Option Trading Strategies » Calls

Fellow Options Traders, Why Aren’t You Selling Options in Your Trading Account?

admin — Sat, 30 Apr 2011 10:04:04 +0000

The only explanation which would seem acceptable is no one has shown you how to perform this marvel of printing money before, so you are a bit unsure of how to go about doing so!If this is your situation, then you are excused…But if not, you are truly missing out. Even if you are in the first situation, you are still missing out!No matter how long have you been an options trader, you will eventually find out that there is quite a bit of uncertainty involved with buying options.The Chicago Mercantile Exchange estimates over 80% of all options sold expire worthless. So why aren’t you selling them instead of buying them?An option is considered a “wasting asset.” Time value erodes as each day passes, accelerating as the option’s expiration nears. This is referred to as “time decay”.If the underlying contract does not move far enough by expiration, the option will have no value left and expire worthless and the option seller will keep the premium.When selling (or writing) an option, we get paid the premium up-front and we take advantage of “time decay”.However, it is simply not enough to know that to selling options generates significant premiums, you must also have a well throughout strategy for performing this. Along with this, you will also need to make corrections for when the market goes out of your favor.We have solved this by only selling straddles. You seasoned guys know what a straddle is. It is simply having a neutral outlook on the market, and trading it accordingly. By selling straddles, we are essentially playing both sides of the market. Stocks go up, down or stay the same. So we hedge our bets in both directions and hope that the stock remains flat.Our view stems from the fact that, a directional move will increase one side of the option play, and decrease the other side. So even if you may loose money in one position, we are gaining money in another. and by staying flat, both sides simply reduce to zero.Since we only sell out of the money positions, unless the stock breaks through the strike price, at expiration, best case scenario is we make money on both option legs. Worst case scenario is we loose on one leg, and we gain on the other, coming out with a wash.Or the more likely scenario, is both option legs are reduced to a level which we are happy to take profits.However, even though we believe selling options can potentially put the odds of success in your favor, it still requires good, solid market analysis. That’s how we, as seasoned traders arrive at our option picks!After trading options for many years with so much success, we see no reason to buy options. We have discovered, when options are sold correctly and carefully, they can generate a higher percentage return than any other option or stock trading strategy.Novice traders benefit the most from our alerts because they soon realize the difference is, selling options gives you a larger margin for error. You don’t have to be exact, only close.OPTIONXSPREADS is a group of ex-stockbrokers and investors who have developed this site to allow the ordinary investor to trade along with the pros, and have a chance to double, tripple and quadruple their investment dollar. And all you have to do is follow our trades and make money!Even if you do not follow our trades, realize that you should incorporate option selling into your trading strategy, to take advantage of the favorable odds! To see how we provide tremendous gains to our members every month, visit our website: www.optionxspreads.com

Fellow Options Traders, Why Aren’t You Selling Options in Your Trading Account?

admin — Sun, 03 Apr 2011 11:30:25 +0000

Fellow Options Traders, Why Aren’t You Selling Options in Your Trading Account?

admin — Thu, 06 Jan 2011 23:26:51 +0000

Fellow Options Traders, Why Aren’t You Selling Options in Your Trading Account?

admin — Mon, 03 Jan 2011 23:30:24 +0000

Options Trading Is a Opportunity For The Small Investor Too

admin — Fri, 27 Nov 2009 19:56:48 +0000

The stock market appeals to people for many reasons. Some see it as a quick way to make a nice nest egg to tuck away for their eventual retirement. Some see it as a way to live out their fantasies of being a powerful, corporate type. And some are actually more logical about it, seeing the stock market as a potential way to make money, if they play their cards right. They know that there are no sure things in life and nowhere is that more clear than in the stock market. But options trading is a opportunity for the small investor too.Options trading has grown in popularity, especially with the smaller investors over the course of the past ten years. Unlike other forms of trading that can require large amounts of venture capital, options trading can be accomplished with often a very small initial outlay. Of course, because they can be easily started, it can allow the uninitiated or poorly informed to get in well over their heads in a matter of a very short time. Not allowing yourself to understand the market before you make the first trade is financially foolhardy and personally dangerous. First of all, as the name implies, option trading is not buying actual stocks, but rather busying the right to own or sell them. The options trader can make the same profit with stock options that he would make as if the owned the outright stocks, but that also means that he would face the same risks if that stock did not do well on the market. As with other forms of trading, options trading will require that you learn some facts and make some decisions before hand. Know everything you possibly can about options trading, as well as trading in general. Know how to track stocks for movement and know how to watch for trends. Know what the basic types of options trading is- and understand how each works. And, as with any other type of trading, make sure you know and adhere to your personal limits, including your absolute loss cap. Do not overextend yourself, even if you just got a tip on a great stock. Options trading can focus on stocks that are heading in one of two directions, up or down. Call options will focus on rising stocks, while Put options focus on those on the decline. Both allow you the right to buy the option on a stock at a fixed price, but do not force you to do so. Knowing how to work this system to your best advantage is key.Invest in yourself, learn the basics and expand on that to become profitable in options trading.

Options Trading 101

admin — Tue, 10 Nov 2009 05:16:17 +0000

The individual investor will typically include some stocks in their investment portfolio. And whether they are a long term trader or in it for much quicker returns, many investors understand and feel somewhat comfortable with the concepts and techniques of trading stocks.
Options tend to be much less understood – and therefore avoided. But Options can form an extremely valuable part of your trading strategy as they can provide tremendous returns!
So here I will try and give you some of the fundamental concepts behind trading options.
Options are a contract conferring the right to buy (a call option) or sell (a put option) some underlying instrument, such as a stock or bond, at a predetermined price (the strike price) on or before a preset date (the expiration date). Options officially expire on the Saturday after the third Friday of the contract’s expiration month but because the markets are typically closed on Saturdays, the Friday is commonly used as the expiration date.
A key concept to grasp is that, when you buy an option, you don’t actually own the underlying security. You simply own the right to buy (or sell) at a specific point in time. But, of course, the price of the underlying instrument and the time remaing before expiration both affect the value of the option itself.
So in trading options you have two main ways to make money on them:
- You can hold to maturity and then exercise the option (with the expectation that the underlying instrument is then worth more than what you are entitled to buy it at – your “strike price”)
- You can sell the option itself prior to expiration (in the expectation that the value of the option itself has risen above what you paid for it)
A great many investors do in fact hold until maturity and then exercise the option to trade the underlying asset. Assume the buyer purchased a call option at $3 on a stock with a strike price of $30. (Typically, options contracts are on 100 share lots.) To purchase the stock the total investment is:
($3 + $30) x 100 = $3300 (Ignoring commissions.)
So if, at expiration, the stock is worth more than $33 you’ve made a profit (You can sell your 100 shares for more than $3300 right away).
Speculating on the actual value of the option itself is the second alternative.
Let’s use the same example above.
You bought your options for $3 with a strike price of $30.
If the price of the underlying stock goes above $33 at any time prior to expiration, then naturally more people will want to try and get a hold of that option you own, because they see a high likelihood of making a profit off the underlying security. With the increased demand for that option, the value of the option itself will likely go up. So you can sell the option to that higher bidder for a profit.
For example, if the price of the underlying stock rose to, say $35 then the option itself may become worth, say $4 on the open market. So you sell your options for $4 and make a nice 33% return. Without ever having owned the underlying stock itself.
Those are the kinds of returns that make options so attractive.
Many brokers offer trading accounts to individual investors that allow options trading and frequently at very competitive commision rates.
It really isn’t very difficult to get started.
Options trading is risky, so manage your risk and your assets wisely and only use a small percentage of your overall portfolio for trading options. But do consider them as an additional component of your investment strategy, as they can yield tremendous returns when traded correctly.

Understanding Equity Options

admin — Sun, 01 Nov 2009 17:25:11 +0000

Welcome to the wonderful world of equity options. You may have heard that option trading is high risk, and indeed it is, for much the same reasons that spread betting is high risk. The instruments themselves are derivatives from the cash markets, and are highly geared, but options themselves were originally introduced to the US markets in the mid 1970’s as a tool for hedging risk. In other words they were a form of insurance. You paid a premium, a bit like car insurance, which covered you in the case of an accident. In the financial markets you bought some protection in case the market went in the opposite direction. In this article we look at equity options, which are those derived from the cash market share or stock.

In the early years, the options market was very small, with only a handful available on the larger blue chip stocks in the Dow 30 and other major indices. Today, the American market is enormous, with over 12,000 equity options available to trade. In the UK it is just under 100 (the blue chip shares mainly) which can be rather limiting, but if your trading is mainly in UK shares it is not a bad place to start.

OK, let me start with some definitions, and I will try to keep this as simple as possible (not because you will not understand) but because the terminology can be very confusing for newcomers. It took me 6-9 months to get comfortable with this so do not expect to pick it up straight away. Firstly there are two type of options as follows :

A Call Option – A contract representing the right for a specified time to BUY a specified security at a specified price

A Put Option – A contract representing the right for a specified time to SELL a specified security at a specified price

An option is a contract which gives the buyer the right, but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. Right, let me try and explain. Suppose you are buying a classic second-hand car. You visit the owner, love the car, and agree a price, but explain that you will not have the cash for 4 weeks. The owner agrees to hold the car and the price for you for only 4 weeks, but on condition that you pay a small non – refundable premium for his trouble (this is in addition to the full price of the car)

This is what an option contract is – the car owner has effectively written an options contract to give you, the contract holder, the right to buy the car within the four week period, at the agreed price. Now, as the option buyer ( or holder ) you have an option to buy, but you do not have to if you change your mind. Which is why in the above definition it says ‘ the right but not the obligation’ – if you change your mind you just walk away. All you have lost is your premium which the buyer keeps (even if you do decide to go ahead). The car owner, who has written the contract, has a contractual obligation to deliver the car at the agreed price, and he or she must deliver.

In summary, as an options buyer, you have choices – you can exercise the contract or walk away. As an options seller, you do not have any choices – if the contract is exercised you must deliver the asset. If we take the example a stage further (I know its not ideal but I hope it gives a feel for what these things are all about). Let us assume that whilst you are waiting for the bank to supply the cash, so that you can go ahead and buy the car, the original factory where the cars were made is destroyed by fire. Suddenly these cars increase in value sharply. You, however, have a contract in writing at an agreed price, provided you buy within the next four weeks. Now, you as the buyer or holder of the contract have two choices. Firstly, you exercise your contract by paying the seller the agreed price, and immediately put the car on the market and sell at a profit, or alternatively you sell your contract on to someone else, as it now has a higher ‘premium’ value due to the increase in value of the underlying asset (the car )

Now, as the seller of the car ( the writer of the contract option )you have no idea who will exercise the contract, which could have been bought and sold many times over during the 4 week period. But one thing is constant. If it is exercised, you will have to deliver the asset at the price agreed.It is a contract. This is how the options market works.

If we now look at some of the unique features of options these are as follows:The contract is for a specified time, normally 4 weeks, but there are options called LEAPS which extend for years. As there is a specified time, this is a wasting asset. If you buy an option it will be worthless in 4 weeks if not exercised. Each has an agreed contract price fixed for the life of the option. This is based on the underlying asset ( the share ). The option carries a premium. This is paid to the seller of an option by the buyer and is always kept by the seller. CALL options increase in value as the underlying asset increases, whilst PUT options increase as the underlying value of the asset decreases.

OK, lets just recap the above. When you buy an option the purchase price is called a PREMIUM. If you sell an option, the premium is the amount you receive. As a buyer you have rights, but no obligation. As a seller you have an obligation to deliver the terms of the contract. An option seller is also called a WRITER. Options are a derivative product, they are derived from something else. Equity options are derived from the equities market so the underlying asset is the share or stock price. The premium will vary minute by minute, up and down as the underlying value of the asset changes in the cash market. Options are leveraged instruments and therefore higher risk. Most equity options are ‘Physical Delivery’ which means that shares must change hands if the contract is exercised. Now one last point before we move on and it is simply this – as an option writer (seller ) you do of course have one choice – you can buy yourself out of the obligation by buying the contract back – this will naturally cost you more if the premium has increased in value! ( if the premium has decreased you may want to close out the contract for a small profit, or just leave it to expire for 100% profit on the premium ) As you can see from the above, the same option can be bought and sold many times before it is either exercised or expires worthless. Whatever happens, the option seller keeps the premium received from the initial buyer 1. As you can imagine all this trading has to be tightly controlled to ensure that buyers and sellers are matched correctly, and that contracts are fulfilled by sellers. In the UK, the options exchange is called LIFFE ( London International Financial Futures and Options Exchange ) and this is where all equity options are managed and traded. In the US there are several exchanges, but the principle ones are CBOE ( Chicago Board of Options Exchange ), AMEX and Philadelphia Exchange. Everything to do with trading, managing and exercising the options is conducted by the exchanges. You do not have to worry about actually doing anything – it all happens automatically. So if, for example, you have sold a call, and the contract is exercised, this will all happen automatically and the broker will transfer the shares out of your account at the agreed contract price and replace with cash. Finally there are two ’styles of options’ – American style and European style. American style options can be exercised at any time as in our example above, whilst European can only be exercised only at expiry. Most equity Options will be American style but please check and make sure beforehand.

Whilst the terminology of equity options may seem strange at first, it is worth the effort. In their simplest form they can simply be bought and sold like any other financial instrument. Remember however that these are assets with a time value, they cannot be held for long periods as they all have an expiry date as part of the contract. Many traders simply buy and sell options throughout the trading day, making their money from the increase or decrease in the options value. Others use them in combination with the underlying stock to write calls. There are many ways to benefit from an understanding of these sophisticated instruments and I would urge you to dip a toe in the water!

Maximizing Option Trading Profits With Fast Puts And Calls

admin — Fri, 30 Oct 2009 05:49:31 +0000

In today’s chaotic stock market, the ability to make a profit trading long Option positions (Puts and Calls) depends on being able to capitalize on short-term moves in the price of a stock or index. Stocks are up one day, and down the next – and it’s anybody’s guess as to what the long-term outlook is. With the price action occurring on a daily basis being more or less a guessing game, the ability to make profits with long option positions depends on being able to buy options that can gain value quickly with a minimum amount of price movement in the underlying security.
In the past, figuring out which option might move the most quickly has been a guessing game. For every equity with options there are several options for each expiration month. In the case of options on Indices, such as SPY or DIA, there are literally dozens of option choices for each month. Clearly, figuring our which of those options will reach a particular target gain on your initial investment, just by looking at the list of choices, is basically a guessing game
The key to a winning Option Trading Strategy it to be able to sort out the relative behavior of all of those options, and find the ones that can make your target investment gain (50%, 100%, etc.) with the least amount of price movement in the stock. The availability of a new Spreadsheet that can analyze and display the behavior of the various option choices, and show clearly which options can provide the desired gains with the least amount of price movement in the stock, eliminates the guesswork.
This analytical spreadsheet provides a number of useful Metrics for characterizing the behavior and future value of options, but the most important are the price gain data in the Matrix displays, which give a visual impression of the rate at which the different options will gain value as the price of the stock or Index changes. This provides the tool for finding the options which gain value at the fastest rate.
The spreadsheet provides two Matrix displays: The first shows the behavior of the options based entirely on the effects of Delta and Gamma, which determine how the price of the options change as the Stock price changes. This set of calculations is most relevant when you expect a very quick move in the stock price – a situation in which time decay (Theta) does not play a significant role. The second Matrix adds to the Delta and Gamma effects calculations of the influence of both Time Decay, and Volatility (Vega). These two variables can be changed independently of each other.
The results of these calculations are illustrated below in two tables. The data in the tables are for Dollar Tree Calls. The first set of values shows the amount that each call will gain based on the increase in the value of DLTR stock shown in the top line of the table (DLTR Price Gain). To make the relative behavior of the different Options clear, each line of the Table shows only the two price gains which bracket the increase in the option Bid price that will allow each option to be sold for double the original price paid, (the Ask price). (The target value can be set to any desired multiple of the initial cost, not just 2x, as in this example):
DLTR @ $35.42, Price changes needed to Double the value of a Call:
Matrix 1 – Delta & Gamma only price gains:
DLTR Price Gain:___ $2.00__$3.00__$4.00__$5.00__$6.00__$7.00__$8.00
DQO CU_______________$1.48___$2.09
DQO CH_______________$1.09___$1.56
DQO CV_________$0.47__$0.76
DQO CI_________$0.31__$0.51
- – - – - – - – - – - – - – - – - – - – - – - – - – - – - – - – - – -
DQO EH_______________________$1.89___$2.45
DQO EV_______________________$1.56___$2.04
DQO EI________________$0.91___$1.28
DQO EW_______________$0.73___$1.03
(These tables are greatly abridged for publication, and many data columns are not shown.)
The second Matrix shows how these same options will behave at some time in the future and, optionally, with a change from the present value of Volatility (Vega). The number of days into the future, and the change in Volatility, are determined by user input, which allows the exploration of many different “what if?” scenarios:
Matrix 2 – Price Gains after 35 Days and with Volatility at 85% of current value:
DLTR Price Gain:____$2.00__$3.00__$4.00___$5.00___$6.00___$7.00__$8.00
DQO CU__________________* * *___* * *__$1.65___$2.53
DQO CH__________________* * *___* * *__$0.52___$1.28
DQO CV__________* * *____* * *__________________$0.43__$0.76
DQO C___________* * *____* * *__________________$0.18__$0.37
- – - – - – - – - – - – - – - – - – - – - – - – - – - – - – - – - – -
DQO EH_________________________* * *____ * * *___$1.58___$2.30
DQO EV_________________________* * *____* * *__________$1.50___$2.15
DQO EI___________________* * *___* * *__________$0.66___$1.06
DQO EW_________________ * * * ___* * *__________________$0.72___$1.06
In this second Matrix, the positions occupied by price gain data appearing in Matrix One are represented with asterisks (if they differ from the new positions), providing a clear visualization of the way in which the Options’ gains in value have been changed by the effects of Time and Volatility.
The Tables above show how an analysis of multiple options can be used to make choosing the fastest option to purchase for a trade a more systematic process. If we anticipate that DLTR is going to make a quick move upward in price over the next couple of days (perhaps because of an earnings announcement), then using the data from the top table we would buy either the DQO CV Calls, or the DQO CI Calls. In cases like this, where there are two choices for an option based on the fastest rate of price gain, there are other metrics, such as price gain to achieve break-even, which can be used to narrow the choice further.
Based on the results of the analysis, these two Calls should double in value if the price of DLTR stock rises by $2.00 – $3.00 over the next few days, as of the time this data was current (early February 2009). The DQO CU and DQO CH options, by contrast, won’t double unless the price of DLTR rises by $3.00 – $4.00. If we were expecting the stock to drop, then we would perform a similar analysis using the Puts for DLTR. This example illustrates the power of this strategy: Buying one of the two fastest options cold result in a 100% profit, after the price of the stock has risen by less than 9%!
On the other hand, if we expect that DLTR will rise gradually over the next several weeks, then we would use the calculations in the second Matrix. Setting the number of days to the expected interval for the trade (in this case, 35 days) and allowing for the likelihood of a 15% decrease in volatility for these options, the best choices for Call options to buy would then be either the DQO CU, or the DQO CH Calls. Note that these March calls will still provide a faster return than the longer expiration options (the the May calls), even though the elapsed time is 35 days. This is not always the case, however.
One of the advantages of the way this data is presented is that anomalies in Option pricing “jump out” at the user very clearly. In the second Matrix, notice that the price gain data for the DQO EI Calls are displaced one position to the left, relative to the DQO EW and DQO EV Calls. This indicates that the DQO EI calls have an advantage over the others under these conditions, and will produce a faster return.
The use of a trading strategy that takes advantage of analytical tools (like the price gain velocity analysis shown here) provides an opportunity to make trading decisions that are based on analytical data, rather than “gut instincts”. This provides Option Traders with a more systematic way to make choices when devising an Option trading strategy, and taking an Option position.

Using Option Credit Spreads to Earn 5-10% Month

admin — Thu, 22 Oct 2009 05:11:36 +0000

sing credit spreads is a good way to make a consistent income using options without taking too much risk. However very few non-professional investors know how to use it and believe it to be too complicated. This article shows you how to write credit spreads.

The first thing you want to do is check the overall trend of the S&P index. If it is trending down use a Bear Call Spread. If it is trending up use a Bull Put Spread. There are a number of ways you can do to determine the trend of the market. One simple way is to use the 50 day moving average. If the market is above 50 day moving average the market is considered to be in an uptrend, below it the market is in a downtrend. There are also things like moving average crossovers and or the close above the highest high of the last three trading weeks or a close below the lowest low of the last 3 trading weeks.

You then want to find a stock that is trending the same way as the index. So again if the index is bullish you want to find a stock that is going up, if the index is bearish find a stock that is falling.

You then want to find a support or resistance level on the stock or exchange traded fund (ETF). You can use bollinger bands, the 50 day moving average or pivot points for this.

After that check the stocks fundamentals. One good way of doing this is using Investors Business Daily. Using their website all you have to do is type in the ticker symbol and it gives you a letter grade for the stock you are looking at. Obviously if you are bullish on a stock you want it to have a grade of A or better. If you are bearish on a stock it should have a C or lower. The website will also give you information on things like earnings per share, relative strength of the stock and institutional accumulation. All important things for determining a stocks fundamental strength.

Finally you want to purchase the credit spread. In the case of a bull put spread sell a put at the money and buy a put two or three strike prices below. So let’s say the Nasdaq Stock ETF is selling at $29.00 and it’s January. You can sell a February $29.00 Put for $1.60 and buy a February Put for .90 bringing in a total of $70 per contract (.70 x 100) If the stock closes above $29.00 at options expiration in February (3rd Friday of the month)then you will keep the full credit. If it ends at $28.30 ($29.00-.70) you will break even. If it ends at $27.00 or below you will lose $130 per contract ($29.00-$27.00)-.70.Depending on the number of contracts that you use you can easily earn anywhere between 1-10% a month using this method. The beauty of it is that as it gets closer to the expiration date the options will begin to lose value, which is what you want to happen. Because once they go to 0 you don’t have to do anything, but keep the money that you’ve already collected.

There are a couple of key points to remember about using this technique.

1. Always use good management and don’t expose more than 6% of your portfolio at a time.

2. Don’t trade before an earnings announcement.

3. Try to take in at least $1 for every $2 that you’re risking. Usually I try to get $1 to $1.

How To Start A Home Business With Options Trading And Credit Spreads

admin — Wed, 21 Oct 2009 18:27:53 +0000

If you are like most people, in these times of economic uncertainty you are looking for a way to earn extra money, that doesn’t take a lot of time, preferably from home and that doesn’t require a lot of capital to get started. If you fall into this category then options trading might be just what you are looking for. Although trading is a simple business to get started in, it is far from easy and be wary of anybody who tells you differently. Also you may have heard that trading options is risky, and while nothing in life is risk free, there are ways to substantially reduce the risk.

How much money do I need to start?

One of the beautiful things about options trading is it’s one of the few businesses that you can take for a free test drive to see if you can be successful at it. By trading in a simulator you can start your business with no money. Obviously you won’t be earning anything either, but you will be gaining valuable knowledge. You can find a simulator at CBOE.com. After you’ve traded in the simulator for a few months and become consistently profitable you can start with as little as $2,000.

Finding a broker

The first step in getting started in an options business is finding a broker. There are many (excuse the pun) options available, a few of the good ones include, OptionsXpress, TradeStation and Interactive Brokers. These are all members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which are two organizations that protect you against fraud from financial brokers.

Putting the Odds in your favor

While this isn’t a comprehensive list there are a few things that you can do to stack the odds in your favor when dealing in stock options. First of all rather than buying puts and calls you can use credit spreads. This method of selling a higher priced option and purchasing a lower priced option alone will stack the odds enormously in your favor simply because this method can allow you to make money whether the markets go up, down or sideways. As a matter of fact using this method can allow you to win as much as 80-90% of the time, which is why professional traders use this type of trade to generate consistent income. The next thing you want to do is a bit of technical analysis and look at the S&P stock index. If the index is moving above it’s 200 day moving average you generally want to be purchasing stocks or using bull put credit spreads. If the index is moving below it’s 200 day moving average you should short sell stocks or use bear call spreads. How much can I earn? This can fluctuate depending on market conditions but by using credit spreads you can make anywhere from 5-20% a month. So with $10,000 you can generate anywhere from $500-$2000 in extra income a month.

Reducing Your Risk

1.Start off by trading in a simulator at CBOE.com

2.Always use a stop loss or have your positions hedged.

3.Never trade with money that you need to pay for you day to day expenses with such as rent and bills. Nervous money always loses.

If you’d like to find out more about options trading and credit spreads click on the link in the resource box below and sign up for a free 10 part course.