 +0000

Any journey starts with a single first step. Everyone agrees that this is true, but what is the first step for the beginning option trader? The vast amount of information can appear to be overwhelming, and is full of terminology that might as well be ancient Greek for all the sense it makes. Everyone you meet, and every website you visit has some different advice. There are a few things to think about even before you ever make that first trade.

What are your Goals

It is important to have some idea of where you want to go before you begin. The field of Options trading is large, and there is a lot of variety in it. It is better to take a general look at the different types of investment opportunities available, and select the ones that interest you the most.

You are going to have to do a lot of research and a lot of study in order to be successful, and it is going to help if the topic is one that you find to be fascinating. Also, you need to have a good idea of how much time and effort you are willing to invest in your investment strategy.

Options are time critical investments, and if you are only planning to dabble a bit in the market, it would be better to either keep your Option portfolio very small, or even to seek a more long term and less interactive type of investment.

In For a Dollar or a Dime

One of the most important options trading terms a beginner needs to completely understand is risk capital. Most reputable brokers will advice you to invest in options with risk capital. Risk capital is that portion of your total investment capital that you can afford to lose. Long term bonds, savings accounts, mutual funds are the places for your retirement income, and your landlord’s checking account is the place for the rent money.

A beginning investor in the option market needs to know exactly how much he is willing to invest, and once this amount is established, he needs to stick with it. There are practical reasons for this. One of them will be investor’s personal financial security concerns. If you are overly worried about loss, you would not be able to make decision with a clear head and in a confident manner. Determine what amount you are going to invest, and set it aside, and stick with it.

Do you Speak the Language

Calls, puts, strike price, margin, leverage, long position, expiration date, bid, and ask are all Option related terms. If you are unsure of the meaning of any of them then you need to go to Option’s language school for awhile. Investing has its own unique terminology, and you can not afford to be confused.

Take the time to learn what everything means. It is going to be important to give yourself a bit of education in quite a few different areas of trading. You are not going to be able to evaluate Broker’s websites, or decide on a personal method of analysis until the basic framework is in place. And the basic framework is terminology.

Start in First Gear

You have to crawl before you can walk. Learning to invest your money in any market, and even more so the complex Option Trading market is not the kind of thing that is best served by jumping into the deep end of the pool right at the start. You are almost certainly going to drown. Experience is very important here, and experience is only gained by the actual doing. Start slowly and make a few small investments.

It is good to have a sample option trading strategy in place. It should be on a rather small scale involving only a small percentage of your available risk capital. Once you gain a little confidence, you can increase the amount of your investments. How long this takes is going to depend completely on you. Remember that there is no magic formula here.

The beginning investor should not be too nervous. There may be a lot to learn and it may seem a bit confusing, but it is learnable. In the end, it is going to be his own intelligence, and his own instincts that are going to determine his success or failure. Most people would ask for nothing else, but to have their financial fate in their own hands. Remember the words of a wise old investor who once said, “Every Option Trader was a beginner at one time, even if for some, it was only a few minutes.”

Is Option Trading Gambling?

admin — Wed, 16 Dec 2009 08:41:50 +0000

We have seen it way too often, haven’t we?
Advertisements that tout making thousands of percents in profits within days and millionaires made within weeks, all by option trading! Such advertisements usually draw hordes of hungry, indebted gamblers who need that “one big win” to recover their debts or losses elsewhere to their unusually expensive seminars.
95% of those who walked into such seminars, paid for it and actually traded options, lost all their money. 3% will make some money within the first few trades and then lose it all subsequently. 1% will really make some sustainable money and a final lucky 1% will make the 1000% a month on their first month (again, just to lose it all within the next month). Anyone who has been in this predicament usually think that option trading is nothing more than just a gamble on an instrument that has no value of its own.
Yet, many professional traders and fund managers are making a good, consistent profit from option trading! These professionals don’t make 1000% a month in profits, neither will they ever, but they continue to make a living in the markets month after month, year after year (me included)!
So, what makes option trading a real investment and trading activity to these professionals and a mere gamble for those who lost all their money attending option trading seminars?
The difference is in ATTITUDE. Attitude governs decisions and actions. Anyone who approaches option trading with the “get-rich-quick” attitude will also soon find themselves “getting-poorer-quicker” simply because these punters hoping to “make-it-big” on their next trade, totally rejects any semblance of a trade management strategy, totally cast aside sensible analysis in favor of a 50/50 “bet” and take totally senseless out of the money positions that either make it big or expire completely worthless!
A real option trading professional utilizes sensible money management strategy on every trading opportunity, weighted against the potential risk of non-performance. This means that a real option trader will never put all his money into one big out of the money position! A real option trading professional utilizes trade analysis methods based on proven methodologies so as to put the odds of performance in their favor and never treat every trade as a 50/50 bet. A real option trading professional calculates the amount of options leverage to be used on every trade so that his portfolio is never over-leveraged. A real option trading professional do not expect to make it big on his next trade and he is not aiming for one huge home run but a series of small wins that eventually adds up. A real option trading professional never allow one loss to wipe out his portfolio because he treats the market with respect knowing that no matter how much analysis has been conducted, there is always a chance that the market will work against him.
In a nutshell, a real option trading professional (and an option trading winner who stays in the game for years) differ from a gambler (who rarely survives for more than a month) mainly in terms of mental attitude! The wrong mental attitude transforms option trading from the sensible and sophisticated financial instrument that it is into nothing more than lottery tickets.
The problem with most option trading seminars today is that they don’t put these critical elements of successful option trading together! All they teach are how option trading can make anyone rich very quickly! It is like teaching someone how to queue up for a lottery ticket! A real option trading system incorporates all the critical elements to successful option trading; From looking for trading opportunities systematically, to analysis of that opportunity in view of the trading horizon required, to selecting the correct option based on the requirements of that opportunity to risk balanced trade management and more! One such option trading methodology is the Star Trading System that I have taught online for years.
So, isn’t it time you reviewed your attitude and approach towards option trading?

Online Trading Temptations…Too Much Power At Your Fingertips

admin — Mon, 14 Dec 2009 19:15:10 +0000

Your Computer Is Not a One Arm Bandit Where would we be without computers, and the technological advancements the internet offers us? Just as there is a generation getting addicted to video games, there are an alarming percentage of internet junkies. Keep in mind that online trading is becoming more and more popular too. With anything that is extremely popular comes extremist. Whatever style or strategy you engage in, remember that you are gambling with real money. You can’t continually treat your computer like a slot machine, and expect to always hit the jackpot. Without a solid and proven plan, things like going by instincts or by the seat of your pants, you will eventually fail in major way. You can however, take some of the more frightening aspects of gambling out of the equation. Instead of just rolling the dice, putting your chips all on lucky 7, or hopelessly watching the little pea spin around, you can learn what is the equivalent of counting cards. Let’s turn a tempting passion into a money making habit.I know that addiction for online trading can completely envelop a person 24 hours a day, if they allow it to. Any online trading system or plan, should have three very important elements of success. Knowledge…Training…Software… Without any one of these three basics, as tempting as it might be to trade online, you will ultimately lose your entire investment capital. Let us assume that you have some knowledge or you wouldn’t be researching the market. Any training you receive should be for technical analysis, or you are just wasting time and money. Technical analysis training must be centered around candlestick charting, which will become your equivalent of counting cards, which I just referenced. It matters not what market you trade in, stocks or options, currency, commodities and futures, the following advice will help you. For those of you not yet familiar with candlestick charting, I will try to give a brief but accurate explanation. The Chinese invented the market concept, and the Japanese perfected charting techniques with the use of the candlesticks. It is easy to understand this complex system, if we simply break it down to the ticks on the chart you follow every day. We know that the lower tick is where the stock opened and the higher is where it closed. Now if we made the two lines parallel and connected them, what would we have? A candle. However, during that movement, the stock might have gone lower or higher then where it opened or closed, so our candle has formed a tail and a wick. Is it starting to make a little sense to you? Can you see the advantage of knowing this information, for getting in and out, and setting a stop loss?Knowing Candlesticks Will Ensure Your Online ProfitsTake these examples: 1. Let’s assume a stock opens twenty cents higher than it closed yesterday. It later closes ten cents higher than that. Should we get in? Not necessarily. Because as the candlestick showed us, even though it had a thirty-cent swing from the day before, a long wick was created. This meant that it went even higher then it eventually settled on. That tells us that the pressure to go higher wasn’t strong enough. We will put it on our watch list, and keep a keen eye on it.2.A few days passes with similar results. Suddenly there is a break in the resistance. The stock has formed a candlestick with a long tail. What does this convey? We might put a buy signal for a couple of cents higher than it has previously gone, because the long tail tells us that the bulls are ready to take over.3. Ideally you want to wait for clusters to form. Of course the greatest indicator is a long candle. One that opens and closes with hardly any wick or tail.This synopsis could have very easily taken place over a few hours rather than days, if you were day trading, for example. There are many “characters” in candlestick charting, and those who master reading them become successful.

Software That delivers Gives You a Successful PlatformChoosing the Right Program Is like Hitting the Jackpot. As far as software platforms, the following suggestions I strongly feel are necessary for any software to be useful.1. It must be able to offer live streaming technical data. (Otherwise the program is merely educational) 2. The platform should defiantly include candlestick charting.3. Visually it has to be large enough for all the data to be seen easily. (Many of the online brokerage’s technical data is too small to be useful) 4. It must be cost effective. (Most good systems can be purchased for between one and two hundred dollars)If you can acquire software that gives you even the slightest edge in your favor, it is well worth the Investment. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro,Market Mentalist offers the online investment resource, you just might be seeking.

What is Day Trading?

admin — Sun, 13 Dec 2009 07:42:12 +0000

Day trading is the practice of buying and selling financial instruments, such as stocks, stock options, currencies, and futures contracts, within the same day such that your positions are usually closed before the end of the day.

Day trading used to be the sole realm of professional investors. In fact, many day traders work for banks or investment firms. Advances in technology and the Internet, however, have allowed even amateur traders to day trading.

Day traders often borrow money to trade. This leveraging allows for a high potential rate of return and large profits. Some day traders earn millions of dollars a year. However, day trading can also be extremely risky. Without the proper skills and tools, day traders can just as easily and quickly lose money.

Although collectively called day trading, there are several different styles of day trading. Some trading styles include:

Momentum Trading

Momentum trading is a strategy in which one believes that stocks, or other financial instruments, move with a momentum or trend. Thus, stocks that have been rising are assumed to continue to rise. Likewise, stocks that are falling will continue to fall. A momentum trader thus buys stocks that are rising and short sells ones that are falling.

Contrarian Trading

Contrarian Trading sharply contrasts momentum trading. Contrarian traders believe that stocks that have been rising will reverse and fall. The contrarian trader buys stocks that have been falling and short sells stocks that have been rising.

Range Trading

Day traders who range trade look for stocks that have been consistently trading within a specific range. These stocks rise after hitting a “support” price and fall after hitting a “resistance” price. A range trader therefore buys stocks that are near the support price and short-sells stocks that are near the resistance price.

For more information on day trading, check out DayTradingModels.com

Balance of Risk and Reward in Options Trading

admin — Tue, 01 Dec 2009 08:11:48 +0000

You don’t need to be a trader or an investor to know that the higher the risk, the greater the reward. This concept is true in all aspects of life and business. The more risk you are willing to undertake in life, the more life returns to you. Indeed, risk and reward are directly proportional and often in trading and investment, the more risk your account is exposed to, the greater the return on investment when things work out as planned.
Knowing that risk and reward are proportional makes finding the correct balance of risk and reward extremely important to all kinds of traders; stock traders, futures traders, options traders etc. There is no one solution that works for everyone and the correct balance is decided upon the risk appetite and risk tolerance of the individual trader.
For stock traders, balancing risk and reward primarily involves adjusting the amount of growth stocks and defensive stocks in one’s portfolio. Generally, the more growth or speculative stocks in one’s portfolio, the greater the risk due to greater uncertainty and therefore the higher the gain when things works out as expected. The more defensive stocks in one’s portfolio, the more predictable returns become and therefore the lower the return as these stocks does not generally move a lot. This degree of risk / reward balancing is at best crude compared to the surgically fine degree of balancing you can have in options trading.
Stock options are the most versatile trading instrument in the world right now due to the wide array of options strategies that are employable. Yes, not only can risk and reward be balanced through employing different mix of strategies in your portfolio, there are also different risk and reward profiles achievable by each individual options strategy. There are options strategies that range from making over 1000% profit while risking all your money to options strategies that make a mere 0.01% return while risking nothing as well as every centimeters in between.
As long as you understand what your personal risk appetite and risk tolerance is, you will be able to find an options strategy that suits your needs 100%. Here’s a general outline of the kind of risk reward balance that can be achieved through options trading:
Highest Risk, Highest Reward – OTM Call / Put buying
This is the options strategy that produces the legendary 1000% profit that amazed so many beginners. What those ads did not tell you is that the risk is losing ALL the money that you put into the strategy. This options strategy involves buying out of the money(http://www.optiontradingpedia.com/out_of_the_money_options.htm)call options when you think a stock is going to go up or buying out of the money put options when you think a stock is going to go down. Professionals use this options strategy with only a very small portion of their money in order to place a bet on an uncertain event such as leveraged buyout. Some lucky amateurs use this options strategy with all their money and then become millionaires overnight. The downside of this strategy is the fact that if the stock did not move far enough in the direction you expected it to, you can lose all the money you put into the strategy. That is also why so many beginners break their accounts overnight in options trading.
Various Degrees of Risk and Reward – Options Spreads
There are literally hundreds of possible options spread strategies out there with various degrees of risk and reward for every market condition. There are more aggressive bullish, bearish, neutral and volatile spreads and there are more conservative ones. All of them shares the same logic of higher risk compensated with a higher profit potential.
Lowest Risk, Lowest Reward – Options Arbitrage
Yes, there are literally risk free trading opportunities in options trading which also returns very small, sometimes negligible returns. These are the legendary options arbitrage strategies. Options arbitrage strategies such as conversion/reversal aims to make a fixed return totally risk free through simultaneously buying the underlying and shorting the overpriced synthetic equal or vice versa. The problem with such strategies is that the returns are so low that most of the time, it’s even lower than the commissions you will pay for the trades made. Even if you manage to return a positive return, the return can be as low as 0.01% in percentage terms. That is why arbitrageurs aim to make an absolute return using enormous amounts of money.
With this in mind, the most conservative traders may choose to specialize totally in arbitrage strategies (http://www.optiontradingpedia.com/options_arbitrage.htm) while the most aggressive traders may choose to specialize in leveraged speculation using OTM options. Everyone else would be able to find something to suit your risk appetite in the hundreds of spread possibilities. This degree of flexibility and range of risk/reward possibilities makes stock options the most versatile trading instrument in the world today and why options trading (http://www.optiontradingpedia.com) is so popular these days.