Advanced Option Strategies » Options Trading

7 Simple Steps to Financial Freedom and Wealth Building – Step 4

admin — Sat, 23 Jan 2010 07:25:52 +0000

7 Simple Steps to Financial Freedom and Wealth Building

STEP 4: The Business Setup – Choosing the Right Partner

With advancement in technology, the options trading business can be easily setup with a few clicks of the mouse. Welcome to the online world of trading.

Equity trading is a serious business because it involves a lot of money – your money. It can build wealth and can also destroy wealth. Either you make money from the market, which belongs to someone else, or you lose your money to the market, which will benefits another trader. So please take it seriously because most traders and investors do not. So if you are serious, would you trust your business dealings to just about anybody? I hope not!

A business that does not have reliable partners typically will not succeed for the long term unless a new reliable partner is quickly identified. In the options trading business, brokers are our partners. As such, we would have to identify and be very selective in appointing the brokerage house to help us run this business.

With so many brokerage firms out there, it can be quite a tough and confusing for many of us. In fact, choosing the wrong broker can be expensive.

So we have prepared an easy way to shortlist these brokers. A good “business partner” should have:

Attractive commission rates – understand if it is fixed or if it depends on the number of trades. Low commission does not mean it is good.

High availability on their website – since almost all transactions are executed online. Understand contingency as well when website is down.

Fast Execution – a good opportunity may be gone if not executed fast.

After Hours Trading – if you like trading longer hours.

Sweep Facility – a good broker would automatically take your available cash to have it placed in a money market to generate interest.

No hidden fees – many brokers have all sorts of endless hidden charges. Do not take this nonsense.

Powerful trading Tools – like streaming real time quotes, screeners, stock charts, etc.

Wireless trading facility – most of the time for day traders

Ability to execute complex options trades – many brokers provide options trading but this is not good enough!

A good stock broker may not be a good options broker because options trading are relatively new. Although stock brokerage firms offer options trading, they are still behind in many of the services offered by brokerage firms that specializes in options trading. Once you understand options trading, which has more than 20 different trading strategies, stock trading looks like child’s play.

When selecting a brokerage firm, select the best to prevent any heartbreak later on. We have worked with several options brokers and, in our opinion, www.optionsexpress.com and www.thinkorswim.com are the best around. These two options trading firms meet the requirements above while many have failed to impress. Before proceeding to the next step, start working with the right partner. It only takes a short while to open a new account. This is an important decision.

Stay tuned for STEP 5 – Arm Yourself With Options Trading Knowledge.

Know What Does an Investment Really Means

admin — Fri, 15 Jan 2010 07:20:49 +0000

Investment is an expansive word that encompasses a wide variety of things, but on tracing the word back to its roots, it is funny that this word finds its origins in the Latin word ‘vestis’, meaning garment. Digging in a little deeper, we find that the word was used in reference to putting things (money or other claims to resources) into others’ pockets, which though simple, is the most effective way of defining this word. By investing our money, or resources, or time for that matter, we are making a definitive contribution to an activity or the acquisition of an asset that is capable of producing a recurring profit. But the flip side to this two sided coin is the use of the misnomer profit, which is not necessarily what the investor ends up with. Investment in financial circles, is of two types –

The first being a Real investment, which deals the acquisition of tangible property, such as an automobile or a house. The other type of investment is the acquisition of Financial assets, such as money in a bank, or stock market shares, that one can trade or sell at will.

But from an investor’s standpoint, one worries only about the ‘recovery’ of one’s investment, and hence the classification would be on the basis of whether his or her investment earns him money, or ends up with him going ‘belly-up’ if you could use the expression.

So how does one toe the fine line and find the right balance which would be the difference between hero and zero. The trick lies in one’s ability to filter and select only those assets that have a relatively high probability of success, and I use the word relatively here because some of the most brilliant ideas do not make it big because of circumstance, which unfortunately is out of human control. It is a person’s cognitive ability to analyse the situation at hand and take calculated risks that separates the successful from the not-so successful.

One often hears or reads about investment guaranteeing immediate results. I would add that to redundancy in wording. A key in investing is patience and persistence. One cannot expect his input to immediately produce returns. A parallel can be drawn between the lives of an investor and a mosquito. One cannot expect returns too soon; even a mosquito doesn’t get a pat on the back until he’s nearly completed his task.

During the course of writing this article, some research on the internet led me to many sites that gave tips on successful investing. Kind of surprising is it not that with such potent advice available you don’t find as many Ambanis or Donald Trumps walking down the road. The real reason is that you do not become a successful investor by reading about how to become one, but by going out there and developing this intuitive feel to the ground reality. Technology is growing by leaps and bounds and this will only enhance your ability to keep in touch with your investments. But it is the discretion of the investor whether he adapts to this technology and raises the bar just that little bit more for his competition.

Stock Options Trading: the ‘lean’

admin — Mon, 28 Dec 2009 19:55:39 +0000

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.

The Stock Replacement Covered Call Strategy

admin — Sun, 27 Dec 2009 07:42:00 +0000

Back in 2003, (October and November ‘03), the giant biotech Amgen (AMGN) came under some intense pressure, trading down about $12.00 before it found what appeared to be a decent level of support, and began to consolidate. At this level, anyone interested in going long Amgen at a discounted price would be advised to do so. Implied volatility was high coming off this precipitous drop, which caused premiums in the options to increase considerably.
This scenario can be a very attractive for covered call sellers or buy-writers. On Tuesday, December 2, 2003, Amgen was trading at $58.90, the December 60 call was trading at $1.30, and there were only two weeks left until expiration.
Let’s assume that you wanted to take advantage of this opportunity but you would be unable to participate in it due to capital requirements. The stock was trading at $58.90 and you did not have sufficient funds to support buying the stock at that price. After all, the purchase of just 1000 shares would cost $58,900.00.
This is the time to consider using a strategy called stock replacement. In many instances, an insufficient amount of funds in the investors account can mean the loss of a golden opportunity when dealing with high dollar priced stocks.
So, an alternative to purchasing the stock outright is to find a way to replace the actual stock with something else which is not as expensive. In this case, a deep in-the-money call would do just that.
When a call is deep in-the-money, meaning that the strike price of the call is much lower than the stock price, the delta of the call approaches 100. This means that there is close to a 100% chance that this option will finish in-the-money.
Because of this, the option will trade just like the stock; penny for penny, dollar for dollar (in a theoretical 100 delta scenario.) If you recall, the term delta was mentioned when describing the option in question. Delta is the first derivative of the stock and it has a three pronged definition. The first is percentage change.
The delta is given as a percentage change, meaning how much in percentage terms the option price will change with a movement in the stock. A 50 delta option will move 50% the amount the stock does. If the stock moves $1.00, than the option moves $.50. A 30 delta option moves $.30 on a $1.00 movement in the stock, and so on.
Delta can also be defined as percent chance. This is used to describe the percentage chance that the option will end up in-the-money. A 90 delta option has a 90% chance of finishing in-the-money.
Finally, delta can also be defined as hedge ratio which is the amount of deltas needed to properly hedge a position. These concepts will be discussed in more detail in future Options University courses, but for now it is sufficient to just understand these basic concepts.
It was important to explain the meaning of delta to understand that the deep in-the-money call would perform and act just like the stock. One way to determine if the call you will select is in-the-money enough for your purpose is the delta. A delta in the mid or high 90’s is an ideal candidate.
The selection of the proper in-the-money call to use is a critical element in the success of this strategy. In order to obtain an accurate delta of all options under consideration for stock replacement use, you can go to any number of web sites or consult your broker. If all else fails, there is a little trick of the trade that can be used to aid in selecting a call that is deep enough in-the-money to suit the stock replacement criteria.
To do this, check the quote of the corresponding put (i.e. the December 47.5 put if you are looking at the December 47.5 call for stock replacement). If there is no bid quoted for the put, then the call is deep enough in the money to consider it for a stock surrogate. There are several reasons for this being an effective strategy, which we wont cover here, but for the purposes of this discussion, it is enough to know that this method does work.
So, with the stock at $58.90, the December 47.5 calls met the criteria for stock replacement. This call had a mid to high 90’s delta and its corresponding put had no bid. The December 47.5 call was trading at $11.45 or $.05 over parity. By purchasing this option, you would be equivalently buying the stock at $58.95 (the strike price plus the option price).
Let’s say that you bought the December 47.5 call for $11.45. If a total of 10 calls were purchased (an equivalent of 1000 shares), you would lay out a total of $11,450 to fulfill your stock requirement on this buy-write. If you had purchased the stock outright, you would have spent $58,900. The difference between the capital needed to purchase the stock outright ($58,900) and the capital needed to buy the in-the-money call ($11,450) is the key to this trade.
Now that you have your stock (via the calls you bought above), it is time to sell covered calls against this position, which would be the December 60 calls for $1.30. If the stock stays at its present level, you would then capture the $1.30 premium that you sold the December 60 calls for because they finished out-of-the-money at expiration.
The $1,300 profit in this scenario represents an 11.35% return in only two weeks. This well out-performs the return garnished on a $58,900 investment which would only be a 2.21% return in the two weeks, if you purchased the actual stock.
As we know, the maximum profit of $2.35 will be attained if the stock reaches $60.00 or above. This return comes from the $1.30 you received in the premium for the sale of the now worthless December 60 call plus a $1.05 profit from the December 47.5 call you purchased. With the stock now at $60.00, the December 47.5 call is worth parity, which is $12.50.
You purchased the call for $11.45 thus you received a $1.05 capital gain in the option. This profit of $2350.00 represents a 20.5% return in two weeks verses a 3.98% return in two weeks, if you had purchased the actual stock.
As you can see, you are getting the same overall dollar return on much less money – which creates a much higher percentage rate of return. This is one of the positive leverage effects that the proper usage of options can provide. When you initiate this trade, you are buying and selling two different options simultaneously which is known as a spread. A spread is a trade which involves the buying of one option against the sale of a different option simultaneously and will be covered briefly in the next section.
By buying the December 47.5 calls for $11.45 and then selling the December 60 calls at $1.30, you are buying the December 47.5 December 60 call spread for $10.15. This type of spread is known as a vertical spread.

Options Trading Mastery: Time Decay and Volatility Trading Opportunities

admin — Tue, 22 Dec 2009 19:35:57 +0000

When vertical spreads are mentioned, they quite often come with monikers such as ‘bull’ and ‘bear’. This lends most to think of vertical spreads as directional plays which is true. However, vertical spreads can be used to take advantage of two other potential trading opportunities – time decay and volatility movement.
If you are looking for a fully hedged way to take advantage of time decay, a vertical spread can be an excellent tool. Knowing a little about them now, you will recall that a vertical spread has a limited profit potential but also a limited loss scenario for both the buyer and the seller. So, how do we use this covered trade to take advantage of time decay.
At-the-money options have more extrinsic value than their similar month in-the-money or out-of-the-money options. Since it is an option’s extrinsic value that decays away over time, you could set up a vertical spread by selling an at-the-money option and buying either the out-of-the-money option (creating a credit spread) or buying an in-the-money option (creating a debit spread). If the stock holds tight to the out-of-the-money option, the option’s extrinsic value will decay away at a faster rate than either the in-the-money option or the out-of-the-money option due to the fact that the at-the-money option has more total extrinsic value to decay in the same amount of time as the others.
Creating the vertical spread by selling an at-the-money option and buying an out-of-the-money or in-the-money option as a hedge looks like a good idea, but now there are a couple choices. Should you do the put spread or the call spread? Should you buy it or sell it? The decision of what to do from here should first be based on which way you think the stock will move. Although you are playing for time decay and you are assuming an overall lack of movement, you can’t expect the stock not to move at all. So even though you are playing time decay, you still want to form an opinion about in which direction the stock is most likely to move. By doing this, you’ve now give yourself another way of making the trade profitable. You are playing for a lack of movement but now you can still win if you pick the right direction. This scenario presents you with two ways to win and only one to lose.
Now that you have picked which at-the-money strike you are going to sell and you’ve picked your anticipated stock position you still have a decision to make. Do you do the call vertical spread or the put vertical spread? Remember both the vertical call spread and a vertical put spread allow you to participate in either stock direction. For the bulls, you can buy a vertical call spread or sell a vertical if you think that the stock will go up. For the bears, you can buy a vertical put spread or sell a vertical call spread. For each direction there are two choices to decide from. One is a purchase, one is a sale. The best way to decide which to do, other than your own style or comfort ability is a simple risk/reward analysis.
By selecting an at-the-money option to sell as part of a vertical spread, an investor can execute a time decay play with a hedged position.
Much in the same way that a vertical spread can be used as a time decay play, it can be used as a volatility play. We stated earlier that an at-the-money option has more extrinsic value than any other option in its expiration month. This is due to a number of contributing factors including time but it is in no small way due to volatility. Volatility is a huge component of an option’s extrinsic value. An option’s dollar sensitivity to movements in implied volatility is known as vega. Obviously, an at-the-money option will have a higher vega (volatility sensitivity) then will an in-the-money or out-of-the-money option in the same month.
As volatility increases, the at-the-money option will increase in price to a greater degree than will an in-the-money or out-of-the-money option in the same month. As volatility increases, the at-the-money option will increase in price to a greater degree then will an in-the-money or out-of-the-money option whose vega’s will be less. Conversely, the at-the-money option will lose value at a greater rate than an in-the-money or out-of-the-money option should implied volatility decrease. The question now is how to use the vertical spread to take advantage of anticipated movements in implied volatility. Remember, the vertical spread affords you the luxury of being hedged on either side of the trade – both as a buyer and a seller of the spread.
So, if you think that implied volatility is likely to increase, you can set up a vertical spread by buying an at-the-money option and selling either the in-the-money or out-of-the-money option against it. Conversely, if you feel implied volatility will decrease; you can set up a vertical spread by selling an at-the-money option and buy either an out-of-the-money or an in-the-money option against it.
As to how to set it up, you would follow the same guidelines as you would for setting up a vertical spread to take advantage of time decay. Decide which direction you feel the stock would most likely move. If you feel the stock would most likely rise, you will have to decide between buying a vertical call spread and selling a vertical put spread.
Either way, the spread will have to be constructed with the at-the-money option being long if you feel volatility will increase or short if you feel volatility will decrease. If you feel the stock would most likely fall, you will have to decide between buying a vertical put spread and selling a vertical call spread. Again, either way, the spread will have to be constructed with the short option being the at-the-money.
As you can see, the vertical spread does not have to be used only in directional scenarios. It is very versatile allowing the investor several choices among a diverse group of potential uses. It also affords limited risk, albeit limited profit potential, to both the buyer and the seller.

Options Trading Mastery: Rolling the Position

admin — Tue, 22 Dec 2009 07:43:58 +0000

The selection and management of a vertical spread are only two-thirds of the game. Closing out, rolling or morphing the position has to be analyzed and executed with the same due diligence.
Looking at the closing out of a vertical call spread, we find there are three possible outcomes. The spread can finish out-of-the-money and valueless. For a call spread, this scenario occurs when the stock closes at or below the lower strike of the spread. In order to close out the spread, an investor would just let it expire. Both options finish out of the money so there is no residual position left over.
If the spread finishes fully in-the-money (at maximum value), meaning both options in-the-money, both options are exercised. You will exercise your long call and your short call will be assigned. They cancel each other out leaving you with no residual position. This scenario occurs when the stock price closes lower than the lower strike call involved in the spread.
Investors encounter a difficult scenario when a stock closes in between the two strikes of the spread. This creates a situation where one strike winds up being in-the-money while the other ends up out-of-the-money. When both options expire in-the-money, they are both exercised. One creates a long stock option, the other a short position canceling each other out. This is not the case here. The option that is in-the-money leaves a residual stock position. Since the other option is out-of-the-money, it cannot offset the residual stock position created by the expiring in-the-money option.
Two actions are possible in this scenario. One involves trading out of the spread on expiration Friday just before the close. Because of the bid/ask spread of the two options, you will probably have to give away some of your profits in order to close out the position. This may be the best thing to do in order to avoid naked, unlimited risk.
If you only trade out of the in-the-money option, you run the risk that the stock moves adversely and the out-of-the-money option suddenly becomes in-the-money. This risk is short-lived because you are doing this late on expiration day of the expiring month. If this happens, you will be naked in the residual stock position.
If there is still time, you can always trade out of the option, but that is very risky. If the stock is at a relatively safe distance from the out-of-the-money option, you may want to just close out the in-the-money option and let it expire worthless.
The two factors that must be considered are: the combination of the distance of the strike from the stock price in relation to the short amount of time for the stock to get there, and the amount of money saved by not buying back the out-of-the-money option. Remember, this takes place at the very end of the day on expiration day. These options only have minutes of life left. The risk is somewhat mitigated, but still there nonetheless.
The catch is the proximity of the stock to the out-of-the-money option. If the stock is close to the out-of-the-money option, it is best to trade out of the spread entirely.
As stated before, if the stock closes either with the spread fully in-the-money or out-of-the-money, the position will adjust itself through the exercise process leaving no residual position. If the stock price finishes between the two strikes, there will be a residual position.
We discussed how to trade out of this position. Your second choice is not to trade out and allow yourself to go through the expiration process. You must remember that if you are going to accept a residual stock position, you must be able to afford it.
If you have 10 July 50 calls and you exercise them, you will be receiving 1000 shares of stock at $50.00 per share. Thus, you must have $50,000.00 of cash and/or margin in your account to receive the stock. If you do not have enough cash and/or margin to accept delivery of the stock, then you must trade out of the position before it expires.

Options Trading In A Nutshell-The General Idea Behind Options Trading

admin — Mon, 21 Dec 2009 08:13:15 +0000

Perhaps among the most difficult and maybe the riskiest type of trading is option trading. Many experienced traders realize that option trading does not suit all traders. It selects its own type of people, generally the risk takers. And the trade itself requires skills and thinking unique only to people who won’t fold under extreme risks. Most experts recommend this kind of trading only to those people who have enough risk capital as it carries with it substantial risks.By default, it is also speculative. So if you are a person who doesn’t want to speculate too much, you might as well find another kind of security which will work better for you. However, stopping the idea of entering this trade right now is as risky as not knowing anything about it. It carries with it risks, that’s true,for sure, but it is also a very rewarding venture. You should try to understand something on it such that you would be able to decide whether to go for options trading or not.Since it is always risky, option trading also offers advantages that may not be available with different types of trades. Among its premium advantages is the flexibility it lends its investors. Each lender has the option to trade at a specific price within a specific period.It is also, when comparing the two, a more advantageous type of trade due to its high leverage it offers. Depending on the location, each option may cover a few underlying assets. In the U.S.A., for instace, each option may represent for 100 underlying assets. Thus, this strategy affords the holder the ability to profit from several assets within a single option.So tell me about an option?An option is a type of security, generally closely comparable to bonds and stocks. It is, in itself, a binding contract, that is monitored by and through strict terms and conditions. Basically, options are contracts that owners will buy or sell at a certain price prior to or on a certain date. An option is usually an additional price tag to a certain asset or item because it is a reservation for the purchase or sale of a certain asset.Options are also occasionally called derivatives. This is because the value of an option is based from the value of the underlying asset.To better understad this topic, lets look at the example below:Say you have thought about purchasing a real estate property which is valued at several hundred thousand dollars. However, when you first negotiated with the owner, you did not have enough money to buy the property on the spot. So you made a deal with the owner to pay an extra $5,000 to keep the deal for you for the length of 60 days. The extra money you put in is referred to as the options. In case you don’t want to pursue with the sale, the owner of the real estate is not allowed to force you to buy the property nor can the law impose the sale on you. However, you would still have to shell out the price of the option.In conclusion, when thinking about buying a property with an enclosed option, you will have the right to continue with the sale or to turn down the sale. You are not mandated to do either of the two. But be aware, you may lose 100% of your total investment in options trading which is the value of the option itself.

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admin — Sat, 19 Dec 2009 19:19:40 +0000

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Options Trading Mastery: Getting Out or Rolling the Position

admin — Sat, 19 Dec 2009 19:17:44 +0000

The selection and management of a vertical spread are only two-thirds of the game. Closing out, rolling or morphing the position has to be analyzed and executed with the same due diligence as was used in the selection and management processes.
Looking at the closing out of a vertical call spread, we find there are three possible outcomes that must be addressed. The spread can finish out-of-the-money and valueless. For a call spread, this scenario occurs when the stock closes at or below the lower strike of the spread. In this scenario, in order to close out the spread, one would just let it expire. Both options finish out of the money so no residual position will be left over.
If the spread finishes fully in the money, (at maximum value) that is with both options in-the-money, then both options will be exercised. You will exercise your long call and your short call will be assigned. They will cancel each other out and you will be left with no residual position. This scenario occurs when the stock price closes lower than the lower strike call involved in the spread.
The difficult scenario is when the stock closes in between the two strikes of the spread. This scenario, the closing of the stock between the two strikes creates a situation where one strike winds up being in-the-money while the other ends up out-of-the-money.
When both options expire in-the-money, they are both exercised-one creating a long stock option, the other creating a short position thus canceling each other out. This is not the case here. Here, one option, the one that is in-the-money will leave a residual stock position and since the other option is out-of-the-money, it will not be able to be used to offset the residual stock position created by the expiring in-the-money option.
There are two actions that could be taken. Choice number one involves trading out of the spread on expiration Friday just before the close. Because of the bid/ask spread of the two options, you will probably have to give away some of your profits in order to close out the position. Giving up a portion of the profits may be the best thing to do in order to avoid naked, unlimited risk.
If you only trade out of the in-the-money option, you run the risk (albeit short-lived because you are doing this late on expiration day of the expiring month) that the stock moves adversely and the out-of-the-money option suddenly becomes in-the-money. If that happens, you will now be naked the residual stock position. Of course, if there is still time, you could always trade out of the option then but that is very risky. However, if the stock is at a relatively safe distance from the out-of-the-money you may want to just close out the in-the-money option and let the out-of-the money option expire worthless.
The two factors that must be considered are: the combination of the distance of the strike from the stock price in relation to the short amount of time for the stock to get there, and the amount of money saved by not buying back the out-of-the-money option. Remember, this is being done at the very end of the day on expiration day. These options only have minutes of life left. So, knowing this, the risk is somewhat mitigated, but still there none the less.
The catch is the proximity of the stock to the out-of-the-money option. If the stock is close to the out-of-the-money option, you would be best advised to trade out of the spread entirely.
Again, as stated before, if the stock closes either with the spread fully in-the-money, or fully out-of-the-money, the position will adjust itself through the exercise process leaving no residual position. If the stock price finishes between the two strikes, there will be a residual position. We discussed above how to trade out of this position. Your second choice is not to trade out and allow yourself to go through the expiration process. You must remember that if you are going to accept a residual stock position, you must be able to afford it.
Then, if you have 10 July 50 calls and you exercise them you will be receiving 1000 shares of stock at $50.00 per share. Thus, you must have $50,000.00 of cash and/or margin in your account to receive the stock. If you do not have enough cash and/or margin to accept delivery of the stock, then you must trade out of the position before it expires.

Short Term Options Trading

admin — Fri, 18 Dec 2009 08:37:17 +0000

There are many traders who still consider options and warrants to be long term trading markets, but options can even be traded short term. It is important to understand that trading options short term is not dramatically different from trading any other market but there are a couple of options specifics that need to be taken into account. In short term trading, the aptitude to steer the short term market is a key component for continued success. As an equity trader one has to learn to trade with the short trend of the markets to reduce market risk.

An option trading is a strategy that does not depend on the market direction; in fact it does well in volatile markets. With options trading there are two methods through which you can enter a long trade and short tern trade. While a long fundamental trade can be entered either by buying a call or by selling a put, a short underlying trade can be entered either by buying a put or by selling a call.

In short term options trading calculating risk reward is yet another important point that trader need to well aware of. Calculating the risk reward can be defined as the amount trader would risk if he or she were wrong and the amount trader would make if he or she were right. If we don’t figure out this number, the chances are more where we may find the stock that may go in favor but the option goes against.

If we compare long term and short term options trading, then both have their own advantages. However, buying short term options can be very beneficial as it gives more control. It very general that no one can exactly make prediction very clearly when it comes to stock trading. It’s really hard to predict what will happen to a stock 3 months down the road. Though sometimes it is easier to predict which way the stock will be heading in just a few weeks as opposed to a few months. Thus, selling short term options allow capture more premiums over a longer time frame.

Apart from this, it even works well and provides an excellent way for novice traders to trade. This is because as the price movement is so fast and dynamic that when things happen, beginners may not know what to do and be able to do it quickly. Moreover, it is an enormously lively options trading method where options are bought and sold very quickly in order to gain profit from the least intraday price swing or change in volatility.

Today certainly short term option trading has gained its world-wide popularity. It has become extremely money-making method in the hands of options trading veterans and new comers in current extremely volatile market conditions.