For a long time I couldn’t say those words as I struggled just to hold on to my capital, let alone make it grow.

Though there were several reasons why I struggled (including being grossly undercapitalized and at the same time placing too much of my trading bank on individual trades) the main reason for my struggle I believe was a lack of focus.

By ‘lack of focus’ I mean that I was constantly jumping around trying to implement too many different option trading strategies from basic call and put buying, to putting on multi leg spread tades, believing that the more complex the strategy, the greater my chance of success.

I had become a ‘Jack Of All Trades & A Master Of None’ and the only people that were making money from my option trading were my brokers.

One day a friend of mine (a very successful futures trader) said to me, “You don’t need to know everything about trading the markets to make money and be a success. You just need to ‘focus’ and become an expert in one or at most a few different trading strategies and know exactly when and how to use them. The rest is just practice!”

Those words rang loudly in my ears and from that point onwards I narrowed my focus.

I decided that I would go back to the very basics of option trading and only buy calls and puts with the intention of becoming very good at picking the short-term direction of stocks.

Today, almost 2 years later and after going through a steep and often expensive learning curve, buying calls and/or puts is what brings in the largest portion of my current monthly income.

I also use a couple different spread trading strategies when the market moves sideways, but my main ‘focus’ is on picking the short-term direction of a small number of stocks that I have gotten to know VERY well (through backtesting), and then buying the appropriate option based on risk vs reward and my short-term outlook.

The success I’m enjoying today (19 profitable months out of the last 24) is due to becoming proficient at reading stock charts and developing an option trading system that I am comfortable with and performs well and by applying my trading rules consistently.

Ultimately you only need to know a few different strategies to be able to trade any stock up, down, or sideways.

The options themselves are simply the ‘tools’ to make money from your ‘opinions’ and in my experience the tools that are the easiest to use, have also been the most profitable.

For a long time I couldn’t say those words as I struggled just to hold on to my capital, let alone make it grow.

Though there were several reasons why I struggled (including being grossly undercapitalized and at the same time placing too much of my trading bank on individual trades) the main reason for my struggle I believe was a lack of focus.

By ‘lack of focus’ I mean that I was constantly jumping around trying to implement too many different option trading strategies from basic call and put buying, to putting on multi leg spread tades, believing that the more complex the strategy, the greater my chance of success.

I had become a ‘Jack Of All Trades & A Master Of None’ and the only people that were making money from my option trading were my brokers.

One day a friend of mine (a very successful futures trader) said to me, “You don’t need to know everything about trading the markets to make money and be a success. You just need to ‘focus’ and become an expert in one or at most a few different trading strategies and know exactly when and how to use them. The rest is just practice!”

Those words rang loudly in my ears and from that point onwards I narrowed my focus.

I decided that I would go back to the very basics of option trading and only buy calls and puts with the intention of becoming very good at picking the short-term direction of stocks.

Today, almost 2 years later and after going through a steep and often expensive learning curve, buying calls and/or puts is what brings in the largest portion of my current monthly income.

I also use a couple different spread trading strategies when the market moves sideways, but my main ‘focus’ is on picking the short-term direction of a small number of stocks that I have gotten to know VERY well (through backtesting), and then buying the appropriate option based on risk vs reward and my short-term outlook.

The success I’m enjoying today (19 profitable months out of the last 24) is due to becoming proficient at reading stock charts and developing an option trading system that I am comfortable with and performs well and by applying my trading rules consistently.

Ultimately you only need to know a few different strategies to be able to trade any stock up, down, or sideways.

The options themselves are simply the ‘tools’ to make money from your ‘opinions’ and in my experience the tools that are the easiest to use, have also been the most profitable.

Here is the step-by-step routine that I follow each market day when looking for new short-term option buying opportunities.

1) I wake up at 5am Australian time (3pm New York time – 1 hour before the close) and go to the computer.

2) I then pull up the ‘real-time’ charts in my watchlist and check the DOW, S&P 500 and Nasdaq Comp to see if the day’s sentiment is bullish, bearish or neutral. I then check each individual stock chart for my core Call or Put buying ‘trigger’ which is either a higher trough or a lower peak.

3) As I go I make a list of those stock codes that fit this criteria so I can analyze their charts further.

IF NO STOCKS FIT THIS CRITERIA MY ROUTINE IS COMPLETED UNTIL THE NEXT MARKET DAY!

IF THERE ARE STOCKS THAT FIT THIS CRITERIA, I CONTINUE ON.

4) I then focus on each of these charts and analyze the underlying long and short-term trend, long and short-term moving averages, RSI, bollinger bands, potential breakout patterns or candlestick reversals and last but not least, volume.
– I’m looking for ‘evidence’ of an imminent upside or downside move.

5) I then try to cull this list so that only the highest probability trades remain.

6) I then run the remaining stocks through my Volatility Cone to establish whether implied volatility is low, high or fair.

7) I then take another run through my remaining stock charts and choose the single best opportunity, taking all factors into consideration including my GFI (’Gut Feel Indicator’).

I then login to my trading account and check out strike prices, expiry months and delta.

- If the options on the stock I have chosen have high implied volatility, I will be looking to buy the current month deep ITM options, with a delta as close as possible to 1.

- If the options on the stock I have chosen have low implied volatility and the stock has formed a reliable break-out pattern, I will be looking to buy the next month out, ATM options with a delta close to 50.

- If the options on the stock I have chosen have relatively ‘normal’ implied volatility, I will be looking to buy the next month out, ITM the money options with a delta of 75-80.

9) Once I have found the strike price and expiry month I want, I then work out roughly how many contracts I can buy considering per my capital allocation for the trade (usually 10-15% of my short-term trading bank).

10) I then pull up the order form I need and fill everything out except for the limit price.

11) I then wait until 3.45pm and as long as the stock is trading within the top 1 third of the day’s range for calls OR the bottom 1 third of the day’s range for puts, I enter in my limit price (usually the ‘ask’ price for tight spreads or ‘in between’ the bid and ask for wider spreads) and pull the trigger.

12) Once the order is filled, I then place a 20% trailing stop on the option, which will close out the trade ‘at market’ if hit.

13) I then fill out my trading diary, which includes the details of the transaction and exactly ‘why’ I got into the trade and what my exit scenarios will be, and attach a copy of the stock chart.

ROUTINE COMPLETED!

NOTE: If I am currently in a trade/trades this process will also include analyzing that/those particular stock charts and making my decision to either stay in or exit the postion(s).

Now the reason I just shared my daily routine with you was to illustrate the importance of ‘consistency’.

When you follow a trading system and analysis sequence consistently, you get to a point where you know EXACTLY what you need to do and EXACTLY what you are looking for.

This keeps you objective, focused (i.e. not jumping around all over the place looking for trades) and also supports you making the best possible use of your time.

Afterall, who wants to be staring at a computer screen all day? I have found success in letting my trades come to me on my terms and that fit in with my ‘routine’.

This is a cash generating strategy that not only offers downside protection that you otherwise wouldn’t enjoy if you just bought the stock, but also gives you the ability to generate a consistent monthly income, for only minutes of your time.

However as with all option trading strategies, there are pitfalls that you will need to avoid if you are to be consistently profitable.

Here are a few tips that may help you write covered calls successfully.

Always check the fundamentals of the underlying stock and make sure that you would be happy to own even if options didn’t exist.

A great resource for viewing fundamental ‘ratings’ for stocks is at http://www.morningstar.com

Don’t enter a Covered Call trade just because the option premium looks attractive. Higher option premiums (10-15% or more) often mean that the stock is more volatile i.e. prone to huge price swings and therefore greater risk.

I personally target the larger, more liquid and stable companies with monthly call option premiums between the 3-6% range.

One of my personal favorites and a stock that I have had considerable success writing covered calls on over the years is Oracle (ORCL).

I’ve also had consistent success with Intel (INTC) and Nokia (NOK). At times the Nasdaq Tracking Unit (QQQQ) is also attractive (a 3% yield is the highest I’ve ever seen it though).

Don’t hold stocks at least 2 days either side of earnings announcements. Much of the time expectations of good and even great earnings are already priced into the stock and should the stock fall short of expectations or even worse disappoint, a virtual bloodbath can follow. I’ve experienced declines of 30-50% in just a few days by holding my covered call stocks over earnings announcements.

Don’t get me wrong, it can also be good time to be a stockholder if the earnings numbers are really great, but I’m a little more conservative and to me it’s just not worth the risk. You can always buy back in afterwards anyway!

Always take a look at stock charts when choosing a stock to write covered calls on. There are 3 general patterns that I look for:

1) A moderate uptrend.

2) A sideways trend.

However the most conservative/safe chart pattern for covered call writing (in my experience) appears after a stock has had a steep sell off and has begun to move sideways for a couple of months.

This is a type of ‘bottoming’ pattern where much of the downside risk has already been ’sold’ out of the stock.

As covered call writers it’s always important to remember that our risk lies if the stock falls sharply, so we want to do our best to reduce the risk as best we can. This is just one way that I have found to be effective.

If you go to http://www.stockcharts.com and pull up the chart for the QQQQ during the early part of 2003, you’ll see this exact pattern. I successfully wrote covered calls on the QQQQ for about 4 months during this time before I allowed myself to be assigned and moved onto another opportunity.

There you have it. Hopefully these tips help you on your way to consistent profits and monthly cashflow writing covered calls.

Oh, it also goes without saying but I’ll say it anyway, “Don’t put all your eggs in one basket!”

Happy option trading and investing!

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.

LEAP options that don’t expire upto 2 years into the future give the buyer much more time to be right about the future direction of a stock and at the same time offer tremedous leverage.

LEAP option trading has become quite popular in recent years because just like all options, LEAPs only cost a fraction of what it would cost to buy shares in the underlying stock itself, but give you the same amount of control.

As with all options though, time is the enemy (if you are a buyer) and over time options lose their value.

So how can we use LEAPS to speculate on the future direction of a stock (UP or DOWN) and at the same time reduce our risk of losing all our money on them?

Well let me share with you a couple of simple LEAP option trading strategies that have worked well for me over the years in both bull and bear markets…

TIP:

If you believe a stock will go UP over the next 1-2 years, then buy Call option LEAPs on it and at the same time sell the call options (at least one or two strike prices out of the money) that expire in the current month.

If you believe a stock will go DOWN over the next 1-2 years, then buy Put option LEAPs on it and at the same time sell the put options (at least one or two strike prices out of the money) that expire in the current month.

By doing this you will effectively be getting cash back on your investment every single month that you hold your LEAPs.

Over the long-term this will not only offset the time-decay of your LEAPs, but also offer you some downside protection, should the stock go in the opposite direction that you want it to.

This is known as a Calendar Spread and is a much more conservative way of speculating with LEAPs.

Important:

If the stock rises above your sold strike price for your current month Calls or below your sold strike price for your current month Puts, then you risk being assigned/exercised.

You should never allow this to occur because the moment you are assigned you will lose whatever time value is left on your LEAPs.

It is far better to close out the trade for a profit by buying back the sold option and selling your LEAPs for an overall profit or simply holding your LEAPs and then writing (out of the money) options against them for the next month.

For a long time I couldn’t say those words as I struggled just to hold on to my capital, let alone make it grow.

Though there were several reasons why I struggled (including being grossly undercapitalized and at the same time placing too much of my trading bank on individual trades) the main reason for my struggle I believe was a lack of focus.

By ‘lack of focus’ I mean that I was constantly jumping around trying to implement too many different option trading strategies from basic call and put buying, to putting on multi leg spread tades, believing that the more complex the strategy, the greater my chance of success.

I had become a ‘Jack Of All Trades & A Master Of None’ and the only people that were making money from my option trading were my brokers.

One day a friend of mine (a very successful futures trader) said to me, “You don’t need to know everything about trading the markets to make money and be a success. You just need to ‘focus’ and become an expert in one or at most a few different trading strategies and know exactly when and how to use them. The rest is just practice!”

Those words rang loudly in my ears and from that point onwards I narrowed my focus.

I decided that I would go back to the very basics of option trading and only buy calls and puts with the intention of becoming very good at picking the short-term direction of stocks.

Today, almost 2 years later and after going through a steep and often expensive learning curve, buying calls and/or puts is what brings in the largest portion of my current monthly income.

I also use a couple different spread trading strategies when the market moves sideways, but my main ‘focus’ is on picking the short-term direction of a small number of stocks that I have gotten to know VERY well (through backtesting), and then buying the appropriate option based on risk vs reward and my short-term outlook.

The success I’m enjoying today (19 profitable months out of the last 24) is due to becoming proficient at reading stock charts and developing an option trading system that I am comfortable with and performs well and by applying my trading rules consistently.

Ultimately you only need to know a few different strategies to be able to trade any stock up, down, or sideways.

The options themselves are simply the ‘tools’ to make money from your ‘opinions’ and in my experience the tools that are the easiest to use, have also been the most profitable.

For a long time I couldn’t say those words as I struggled just to hold on to my capital, let alone make it grow.

Though there were several reasons why I struggled (including being grossly undercapitalized and at the same time placing too much of my trading bank on individual trades) the main reason for my struggle I believe was a lack of focus.

By ‘lack of focus’ I mean that I was constantly jumping around trying to implement too many different option trading strategies from basic call and put buying, to putting on multi leg spread tades, believing that the more complex the strategy, the greater my chance of success.

I had become a ‘Jack Of All Trades & A Master Of None’ and the only people that were making money from my option trading were my brokers.

One day a friend of mine (a very successful futures trader) said to me, “You don’t need to know everything about trading the markets to make money and be a success. You just need to ‘focus’ and become an expert in one or at most a few different trading strategies and know exactly when and how to use them. The rest is just practice!”

Those words rang loudly in my ears and from that point onwards I narrowed my focus.

I decided that I would go back to the very basics of option trading and only buy calls and puts with the intention of becoming very good at picking the short-term direction of stocks.

Today, almost 2 years later and after going through a steep and often expensive learning curve, buying calls and/or puts is what brings in the largest portion of my current monthly income.

I also use a couple different spread trading strategies when the market moves sideways, but my main ‘focus’ is on picking the short-term direction of a small number of stocks that I have gotten to know VERY well (through backtesting), and then buying the appropriate option based on risk vs reward and my short-term outlook.

The success I’m enjoying today (19 profitable months out of the last 24) is due to becoming proficient at reading stock charts and developing an option trading system that I am comfortable with and performs well and by applying my trading rules consistently.

Ultimately you only need to know a few different strategies to be able to trade any stock up, down, or sideways.

The options themselves are simply the ‘tools’ to make money from your ‘opinions’ and in my experience the tools that are the easiest to use, have also been the most profitable.

This is a question that I wish more people would ask, but the thing is not too many people know they even exist!

The main reason that I love option trading is that options provide the opportunity to turn a small or modest amount of money into a large amount of money quickly!

How is this possible you might ask?

Well before I get into the ‘how’ that let me show you exactly ‘what’ options are.

Options are simply ‘contracts’ that give the buyer the right or choice (but not the obligation) to buy or sell shares in a particular company, at an agreed price, on or before a set date.

Now the thing is, as an option trader I am not interested in buying or selling stocks, I am only interested in buying and selling the options on stocks.

I want to buy an option for one price and then onsell it to someone else for a higher price and make a profit before the option expires.

Now whether or not I am able to do this depends on two main things:

1) Whether the underlying stock (the stock that the option is concerned with) goes UP or DOWN in price.

and

2) The type of option that I have bought.

Now, there are 2 types of options, CALLS and PUTS.

Call options give us the right to BUY shares in the underlying stock.

PUT options give us the right to SELL shares in the underlying stock.

As I said before, we are not interested in buying or selling the underlying stock, only in making a profit by buying the options (on a stock) and then onselling those options to someone else for a profit.

However, the only way we can make a profit is if the option itself increases in value.

So What makes options go up or down in price?

CALL options increase in value when the underlying stock goes UP.

PUT options increase in value when the underlying stock goes DOWN.

This may sound confusing if you are new to option trading, but basically what we want to do is to buy CALL options on a stock when we think it is about to go UP in price or buy PUT options if we think the stock is about to go DOWN in price.

If we are right and the stock moves in our desired direction, UP for CALLS or DOWN for PUTS, we will make money.

The concept is really quite simple once you accept that it is possible to make money whether the underlying stock moves UP or DOWN.

Now here’s the thing that makes option trading so appealing.

Options only cost a fraction of what it would cost to buy the underlying stock itself and a small move in the price of the underlying stock, creates a much larger move in the price of the option by 10 times to sometimes 100 times!

Let me give you an example, let’s say that GE is trading at $31.00 per share. If we wanted to buy 1000 shares in GE today it would cost us $31,000.

However, the option to BUY GE (CALL options) for $30 at any time during the next 60 days is only $2.00 per share. If we bought enough options to give us control over 1000 shares in GE it would only cost us $1,500.

Now let’s say that GE goes up by $1.00 to $32.00 during the next 3 weeks.

If we had bought the shares in GE we would have have made a $1,000 profit (1000 shares x $1.00 per share) or 3%+ return and if we bought the options on GE we still would have only made $1,000 (1000 shares x $1 per share) however as we would have only invested $2,000 into the trade, this would be a return of 50%!

By trading the options instead of the stock it is possible to make far greater returns and at the same time risk only a fraction of the capital.

This is called LEVERAGE and this is the main advantage to option trading over other wealth creation strategies.

However, just as leverage can work for you it can just easily work against you.

This is why you need a solid trading system that stacks the odds of success in your favor on every trade and at the same time reduces your risk.