Stock and Options Investing Tips

Since October of 2007, markets have declined nearly 45% with the likelihood of even more weakness in 2009. In previous articles I have written about shorting double beta ETF’s like the DDM or QLD, or trading inverse ETF’s like the DXD and the QID, both of which will go up in value as markets tumble. These two strategies have been remarkably profitable during the last 18 months.

But as the bearish longer term trend takes an expected breather now and then, and as markets can move sideways sometimes for months, I regularly get this kind of question, "Is there anything I can profitably trade during these choppy periods?" Actually, there are many approaches to profits at such times, but one I like to trade, which doesn’t require a lot of baby sitting, is that of selling options. I use a strategy called a "bear call credit spread".

It sounds like a mouthful, but basically it is a simple strategy where you sell an option to collect premium, and then use some of that premium to buy second option as a hedge. In this case, our goal is to earn an income instead of price appreciation. Here’s how it works:

When markets have high volatility but lack a real trend, option prices tend to explode and then implode on a shorter term basis. That sets up a good opportunity to simultaneously sell an option closer to the "at the money" strike price, and buy a second, less expensive option at a strike price slightly further out of the money. In this strategy, you hope both options will lose time value and ultimately expire worthless. If they do, you keep the difference between the two option premiums.

For example, when the intermediate cycle, which is one of the best market trends to follow, topped out at the beginning January, the first consideration might have been to buy an inverse ETF, secondly to buy puts on the indices, and thirdly, you could have sold a "bear call spread". Using the latter strategy, here’s how it would have played out:

At the time, the QQQQ was trading around $30-$31. The QAVBF (Feb 32 Call) was selling for $1.15. The QAVBH (Feb 34 Call), was selling for around $.40. The net difference between the two was $.75. By selling the QAVBF and buying the QAVBH, you would have had $75 added to your account for every contract pair bought and sold. Ten contracts would have added $750 to your account (minus commissions).

Your blow-up risk, had the market moved strongly against you to the upside, and you had for some reason, failed to close the short call position (QAVBF), would have been $2 per share. That represents the difference between the two strike prices ($34 minus $32) minus the net premium you collected. In other words $2-$.75 or a risk of $1.25 per contract.

Today as I write this article – February 3rd, the QAVBF is selling for $.18 and the QAVBH is at $.03. In other words, both are nearly worthless, and although you could wait for them both to expire worthless, I prefer to "unwind" the short leg of the position, and buy back the QAVBF contracts so that only your long call remained. Doing so would let you keep the remaining $57 per contract (sold for .75, bought back for .57, minus commissions), with the possibility that if the markets again turn up before expiration, your long QAVBH contracts could go up in value too.

When you get familiar with the strategy, it can become a great tool to generate monthly income in almost any market. I like to describe it as "selling stuff that is likely to become worthless, to anxious buyers who are willing to pay you good money for it right now." Almost sounds a little like online auctions too, doesn’t it? Except in this case, you are always guaranteed a buyer!

Stephen Swanson is the author and publisher of: http://www.TheMarketForecast.com. Steve’s daily stock market predictions accurately show which direction stock markets will move, and how to reap big profits in both bull and bear market trends.

Article Source: articlestreet

The 2008 recession and stock market crash is the worst financial and economic crisis since the great depression. By Feb 2009, the Dow has dropped almost 50%, erasing all its gains since 1998. In terms of absolute points, the Dow has dropped over 7000 points, which is more than the entire Dow index before 1998. Without doubt, this stock market crash has rendered many traders and investors helpless in search for profit.

Even though profiting during such market condition is a really tough thing to do, traders and investors still bought stocks in hope of a recovery only to be disappointed again and again leaving a bunch of stocks in deep losses in their account. When money is used this way, what it really does is to rob investors and traders of cash for investing when the real recovery starts.

So, is there a way to place those bets with very little money and limit your losses to negligible amounts if your bet is wrong as it had been so many times in this stock market crash so far? Yes, the answer can be found in stock options trading (http://www.optiontradingpedia.com).

Everyone knows that stock options trading is risky and that you could potentially lose all your money. What everyone failed to recognize is the fact that stock options trading is also a risk limited way of trading for big profits while controlling potential losses to negligible amounts!

Stock options (http://www.optiontradingpedia.com/stock_options.htm) are contracts that allow you to buy a stock at a specific price no matter how high the price of that stock is in the future (Call Options (http://www.optiontradingpedia.com/call_options.htm)) or sell the stock at a specific price no matter how low the price of the stock is in the future (Put Options).

By replacing the buying of the stock with buying its call options, you will be able to control the profits on a stock using just a small amount of money. If the stock goes up, you simply sell the call options for the same profit as you would as if you bought the stocks. If the stock goes down, you lose nothing more than the small amount of money you paid for the call option contract. See where I am going with this? If you had bought only the call options of those stocks that you have bought all of last year, you would have lost only a small fraction of the losses that you would already have incurred through buying the stocks.

Let’s look at an example.

John and Peter have $15000 to invest with each and they both decided to buy shares of Apple Inc, AAPL, after it has dropped to $141 in October 2008, expecting a rebound. Peter decided to buy 100 shares with $14,100 and John decided to play it conservative and bought 1 contract of AAPL’s call options with strike price of $140 which was asking at $10.20 for a total price of $1020. 1 contract of call options allows you to control the profit of 100 shares of the underlying stock. In this case, John totally replaced the buying of 100 shares of AAPL with buying 1 contract of its call options. 2 weeks later, AAPL fell all the way to $85 as the recession deepened. Peter lost over $5600 while John lost only the $1020 that he spent buying the call options.

Assuming both Peter and John were right about AAPL and the stock rallies to $200. Peter would have made $5900 in profit while John would have made the same $5900 less the amount of $1020 that he paid for the call options.

See how buying stock options rather than the stock itself in this volatile condition allow you to make a few bets for a rebound without risking all your money? In the above example, Peter would only be able to make one bet once on AAPL with $15,000 while John would have been able to make those same bets more than 10 times at strategic support levels. Who would have a better chance of winning?

By replacing the purchase of stocks with controlling the same number of shares of that stock through its call options, you would definitely have a better chance of survival in this recessionary market condition. Be warned however, that you fully expect to lose the entire amount of money paid on the call options should the stock continue to go down, which is why you NEVER use all your money in a single trade.

Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of an Options Trading education site, Optiontradingpedia.com. He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

Article Source: articlestreet

Have you ever lost all your money in Stock Options trading?

If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?

The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.

So, how do we avoid such a predicament?

Simply by applying the golden rule of stock options trading! That is:

Use Only Money You Could Afford To Lose!

Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.

For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!

In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!

So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!

Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

Article Source: articlestreet

Trading stock options shares some similarities with ordinary stock trading, but it also has some very substantial differences. It is almost impossible to know if options trading is something you should be doing until you understand some of the basic concepts and terminology. Options trading has a language of its own, so it stands to reason if you are interested in getting involved in trading stock options you really have to learn the jargon before you can get going.

The basic concept involved in trading stock options is that traders purchase the right to either buy or sell some specific stock for a specific price before a specific time in the future. In other words the trader locks in a price which he may or may not act on before the specified time limit.

Buying the right to a guaranteed future price costs a bit of money. In some regards it is like putting a "security deposit" down on a rental property. When you give the owner a security deposit the two of you are agreeing that you have the right to rent the property for the agreed-upon price. If you exercise that right the owner of the property agrees to have the property available for you, and if you do not exercise the right, you forfeit your security deposit.

Let’s take an example of a very simple stock option agreement and then define the basic terminology involved in the agreement. Say, for example, you want to buy the right to purchase 100 shares of XYZ123 stock sometime before the end of May, for $65 each. This is called a "call option". You have reason to believe that the stock which is currently valued at $60 may go significantly higher within the next two or three months. So by paying a relatively small "premium" you lock in the price you are prepared to pay for the stock by purchasing a contract that guarantees for a limited time period you will be able to buy the stock for that price.

Say the price goes to $75 sometime in early May. You can then exercise your option to buy at the agreed upon price of $65. If the price does not go up enough you can just let your contract run out without exercising the option to buy. In that case you have just paid the "premium". This is not a completely insignificant amount, but not an amount that hurts as much as actually buying stock that does not perform as you hoped it would.

In order to even begin trading stock options you have to know some of the jargon used by options traders. First, it is important to understand that stock options are normally purchased for blocks of 100 shares. Second, the two most common types of options are the "call" option and the "put" option. In the case of the first (the "call" option) you are purchasing the right to buy stock at a specific price, and in the case of the second (the "put" option) you are purchasing the right to sell stock at a specific price.

A "call" option sets a time frame within which the buyer has the right to buy the underlying stock for a set price. A typical scenario in which an investor would buy a "call" option is the one described above: where you pay a premium to lock in a buying price on a stock which you think has a good chance of going above that buying price.

A "put" option sets a time frame within which the purchaser of the option can sell the underlying stock for a set price. A typical scenario where an investor would buy a "put" option is where that person is prepared to pay a premium to lock in a selling price. Often this is used as a hedging strategy to protect against having to hold a stock if it falls in value below a certain level.

The selling price set by the option contract in either case (call or put option) is called the "strike price". So, for example, if your contract says you have the right to buy a stock at $65 any time before the end of May, the strike price is $65. In that case the "expiration date" of the contract is normally the third Friday of the month – in this case, the third Friday in May.

A call option is said to be "in the money" when the strike price set in the contract is below the current market price of the underlying stock. So for example, if the strike price of a call option is $65 and the current market price is $75, then that option is said to be "in the money" because exercising it would result in a profit.

In the case of a put option it is said to be "in the money" when the strike price is above the current market price. In other words, the option lets you sell the stock for more than it is currently trading for.

A call option is said to be "out of the money" when the strike price is higher than the current market price. For a put option it is said to be "out of the money" when the strike price is lower than the market. When an option contract – either a call or a put – is "out of the money" the investor holding the option will typically not exercise it, because to do so would cost money.

These are just some of the basic concepts and terminology used when trading options online. As an options trader becomes more experienced and sophisticated these basic concepts lead to the development of much more complex investing strategies than the ones discussed here.

Join more than 130,000 other satisfied traders by opening an account with TradeKing.com, the online options broker voted by SmartMoney Magazine the #1 discount online broker for stock and options trading 2 years in a row.

Article Source: articlestreet

I bought DNDN shares last month at about $4.00 and less than a month later, I sold it for $21. Yes, that’s 425% profit in less than a month. Was that pure luck? How often has that happened to you? What if I told you that luck has nothing to do with this and that I bought DNDN shares knowing that it will break out strongly very soon?

Yes, I did know for a high level of probability that DNDN was going to stage a big rally soon and I didn’t even look at their news or their earnings nor financial statements in order to do that. In fact, it took me only about 1 minute to spot this great trade. What? Just one minute without even looking at the charts?

That’s right and here’s how I did it:

Every day, I simply look for stocks with unusually high extrinsic value on their out of the money call options. I usually look for extrinsic values that are over 20% of the price of the underlying stock itself.

Why do stocks with unusually high extrinsic value signal a rally?

What is extrinsic value ( http://www.optiontradingpedia.com/extrinsic_value.htm )? Extrinsic value is the part of the price of an option which goes down to zero when the option expires. It is the extra money you pay to market makers for selling the options to you. It is like insurance premium which goes to zero when the insurance expires. Of course, a lot of factors go into determining fair extrinsic value and one of the biggest determinant is implied volatility or how volatile market makers think the stock is going to be in the near future.

Market makers are members of the exchange and are who you are buying and selling options with when you trade options. Market makers control the extrinsic value of options through adjusting the implied volatility of options in response to news, sentiment or trading activities. Market makers are the “insiders” of the market and they know when something is brewing and then raise the extrinsic value of options on those stocks so that nobody can reap a free lunch through purchasing those options. Sad, but true. Somehow, these market makers are extremely accurate and stocks do rally, most of the time.

With this information, one could either do a covered call options trading strategy on these stocks ( http://www.optiontradingpedia.com/free_covered_call.htm ) or they can simply hold on to the stocks itself to speculate the stock going higher. How about buying call options instead? Yes, if you buy deep in the money call options with little extrinsic value. At the money call options and out of the money call options are out of the question since the extrinsic value would have been high enough to significantly reduce any potential profits, if any remains.

Yes, this is no rocket science and you can easily set up a screener for such stocks using most of the online options trading accounts. Have fun, good luck and remember to obtain professional advise before acting on any of the above suggestions.

Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of an Options Trading education site, Optiontradingpedia.com. He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

Article Source: articlestreet

Okay, now that you’ve found a good stock option trading System you are ready to rumble. You’re ready to start ‘cleaning house’ and making huge returns sending you and yours into a rapid luxurious retirement in little under a year.

Your excitement is understood. And guess what? It’s actually possible because it has been done.

We are assuming that you’ve obtained a really good stock option trading system, a method that uses excellent high probability entries, well placed stop losses and a trailing stop method of maximizing profits Now it is time to talk about the ‘good stuff’, the secrets of money management in options trading, where the real profits are created.

Options trading money management is the heart and soul of making your account grow while preventing unwelcome disasters. Trade with intelligent money management and increase your confidence.

Okay, so let’s say your stock options trading system is actually making you profits. You feel that the system can be trusted and now you are anxious to ‘up the ante’ and start making bigger returns. So what do you do next?

Well first of all, keep trading but just keep your position sizes small, for now. It’s now time to do a little tweaking with your money management of your position sizes. Doing this right could possibly make you hundreds of thousands up through millions of dollars, literally. Doing options trading money management wrong can cause you a lot of misery, pain, and suffering and wipe out your account quickly!

In essence, you want to keep your position sizes (the total amount you have invested into an options trade position) even sized and never more than 10% of your options trading portfolio (on a small account and down to 1% to 2% options position sizes on very large accounts). With options, even if you kept your ‘bet’ size the same, say 20 contracts for each and every trade, you could make a great living off just one stock even if you never increase your position size. But if you wanted to taste a little of that compounded, ‘parabolic’ growth increase your options position size by 20% to 30% max every time you double your account (never increase it to 100%!).

In case you’re reading this and do not have a profitable Stock Option Trading System or stock there are excellent systems available through doing a little reasearch. You can try and figure a system out on your own or you can short cut success by obtaining some one else’s system or service and emulate what they are doing.

Here are some basic trading system approaches that can net out consistent profits: Trade trends. Trade pivot points. Trade swings in the direction of the trend. And that pretty much covers it for successful moneymaking, directional options trading that’s worth your time.

If your profits are bigger than your losses then you have a winning trading system. You don’t necessarily have to win more than you lose. Yes you can actually make money by losing more than you win if your winners are big enough and your losers are small enough.

The issue when trading options is that when you lose you can easily take a 25 to 50% ‘haircut’ or more of your position just by simply stopping out through stock price action. This also goes to show that you will want a system that doesn’t lose too often when trading options – remember that. Plus you’ll want your winners to be able to be really big so trend and pivot point systems can perform the best.

This brings up the issue of making a fortune in options trading without losing your shirt.

There is nothing worse than making a fortune in options trading then quickly giving that fortune back. If you’ve ever done that you can understand why people jumped off bridges and have tall buildings in 1929 during the great stock market crash. It’s a most miserable feeling because you get so high and excited, and happy from your gains and then if you lose that if worse than never having had obtained it in the first place. So promise yourself now that you’ll never put your self in that position and that you’ll aggressively guard your profits at all times.

So that said let’s figure out how to grow a trading account rapidly without losing it.

Chris Viscaya is a head trader at OPIVO Stock and Options Trading Systems OPIVO Trading specializes in trading a unique pivot point strategy on stocks with options offering a subscription service as well as a home study course.

Article Source: articlestreet

Believe it or not, good Options trading newsletters and Stock trading newsletter have helped people make a lot of money from the stocks and options markets while saving them considerable fortunes by trading on their own.

The best trading newsletters encompass all the fundamentals of great trading in their service that in turn helps you form top-notch trading habits. Besides making money, forming great trading habits taught by professional trading newsletters (and not all newsletters are taught by professional traders) can be one of the most valuable things you pick up from your subscriptions.

And just for the record stock trading newsletters or option trading newsletters are also called stock trading advisories or option trading advisories, or stock pick newsletters, option pick newsletters, stock trading membership site or option trading membership site etc. you get the picture.

The question is, "How do you find a good Options trading newsletter or Stock trading newsletter?"

Well first all, what kind of trading style do you want to trade? Here are the varieties that are available:
- Swing trading stocks and options

- Intraday trading stocks

- Pivot point position trading on stocks and options that aim for explosive five day to one month moves with well-defined stop losses

- Trend trading that takes advantage of two to four week trends and three to six month trends – trading stocks and trading options

- Then you have the various options strategies, complex option combinations, credit spreads, covered calls etc.

The best services first focus on stock price movement. These top-performing services combine technical analysis, chart pattern set ups, anticipation of opportunities on the charts in addition to combining other price motivational factors such as earnings season cycles, stocks splits, seasonal runs, trends of the indices etc.

The best services have a decent track record. That said don’t get too caught up in a track record because some services may fake their track record. Bottom-line is that the philosophy of the service must make sense and must meet common sense. In other words their approach to capturing trading profits must make sense. Ultimately, if you like what you see, the best test will be to take a trial and paper trade their service. Don’t use real money but pretend like you’re trading in real time with real money.

When you’re testing a stock trading newsletter or option trading newsletter make sure you give it a fair shot. Remember, once you find a good service that service could make you a lot of money. In fact, through known acquaintances that wish to remain anonymous, some subscribers to certain newsletters say they have made millions of dollars trading stocks and options through those particular newsletter trading ideas. So keep positive about the potential of some of these trading newsletters. There are actually good newsletters out there.

Really, the key to finding your Stock trading or option trading newsletter ‘golden goose’ that lays the ‘golden eggs’, is to search in the search engines, search through blogs, forums and review sites. Often when you read review, that person may be a little biased because they may be promoting a particular newsletters affiliate program but it’s worth checking out. Additionally there are many advisories listed in trader magazines you’ll find in your local bookstore.

The bottom line is that you see something that looks interesting you must give it a shot. Don’t trip over pennies on your way to thousands of dollars. If something looks good sign up, receive their updates and paper trade. This way we’ll be doing complete research and you won’t leave behind something that could have even provided you financial freedom.

Paper trading, which is pretending that you are really trading but without the use of real money, is definitely the best way to get started with any trading service, especially if it is in active trading service. Using real money can cloud your judgment because real money pulls strong emotions into your evaluations.

Start doing your research for your ‘golden goose’ stock trading newsletter or options trading newsletter today. Imagine the possibilities if you find one!

Chris Viscaya is a head trader at OPIVO Stock Trading OPIVO Trading specializes in trading a unique pivot point strategy on stocks with options offering a subscription service as well as a home study course.

Article Source: articlestreet

As with all aspects of investing there are a number of tools, software programs, and pieces of information that can make running your stock options investment club smoother. Consider having several of the members of your stock options investment club try different types of software on their computers so that the club can make an informed decision about where it wants to invest.

Some of the software available includes:

Stock analyzers. There are different types of software available that will help you analyze the stocks that you`re interested in and keeping an eye on.

Available from Kingsoft: http://www.kinginet.com/
Available from NAIC: http://www.better-investing.org/about/software/nsa.html

Accounting software. You`ll want to have software for accounting purposes so that you can keep track of all your finances and generate reports for members of the club to have for their records.

NAIC Club Accounting Software
The NAIC produces an accounting software that is tailored to stock options investment club needs. http://www.better-investing.org/about/software/nca.html

Portfolio record keepers. This type of software will keep track of the clubs portfolio. It will track details such as stock options investment fees and transactions, your purchases and sales, member transactions, and stock market fluctuations for your stocks.

NAIC Portfolio Record Keeper
This software will help you keep track of the information that is important to your club`s stock portfolio.
http://www.better-investing.org/about/software/prk.html

There are also a number of stock options investment sites that will send your club stock options investment newsletters which will contain a great deal of information about current stock trends. You may want to consider having members of the club subscribe to some of these, such as the Investor Advisory Service provided by Iclub Central or The Motley Fool`s Money Advisor.

Your club may also want to consider investigating the most active stocks in various markets when they are ready to begin investing. Up-to-date information on this can be found at a number of sites, including www.quote.com.

Remember, stocks are volatile and can fall or rise in a matter of hours so any price information that you get should always be confirmed prior to buying or selling a stock. Each club needs someone who can keep a constant eye on the stock market and the stocks that it`s looking at, which is why all clubs need a broker.

However, one of the main reasons for starting an stock options investment club is to learn about the stock market and do your own investing. So the club should take every opportunity that it can to learn how to monitor its stocks.

You can find a great deal of information to help beginning investors, including how to read a stock quote, glossaries of stock options investment terms, and explanations of stock symbols at sites such as www.investopedia.com or http://www.netvest.com/edu/edu_glossary.html.

It doesn`t matter whether you`re an amateur investor just starting out, or a more experienced investor that wants to expand into more stock options investments, there are tools and resources out there to make all parts of investing clear to your club members.

Who Else Wants To Learn A Simple, Step-By-Step System For Generating Quick & Easy Profits, By Starting An Investment Club? – FREE FOR A LIMITED TIME – http://www.clubinvestment.net

Article Source: articlestreet

We’re half way there in this 10 part series on how to trade options, you are doing well keep learning, practicing and applying these strategies and you will soon find yourself able to successfully and profitably trade on a regular basis. Last week we looked at ways in which to time the entry of a trade so this week we will discuss how to get out at the right time.

There are several strategies and ways to exit a trade and you must decide which way (or ways) suits you. It is infinitely more difficult to decide when to exit a trade than when to enter it because it is at this time that you will either be making a profit or taking a loss! You will be faced with a myriad of different emotions while you are in a trade, most notably fear and greed. Fear appears in several different forms, fear of losing a profit already made, fear of getting out too early, fear of taking a loss and facing a mistaken trade. Greed also rears its ugly head by encouraging you to stay too long in a winning trade and possibly giving back some or all of your gains. There is an old adage on Wall Street that says “Bulls can make money, bears can make money but pigs always get slaughtered.”

As I mentioned you must determine what suits you when it comes to deciding how much of a loss you can handle and how much of a profit you want to take. This is a direct reflection of your risk to reward ratio. For example, I often say “I never feel bad when taking a profit”. I like to take profits when I see them and I generally have a fixed dollar figure or percentage in mind. Unless there is no good reason to exit the trade I will take my profits and if the trade keeps going in my direction after I have exited it doesn’t bother me. Conversely I always have a fixed % loss I will accept. Some people would not be able to handle leaving money “on the table” so they may prefer to let their trades run, but then they may need larger stop losses as well. You generally need large stop losses when trading options because they are volatile and if you set a 10% loss, for example, there is a very good chance you would get stopped out with the normal fluctuations of intraday trading. Bear in mind that there is not as much at risk when trading options as opposed to trading stocks. The capital investment is much smaller so a larger stop loss will not impact your account as much.

Some good rules of thumb are: First if there is profit on the table and the underlying stock breaks down or crosses below its 7 day moving average, take the profit. There is nothing worse than watching a winning trade steadily lose value while you sit there hoping it will rise again. However if market conditions have not changed and your technical analysis supports staying in the trade make sure you do not exit too early. Often the most outstanding profits are made by patient traders. Second, always exit the trade if you are at a 50% loss. Chances are if you are in a trade that is losing 50% it will keep going that way. You must preserve your capital in order to trade again. Third, always exit a trade if there is 30 days or less before expiration. During the month before expiration time decay can rob you blind of the value of your option.

I trust this has given you some things to consider when deciding to exit your trades, stay tuned for next week’s installment where we will discuss how to put together a complete trading plan.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Roger Cox was born in New Zealand and has lived in Los Angeles for seven years. He was President of a freight company at LAX before setting up his own consulting firm. Roger has successfully traded stock options for over 4 years and teaches other people how to successfully trade at http://www.prosperitywithoptions.com

Article Source: articlestreet

Good day and welcome back, this week I have some excellent information for you in this, the sixth part of how to trade stock options successfully. Now that we have covered some of the more technical aspects of how options work and how to enter and exit the trade I want to start discussing how to put it all together. The first part of which is writing a trading plan.

It is imperative you trade with a plan. No trader has ever successfully prospered without a trading plan or with a plan that they didn’t stick to. A sound trading plan includes, but is not limited to, the following items:

1. Money management rules, i.e. acceptable profits and losses per trade, how much capital you will commit to any one trade and to the market at any one time. It is important you identify what your stop loss margin is (as discussed last week) and even more important you stick to it. Writing this sort of information into your trading plan will help cement it in your mind. We will discuss more on money management in week eight.

2. Stock and option identification rules, i.e. how you will decide which stocks to trade options on and which options you will trade. Decide if you prefer technical or fundamental analysis or a mixture of both. How big will your watch list be? What price range of stocks will you trade? Will you trade in the money options or out of the money options? What Greeks will you consider?

3. Entry and exit rules, i.e. how you will decide to enter and exit a trade, how long you will stay in a trade and how often you will trade. Entry and exit rules will depend largely on technical analysis, write down the patterns and indicators you will look for. Deciding how often to trade will be a big factor in your success. Most people over trade, if you have a fixed profit target then once you have met it you should stop trading. Attempting to go for that little bit extra can lead to a big loss, all the more difficult to take if you had already met your profit target!

4. Your own strategy rules, i.e. which trading strategies you will use primarily and which strategies suit your risk profile. “Know thyself” as the ancient Greek saying goes is critical when formulating a stock options trading plan. You will tend to trade options and you do anything else in life, for example, if you are cautious by nature you will trade cautiously, if you are impatient in everyday life you will trade impatiently. Therefore consider your unique traits and formulate your plan around them.

Once you have practiced trading options you will discover your own style of trading, and from that you will develop a plan that suits you. Once you have your plan, and you know it works, stick to it through thick and thin. That doesn’t mean that a plan can’t be changed but you must ensure that you give your plan a chance to work and that you don’t change it the first time you take a loss.

Once you formulate and implement a good trading plan you will be well on your to trading stock options successfully. Next week we will discuss trading with the overall market and index options.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).

Roger Cox was born in New Zealand and has lived in Los Angeles for seven years. He was President of a freight company at LAX before setting up his own consulting firm. Roger has successfully traded stock options for over 4 years and teaches other people how to successfully trade at http://www.prosperitywithoptions.com

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