Options Trading Academy

What is Options Greek?

noreply@blogger.com (Paul Orion) — Tue, 30 Dec 2008 18:41:27 PST

Options price can be influenced by a number of factors which are called the Options Greek. They are Delta, Theta, Vega and Gamma. Before getting started trading options, you might want to understand how these factors can change the optios characteristics.

Delta:

The ratio of the change of the underlying asset's price to the change of the call or put options.

It is from the range of 0.00 to 1.00. For example, if the delta is +0.50, which refers to every $1 movement of the stock, your call options premium will be increased $0.50.

On the hand, for put options delta will be negative, let say delta is -0.50, every $1 increase in the underlying stock, there will be $0.50 decrease for your put options premium. As the In-The-Money call/put options near its expiration, the delta will become +1 or -1 respectively.

Delta is very sensitive to Time and Volatility especially ITM or OTM option, ATM option will be immuned to these two factors. Both ATM Options that is 60 days to expiration and 10 days to expiration have the delta of close to 0.50.

Theta:

Theta is the rate of decline in options premium regards to the time remaining. Options value will be decreased as the time value decrease, Theta is the measure for the time value. Therefore remember, Theta related to Time. (T for time)

For example, if Theta is 0.05, it means everyday the options premium will be drop $0.05 each day. Options premium will drop like waterfall when it comes to expiration, therefore Theta will be increased when it near the options' expiry date.

Theta will be highest for ATM option because it has the most extrinsic value than ITM or OTM options.

Gamma:

Gamma is the measure of rate of change in delta, similar to acceleration when talking about speed. It tells you how much the delta change when the stock price moves $1.00. Gamma will be largest only when the options is near the money.

Gamma basically is telling how stable is the delta, if Gamma is close to 0, the change of delta is gradual. If Gamma is big, it means a small move of the underlying asset can cause a significant change of the options premium.

Vega:

Vega is related to Volatility (V for Volatility). Vega tell us the change of the options premium as the implied volatity change 1.00%.

Options premium is very much influenced by the volatility of the underlying asset, if the volatility is high, options premium will be increased, when the underlying asset is stable - no volatility, options premium is cheap. With this characteristic, options seller always benefited from the implied volatily drop as the options premium will be decreased tremendously.

For example, ABC Call option has implied volatility of 40%, vega 0.1, and its premium is $1.00. When its IV (Implied volatility move to 41%, the option premium will increase to $1.1 now.

How to read the Greek Table:

I will show you an example here to understand the Greek number here in the Interactive Broker format:

QQQQ is trading at 29.5 level, which means that 29 Call is ITM (in the money) and 30 is near OTM (out the money).

I have used eight examples - 25, 29, 30 and 35 options with Dec 31 and Jan 16 expiration options.

1. Delta - Delta is the highest when Options is deeper In-the-money and become less when it is further Out-of-the-money. Put Options has minus delta. 25 Call has Delta of 0.97 but 35 Call only has Delta of 0.0244 in this example. Therefore, for 29 Call option (Dec) which is +0.5919, the premium will be increased if QQQQ moves up to $30.5 from the current $29.5.

2. Gamma - 29 Option has the highest Gamma because delta change the most when it is ATM. Gamma become smaller when it is ITM and OTM, which means the delta change will be smaller than ATM option.

3. Vega - 29 Option has the highest Vega as believe that At the money has the highest volatity. Use the same example of 29 Call Option (Dec), Vega is 0.016 , current IV is 40.52%, if IV increase to 41.52%, the premium will be $0.87 + $0.016 = $0.886.

4. Theta - Jan options has longer time before expiration, therefore Theta for Jan options is smaller than Dec options.

To find out more, go to http://traderwork.com/

Is Stock Options Trading Risky?

noreply@blogger.com (Paul Orion) — Thu, 27 Nov 2008 18:29:23 PST

Are Stock Options Risky?

Most people believe that option players are extreme risk takers. After all, they purchase an asset with a very short life, and hope it skyrockets in value. Option buyers might make 500% or more if they buy the right option, just as they would do if they picked the winning horse at the track.

The waiting period to see if you're a big winner is a little longer than a horse race, but not much. In a month on two, if the stock does not go way up, you lose your entire investment bet. Just tear up your ticket. You picked the wrong horse.

If the stock stays flat, most option buyers lose their entire bet as well. No wonder people think option trading is risky. At least if you buy a stock, and it stays flat, you don't lose anything but the opportunity to have done better in another investment.

When you buy an option, it is a declining asset. It depreciates faster than a new car. It becomes worthless in a matter of months.

High-risk, high reward - that is an investment fact embraced by most people. They believe that any system that offers the opportunity for extraordinary profits must necessarily involve an inordinately high degree of risk.

Nothing could be further from the truth when it comes to intelligent options trading.

I am reminded of the legend of the blind men examining an elephant - each man touched a single part of the animal, and came to an entirely different conclusion as to what he was touching.

Viewed as single transactions, the following two statements are undeniably true:

1) Buying stock options is extremely risky.

Buying stock options may indeed be the risky kind of investment that scares most prudent investors. If we examined this one small part of stock market investing, we could understandably conclude that stock options investing involved high risk.

2) Selling stock options is even more risky.

Selling stock options, when viewed as a single transaction, is even worse! Selling an option alone is called selling naked (because that's how you feel the whole time you have that short sale in your account). You have the possibility of unlimited risk. You can lose many times more money than you invested. At least at the horse race, you only lose the money you bet.

No wonder people believe that stock options trading is risky. There seems to be extreme risk all around. Just like the blind men examining the elephant, they are only looking at a single part of the picture.

Since most people have not made the effort to understand stock options, they quickly conclude that the risk level is too high for them, and put their money into a "safe" place like mutual funds. Somehow if they are paying some "expert" to pick the stocks they own, they delude themselves into believing they are investing prudently.

Nothing could be further from the truth.

If your money is in a "safe" mutual fund, these are the facts:

1) If stocks go up, you will make money (but your profits will be reduced by the management fees, sales fees, and expenses you incur). For the past 50 years, the stock market has gained an average of about 10% a year. That is the most gain you should expect with your mutual fund investments.

2) If stocks stay flat, you lose money (management fees and inflation reduce the value of your holdings).

3) If stocks go down in value, you lose money.

Contrast those facts with the case of a properly executed stock options investment (such as the 10K Strategy I suggest):

1) If the underlying stock goes up, you make money, often at a rate of over 100% a year.

2) If the underlying stock stays flat, you make money, often at a rate of over 100% a year.

3) If the underlying stock goes down, you may still make a profit. Only if the stock goes down a great deal in a very short time will you lose money. (Of course, your mutual fund would get clobbered in this scenario as well.)

Which of the above two investments seems to be the most risky? It seems to me that the mutual fund investment is a whole lot riskier than the stock options investment (not to mention that it yields a profit of only 1/10th what the stock option portfolio might gain).

Why then does stock option investing get such a bad rap on the risk issue? It is clearly due to the fact that people look at only a single part of the picture (buying or selling options) and ignore the total picture.

They conclude that if buying options is dangerous, and selling options is even more dangerous, that option trading must be doubly dangerous. It does not occur to most people that a system of simultaneously buying and selling options might be even less risky than owning the stock. This is the case, but most people never take the next step and learn the truth.

The truth is that a properly-executed stock options strategy is considerably less risky than the purchase of stock or a mutual fund. However, it takes work. You will have to learn a little about how options work, and be an active part of the investment process. You can't plunk down your money like you do with a mutual fund, and passively ignore your investment.

The fact that stock options investing takes work discourages most people from even considering an investment in stock options. That is fine with me. When I compare my returns each year with what the mutual funds are making, I feel like a real winner. I may work a little harder, but that's a small price to pay for the returns I make.

In 2003, my QQQ stock option portfolio increased in value by 196%. My subscribers who followed my trades presumably did just as well. How many mutual funds do you suppose gained that much?

My Options Tutorial Program takes most of the work out of this process for you. First, you will receive a series of lessons, one each day for thirteen days. These will familiarize you with, and help you understand, the most important aspects of stock options.

Second, I have seven actual stock option portfolios for you to watch, and mirror if you wish. Whenever I make a trade, I email you so you can do the same in your own account if you wish.

Third, if you would rather have me do the work for you, I have set up an Auto-Trade program at OptionsXpress or thinkorswim that will automatically make the trades for you in the account that you have funded there. This takes all of the work out of your busy hands. You should understand the system, but then I will do the work for you.

As always, I am here to answer your email inquiries and to help with any questions that you may have. Terry

Dr.Terry Allen: http://www.terrystips.com Stock Options Trading

Article Source: http://EzineArticles.com/?expert=Dr._Terry_Allen

Understanding stock options' strike price, exercise and expiration date

noreply@blogger.com (Paul Orion) — Thu, 27 Nov 2008 06:42:26 PST

by A.W. Berry

Options are a loan contract given to an investor or investors so they may leverage their financial position to a greater level. An options contract allows the investor to purchase a large volume of securities on 'margin' at a proportionally lower but representative price with the knowledge that (s)he may have to pay back the financial institution if the option does not perform the way the investor intended. Unlike regular stock trading, options are traded with the intent and choice of either selling or buying the underlying securities within the options contract. In other words, the options trader has an option or choice regarding how money is intended to be made i.e either a rise or decline in the security. There is a fair amount of financial lingo associated with options trading but three of the more important and fundamental terms are strike price, expiration date and exercise.

Strike Price:

Options are traded as 'calls' or 'puts' a call option is purchased with the intent to purchase the stocks in the option. This future purchase price is called the strike price and is different from the option price. If the price of a stock goes up during the term of the option, the trader or investor may get a deal having locked into a lower strike price. An option strike price may also be a sell price in the case of a 'put'. This is also called short selling as the trader is betting the stock will go down during the term of the option. For example, if a trader buys a put option of Pear Inc. with a strike price of $55.67 and the price of Pear Inc. drops during the term of the option, the trader can then sell the option at the strike price of $55.67 and make a profit if the option cost was lower than the strike price.

Expiration Date:

Options are purchased with time limits. Like a bottles of milk, options expire at a set date in the future. This time limit is often in increments of 30 days. For example, if an option is purchased at the beginning of the month, that option will likely expire at the end of that same month. However options can be bought with expirations several months into the future. The usual extent of options is four months but some options have what are called 'LEAPS' which allow options contracts to exist for more than four months. For example, if it is July now, a July option can be bought with an expiration of July 31 or an August option can be bought with an expiration in August. If LEAPS are available for the option, a contract for November should also be available.

Exercising and Option:

The terms of an option require the buyer to either exercise, continue or cover an option. When exercising a call option for example, the investor buys in at the predetermined strike price stated in the option. If the price of a stock has increased enough half way through the options term, it is a calculated decision by the investor to exercise the option before its expiration. If the price goes down, the trader can either wait and hope the price will go back up or cover his or her position by exercising at a loss. Naturally, this is not a favorable scenario for an options trader.

Options are a leveraged form of securities trading and make possible high volumes of exchange. Options can be traded for stock, commodities and currency markets. Options are bought ahead of time based on the traders anticipation of either an increase or decrease in the actual price of the security being traded and not the option price itself. Options contracts are separate from the underlying securities which they represent in the sense that the contract is a unique financial instrument in and of itself. In the case of stock options, a brokerage firm would offer a margin to the investor so they may utilize the options market. While there are quite a few intricacies and terms associated with options trading, three of the most important aspects of options are the strike price, expiration date and the exercising of the options contract.

Sources:

http://www.investopedia.com/terms/s/strikeprice.a sp
http://en.wikipedia.org/wiki/Option_(finance)
http://www.investopedia.com/articles/optioninvesto r/03/090303.asp
http://invest-faq.com/articles/deriv-option-basics .html
http://en.wikipedia.org/wiki/Exercise_(options)

Learn more about this author, A.W. Berry.

New TraderWork.com Appearance

noreply@blogger.com (Paul Orion) — Wed, 01 Oct 2008 23:57:50 PDT

Just completed the transfer job to a new appearance for http://www.traderwork.com/.

I would love to share more information about options trading, tips, articles as well as my trading journal.

It is a wordpress theme with 3 column, 2 sidebar at the right with easier browsing other information I would to promote.

You can easily find the recent post, category and tag cloud at the right, or simply using the search box.
If you love articles, simply click on the article category, and my articles under Paul's article category.

Pages are all on top, just below the blog title, some of the pages are still under construction but I would optimize it so user can find more useful information there.

Trading is an art, as well as building a website. I hope you like the new appearance.

Free free to stop by and give me some comments, both positive and negative, I welcome that!

My trading site at www.traderwork.com

noreply@blogger.com (Paul Orion) — Sun, 28 Sep 2008 03:48:18 PDT

Dear readers,

Just to announce that from today onwards, I have my own hosted trading site at TraderWork.com.

If you are interested to learn about options trading, please visit my site at TraderWork.com.

Thanks for support!

Basic understanding about Options Trading

noreply@blogger.com (Paul Orion) — Tue, 23 Sep 2008 04:45:07 PDT

Many people dare not trade option, and the major hindrance to them is that they feel that options trading is complicated with lots of strategy involved. Besides, option price is not as straight forward as stock price, it involves a series of calculation and formula. In fact, the one that come out with the option premium formula had gotten the Nobel Price for economic, they are no other than Myron Scholes and Robert Merton.

Though I agree that there is certain level of complication, but the advantages of option would have motivated us to learn more about options trading.

Basically, option is just a contract, this contract is the right for you to buy or sell the stock at certain price within certain time frame, but without obligation. You can imagine that option is just like an agreement between you and the seller of a house, this agreement is for you to purchase the house at certain price, but it has expiry date, and no body can be sure about the future price of that house.

The house price is $100k, it cost you $5k in order to draft out an agreement, and it said that from now until 6 months later, you can buy this house at $100k. You believe that the house price will go up within 6 months. 2 months later, the house price has gone up to $110k, some one (let’s call him A) approach you to buy your contract because he does not want to buy the house with the total sum, therefore he will pay you $15k to purchase your agreement and he think that the house price will go up further within the next 4 months. 2 months has passed and the house price stabilized at $110k, A decided to sell his contract to some one (let’s say B) at $15k. 2 month later, the house price has dropped from $110K to $80K. Instead of losing $30k, B made a loss of only $15K (which is the contract price) and the contract expired worthlessly by now.

Option to buy a stock is call option, and put option is to sell the stock. The benefit of option is the power of leverage, you have the right to buy or sell within that period of time without paying for the full amount. This helps you to minimize the risk.

The targeted stock price in option is strike price, it is also known as exercise price. If the stock is above the strike price, your call option is in the money, otherwise, your option is out of money. For put option to be in the money, the stock has to be below the strike price. The premium of the option is total sum of intrinsic and time value.

Please find out more from TraderWork.com

Trading Journal 18 Sept 08

noreply@blogger.com (Paul Orion) — Thu, 18 Sep 2008 08:01:59 PDT

Today market bounced back to bullish from the start, until now, seem like the financial woes has been calm down at the moment. Of course, this thanks to the effort of Fed and europe centr

Symbol: HPQ
Stratgey: Bull put spread (47.5/45)
- make a strategy change yesterday when a potential bear market was observed
- buy back my sold leg almost the same price when sold it

Left my bought leg (45 put) continue to run for profit,but today seems like the bull has won the battle (at least until now, 11am NY time), therefore end my position with small gain.

Buy: $1.01
Sell:$1.20
Profit/loss: ard +$107

HPQ plunged to 46 level yesterday, but this stock remain strong as the trendline support just beneath the stock level.But with the financial woes hovering in the market, I believe the Bear is still hiding somewhere just waiting for the next attack.

Happy trading!

Trading Rule Part 3– set the difference between novice and professional trader

noreply@blogger.com (Paul Orion) — Sun, 28 Sep 2008 03:44:34 PDT

From the previous article, I mentioned another 4 trading rules after you enter the trade, no 5 – Never average out a losing position, no 6 – Always update yourself with Economy calendar, no 7 – Always update yourself with the Stock news, no 8 – Always do analysis after market close.

Lastly in this trilogy of the trading rule articles, I would like to share more about the trading psychology.

Rule 9 - If you have experience 3 consecutive loss, take a break
Stock market is always changing, if you only use one strategy, it may not work all the time. Making losses in trading is something common, but if you continuously experience loss, probably it is a good indication for you to take a break. Stop trading for at least 1 – 2 week, do other stuff besides just sitting in front of the computer, go for a short trip so that you can relax your mind. Read your trading journal and revise all the good and bad trades, so that you can tweak your trading strategy to fit into the current market.

Rule 10 - Follow the rules you set
Whatever the rule is, follow it with your discipline. You can break somebody rule, but if you break your own rule, you are totally unforgiven. If you would have broken your own rules, why would you have set the rules in the first place, right? The market is always tempting you to change your own rule, frankly speaking, it is not easy for me either. Therefore discipline is your good friend in trading.

Rule 11 - Always work with your patience
Refrain yourself to enter the trade too soon even if you see a golden opportunity. Always wait for more confirmation either from the technical or fundamental point of view. Although I agree that every trader should be confident, but in trading, you need to follow the market, not your feeling, because feeling can be wrong but market never wrong. Therefore, wait and find the best timing to enter the market. If you do not trade, you are in wining position because you keep your money safely in your pocket.

Rule 12 - Always work with your passion
Without passion, trading become a job or a tool to make money, you will never experience the excitement and understand the art of trading. Somebody just aim to make money, but to become a professional trader, your aim to make money is secondary, but your primary aim is to trade well and trade right! Therefore, always trade with your passion and continue to grow in your experience and knowledge, and your success will be just a step closer.

To learn more about options trading, please find out from TraderWork.com. Always trade with your passion!

Trading Rule Part 2– set the difference between novice and professional trader

noreply@blogger.com (Paul Orion) — Tue, 16 Sep 2008 21:54:07 PDT

From the previous article, I mentioned 4 trading rules, no 1 – Always do market research, no 2 – Limit your trading size, no 3 – Give your trade a reason, no 4 – Set exit level.

In part 2, I would like to share certain rules that I follow after I have entered the trade.

Rule 5 - Never average out a losing position
If you are having a losing position, try to minimize the loss by cutting the number of position, never add on to it so that you average out each options price. Many people think that they can salvage the trade by adding on to average out each unit price, this is self deceiving, and you might end up doubling your loss easily. Do not hold on to the losing position, you can either cut the position size or accept the failure, move on to another trade quickly.

Rule 6 - Always update yourself with the Economy Calendar
Financial market is always influenced by the economic event, for example, jobless claim, FED meeting, oil inventory, housing start, and etc. These are the regular report that will affect the overall financial market, therefore affects your decision of when to enter and exit the trade as well.

Rule 7 – Always updates yourself with the Stock News
After checking the broad economy view, now zoom into your stock news. You need to understand how the industry and the sector are performing at this moment. After that find out the latest news of the particular stock you trade, in order to understand if it is the best or worst performer in this sector. Keep yourself update with the company news, certain decision from the CEO or board of director definitely will affect the stock performance.

Rule 8 – Always do analysis after market close
In previous article, I mentioned that we always need to do market research before market open. Now I would like to stress the importance of your stock analysis after market close. The market determine its price only when it close, this is the price that every buyer and seller agree after the war of tug. I usually like to use candlestick chart pattern to confirm if tomorrow I would enter the trade or exit the trade, because you only see the chart pattern after the market close. For example, how can you confirm that today is going to form a bullish engulfing pattern? You know it only when the stock rise up and exceed the open price of yesterday session until the end of the day. Therefore, you can have a better gauge after market close.

Trading Journal 15 Sept 08

noreply@blogger.com (Paul Orion) — Mon, 15 Sep 2008 08:28:17 PDT

Thanks to Lehman, the market is crashing like hell.But at least the market has been salvaged a bit from almost 400points drop and now only 226 (11:12am new york time).

Should have buy some put options for financial stock, but miss it.

I entered KO last week, as seeing some strength from the counter, MACD and Stoch is showing bullish sign, William rising up from bottom. Although the market sentiment is not good, but KO strength is abnormally good.

Symbol: KO
Strategy: Bull Put Spread 52.5/50
Sell at: $0.64 x 8 (date: sept 8)
Buy back: $0.45 x 8 (date: today)
profit/loss: +$151
grade: 5

Although today is Bear day, KO still pull back and bounce up from bottom. Exit the trade quickly with some little gain. I give it a grade 5 trade as within my 2 weeks time limit and make a profit.

Always trade with your passion! Cheers!

Market Check 12 Sept 08

noreply@blogger.com (Paul Orion) — Sun, 14 Sep 2008 20:11:39 PDT

Market is quite quiet on Friday and market does not fluctuate much, DOW settle at 11400 level, SPX at 1250 and Nasdaq composite at 2260 level.

Nothing much to say as I am away and leave my HPQ and KO position continue to run.
Commodity stock seems to have a bounce back. MER and AIG has a dramatic drop on friday, and the latest news of Merrill lynch and AIG seems a bit annoying.

News: (click here)
AIG May Seek help from Federal Reserve

Bank of Ameria reach deal for Merrill

Seems like the subprime issues has come back a second wave for some huge financial center. Probably it is a good time to short financial stock again...

Happy trading

Trading Rule Part 1– set the difference between novice and professional trader

noreply@blogger.com (Paul Orion) — Thu, 11 Sep 2008 21:35:08 PDT

If you ask me what is the major difference between a novice and a professional trader, the difference is whether he or she set the trading rules and follow the rules. There are thousands set of trading rules that you can create or follow, what I recommend is that you do not need to create a certain of trading rules, you can just follow them which came from the famous investor and traders.

One of the famous investor that I admire and respect a lot is Warren Buffet. In his world, rules are more important than anything. His famous quote is as follow:
Rule 1: never lose money
Rule 2: never forget rule no 1
Funny enough? But the fact is many people understand the importance of setting rules but never learn to follow the rules.

For part 1, I would like to share the rules that I follow before I enter the market.

Rule 1 - Always do market research before market open:

Open your CNBC or any finance website to get the latest update, understand what’s happening in the market right now. Either is it oil price drop, or some where having a war, focus on news that may be making any impact to the US market and the stock you are trading. After learning the news, try to figure out the market sentiment, for example, is oil inventory going lower a good thing to the market? Certainly not! With the latest news in hand, it will help you to make a better decision when entering the trade.

Rule 2 - Limit your trading size:

Do not over trade, always make sure you have enough money to play for the next game. Thumb of rule is always using 1/20 of your total money for each trade. If you have $5000, each trade is $250, in that case you can have 20 games to play.

Rule 3 - Give your trade a reason:

Before entering the position, make a note and jot down what makes you buy or sell certain options, as well as what strategy you use, and why? Put all this down in your trading journal, so that you can revise it back. If you end up a loss, make sure you understand where the problem is. If you earn a profit, remember what you did right.

Rule 4 - Set exit level:

When you see a potential trade, holds your trigger, make sure you set your exit level before clicking the button. Many people are good traders, they know when to enter the trade, but do not know when to get out. You need to set two exits, one for your stop loss, one for your profit limit. Especially for stop loss, set at the level that you are comfortable with your risk level, from the technical point of view, you can set your stop loss at certain support level, when the stock break through the next support level, cut the loss and run.

Please continue to visit this site to read my part 2 ...

cheers, fr Paul

Market Check 8 Sept 2008

noreply@blogger.com (Paul Orion) — Mon, 08 Sep 2008 19:37:19 PDT

Today market is boosted up by the good news of US government bailout the two big largest home loan institution - Fannie Mae and Freddie Mac. Heard that this is the largest bailout action ever, even bigger than the Bear Stern bail out, wow. So what's next, is this the end of the story? I wonder.

Dow is crossing 20 and 50 sma, slow stochastic and william are moving upward, show bullish sign

I think the market right now is still struggling with few things, economic slowdown & jobless rate. Oil crisis could be cool down a little bit (current price: $106) with oil price currently at with the worldwide effort by reducing the oil consumption, and trying to use the alternate energy, though that is still long way to go. With the US currency appreciated, most of the commodity price should be lower for now.

DOW up almost 300 points, S&P up 25 points, but QQQQ does not improve, and from the volume point of view, QQQQ can be worsen for a while.

Overall the market sentiment still cover with bearish atmosphere, just a matter of time and event happen to trigger the plunge again. Therefore, we still need to watch out and be mindful when trading.

Happy trading!

Introducing Options Strategy – Vertical spread

noreply@blogger.com (Paul Orion) — Sun, 07 Sep 2008 07:18:33 PDT

There are more than 20 options strategies can be applied, but one of my favorite is Vertical Spread. The meaning of vertical spread is that you purchase and sell options of the same type (same stock symbol) with same expiration date but with the different strike price.

In Vertical spread, you can choose to apply bull put spread, bear call spread, bull call spread and bear put spread. Bull put spread or bull call spread can be applied when you think that the stock is bullish, that’s what the bull word imply. And if you think the market is bearish, use the otherwise strategies (bear call spread and bear put spread) which have the bear word in it.

When the option sold is more expensive than the options bought, there is a net credit, this strategy call vertical credit spread. Both Bull put spread and Bear call spread are credit spread. Therefore, without fail you have the money in your pocket immediately after the button click on screen.

The benefit of using Vertical Credit Spread is that you can limit your loss due to the spread. Take an example, if your spread difference is $5, your limiting lost will be $500 (every option contract = 100 stock, therefore multiply by 100). The smaller the spread, the better chance to win as you minimize your risk.

My preferred strategy is using 2.5 spread, for example, sell/buy a pair of options strike price of 25 and 22.5, the difference is the spread which is 2.5 in this example.

On the other hand, selling a spread is normally better than buying a spread. Becoming the seller makes you have the advantage of the time value of the options. As you know that when option price is decreasing when close to the expired date, like a water fall pattern, time is on your side.

For an example, if you are selling QQQQ strike price 45 and buying the strike price 43, you have 2 dollar spread. Selling $0.8 option of the strike price 45 and buying at $0.3 option at 43 strike price make you have the credit of $0.5. If QQQQ hovers above 45 until the expiry date, you earn the credit of $50 ($0.5 x 100) by letting both of the options becoming worthless.

Nevertheless, set the stop loss at the level of the sold option minus the credit earn, if you use the above example, the stop loss should be at 44.5. Never allow the stock price drop further than the stop loss target, if it does, buy back the sold leg and let the bought leg run.
If you really want to play safe, cut the loss and close the position when the stop loss is triggered.

Always trade with your passion! Cheers!

Trading Journal 5 Sept 2008

noreply@blogger.com (Paul Orion) — Fri, 05 Sep 2008 10:30:27 PDT

DE is below all its EMA (from 20 - 200), looks like very bearish for now. It next support at 62 level.

Now is 12:45pm New York time, lunch time for all the trader and market maker as well as the institutional investor, but the market seems still moving with some upward direction. Dow Jones plunged to 11050 level and bounce back to 11180, seemingly today is show the support level at 11200 if the market continues to at this level.

If Dow gap up next Monday with a bullish rise up, then it will form a morning star pattern which could lead the market some gain.

Nevertheless the market sentiment now is still very bearish. With that, I am happy to reap some fruits to reward my patience for DE.

Enter DE a bear call spread (60/65) on 8/13 when DE gap down to almost 60, with the bearish sentiment, I was thinking it will be a good buy for it to continue to go down further below 60. But I was wrong, DE bounced back on the same day to 67 level while I already asleep. (In fact, I should confess that I should have put a stop loss trigger at around 63 level, please follow the rule, I am giving a very bad example here, haa…)

Wake up in the morning while I was checking my position, it was already in deep red. But thank God that my patience works. DE continues to rise up to 70 level and suddenly plunge down and continue the trend, with confirmation with Slow Stoch and MACD. I decided to wait longer and add in position.

It seems like DE is bouncing back from 62 level, buy back my position, made a small gain and run. At least it give me a good night sleep.

Now, finally I see the red turning green.

Strategy: Bear Call Spread (60/65)
Sold Credit: 4 x 2.75 (date: 8/13)
Bot Credit: 4 x 2.5 (date: 9/6)
Profit: +$102
Grade: 4 (time exceeded 2 weeks, with earning percentage just 10%)

Happy trading with all your passion! Good nite!

Start Options Trading by attending seminar– Tips of choosing the right course

noreply@blogger.com (Paul Orion) — Thu, 04 Sep 2008 22:39:36 PDT

If you are newbie to the financial world, you may want to attend a 3-4 days seminar as your starter kit. I am an engineer by training, therefore I gain my financial knowledge mostly by reading and learning from the web (there are huge amount of resources from the internet today). But to kick start options trading effectively, I strongly suggest that you go find out the course detail in the market today, attend one of the most suitable seminars for you.

The Options trading seminar are very competitive market nowadays, as Options trading is one of the most popular financial derivative and leverage tool, many people are hunger to learn what Options Trading is.

Why a seminar is important to you?

You can choose to learn the knowledge by reading, but you never get the spirit behind it, you need some one whom is so passionate about options trading and impart this spirit and passion to you. Just like many other newbie out there, we are lack of confidence, and inside your mind you will simply put yourself off by disbelieving the possibility of making money through options trading.

Therefore you need some one to show you and guide you by example, that’s the importance part of having a real human teacher/coach.

These are things you may need to do before attending the course:
1. Do market research
Find out who are the players in the market. Do market research with the latest technology – Google! I am sure there are tons of it, my recommendation is that you may just focus on the first page of the search, list them down, and go to there website to find out more about the course details, speaker and etc.

2. Join a forum
People’s comment is powerful, you may not believe if some one is saying something bad, but if there are 100 people saying the same thing, you would probably take it as real. Join a forum and find out from other’s comment about certain course and certain speaker. At this time you probably have filtered out 5 courses by listening what other are talking about.

3. Attend a handful of preview
After you filter down 3 the most prominent course you like, go for the preview and see what they offer. The most important thing is to find out whether you like that speaker or not. Just like when you study in school, if you do like the teacher, you have higher chance dozing off than the lesson of your preferred teacher, that is something very subjective, simply cannot explain. I would choose not only a good speaker, but a reliable speaker, this probably need some discerning skill. Do not sign up the course immediately, make a comparison of these 3 courses, whether the course fee and the package offer make sense to you.

4. Do the math
Seminar fees can range from few hundred dollars to few thousand dollars, even just for a beginner. It does not mean the most expensive one is always the best. At this part, you need to help yourself by doing the math. Do not sign up something that not affordable to you, do it only when you really have extra money. Nevertheless, most of the courses today are back by money back guarantee, which means that you can take your refund if you are not satisfied with the service they provide.

5. Sign up, make the final decision, go for it with all your hearts and mind
Last portion, after you conclude your choice, sign it up and prepare for your course with all your hearts and mind. Before the course, you are supposed to do some read up so that you have done your part without just relying on the speaker. Nothing is going to happen if you do not participate, therefore you need to ask question, and participate with 100% of your soul and mind.

Never simply think that you will get every thing in the seminar, the speaker only can impart 50% of the knowledge and passion to you, the other 50% is fully under your control and responsibility. Options trading is a journey of life, kick start with a course, and trade with your passion!

Cheers, from Paul Liew

Market Check 4/9/2008

noreply@blogger.com (Paul Orion) — Thu, 04 Sep 2008 10:04:15 PDT

While I enjoying chatting with my house mate about the forex market and the bowling event for next week, the market has gone to another level of disaster. But good for me though as I still holding a bear call spread position for DE.

Today market follows the footstep of yesterday, having so much fear about the economy making another plunge for DOW, S&P and NASDAQ.

Jobless claim surge causing another round of bad market sentiment. As most of the time I am not really what happen on the news, I notice that the chart has told the full story of how is the market sentiment being like.

Today Dow Jones plunge until 11300 level, below the 22ma line, with slow stochastic and MACD showing bearish region, selling volume is high. For the next couple of days to next week, I assume it will continue the bearish sentiment for a while. Its next level of support hang around 11100, and the chart pattern seem forming a potential head and shoulder.

I am happy that my DE position has turn from red to green now. Would have gain more for my previous QQQQ position which has been closed yesterday. But I guess we should always set a target to exit, once the target is made, it is time to move on for another trade.

Thanks for the jobless claim report, this plunge could be just a beginning.

Happy Trading, with all your passion!

Paul's Trading Journal 3 Sep 2008

noreply@blogger.com (Paul Orion) — Thu, 04 Sep 2008 03:29:28 PDT

Stock Symbol: QQQQ
Strategy: Sell 5 Bear Call Spread contract (46/48)
Sold: $0.945, 8/26
Buy: $0.45, 9/3 (today)
Profit/Loss: + $245
Grade: 5 (1 is worst, 5 is best)

Enter trade reason: QQQQ cross 22ma to bearish region, slow stochastic and MACD show bearish region as well.

Today is a good day, end my day with 200USD profit. I grade it a grade 5 trade, because it is within my 2 weeks target, with profit percentage > 50%.

The recent market sentiment is bad, with subprime issue is still hanging around, I do not foresee a bullish market coming back too soon. As you see Dow Jones having its 11800 overhead resistance, the chart seems like forming a potential head and shoulder pattern, it crosses 22ma level to become bearish.

Though oil price is getting lower now, but the market see it as a bad sign as oil demand drop. Which means that the economic slowdown might become another fear.

Now QQQQ having its support on 44 level, if QQQQ plunge through 44 level, it could be another potential disaster.

My 2 cents of thought, happy trading ....:)

Trading Addicts: Weekly Watchlist 9/2

noreply@blogger.com (Paul Orion) — Tue, 02 Sep 2008 02:08:25 PDT

Stock Market Analysis September 1 2008

noreply@blogger.com (Paul Orion) — Tue, 02 Sep 2008 02:07:10 PDT

Day Trading – an Introduction

noreply@blogger.com (Paul Orion) — Sun, 31 Aug 2008 08:09:37 PDT

The article provides information on day trading of various products like stock, options, futures and forex currencies. Know more about different day trading strategies and requirements of a day traders. Find more about the different features provided by direct access day trading systems and brokers.

Day trading is the practice of active buying and selling of the stocks, options, futures and currencies within a trading day. All trades are completed within a day so that after the closing of market the day trader do no hold any open positions and therefore are not subjected to any overnight risks. The traders trade against very small changes in price of the financial instruments. Day trading is usually a vigorous trading activity requiring high concentration and time during trading hours.

Day traders can be grouped into two broad categories as scalpers and momentum traders. Scalpers trade in large quantities completing each trade within seconds or minutes. Most scalpers are usually large financial firms or investors like institutional traders. Momentum traders are usually individual traders who trade according to the stock market trends. The trading volume of momentum traders usually depends on the market condition. Some other popular trading strategies include range trading, news playing and rebate trading.

Day trading can be considered as an offspring of high speed electronic communication networks. Most day traders today trades markets from a distant location such as their home or work area. They use trading software, the direct access trading platform, installed in their computer connected to internet to execute trades in real-time. In order to qualify for the trades, the trader must maintain a margin in the corresponding market. It is the day trading broker who maintains the margin for the trader and provides the direct access trading platforms. Although there are web-based trading platforms available, they are not suitable for day trading.

The most important thing, other than the money, trading system and market account, that a day trader need is the market information. Market data enables day traders to pick suitable products to trade. Day traders need live or real-time market quotes as a small delay in information can cause them huge loss. It is the trading system that they use serve for this purpose. Advanced systems provide these information as graphics and are usually have alerts and triggers to automate trades. Day trading systems also use technical indicators and various mathematical tools to facilitate the picking of stocks, futures, currencies, etc.

As told earlier, there are a variety of products available for day trading. The most popular ones are the stock and the forex currencies. Others include options like stock options and futures options, and futures like currency futures, stock futures, stock index futures and commodity futures. Day trading facility is available for most stock, options and futures market, but note that most brokers offers services for limited markets/exchanges. The trader also must be keen to choose markets according to the product they are trading, their financial status, the brokerage they are affiliated to, the trading system they uses, and their geographical location.

The advantages of day trading include high profit making chance, no overnight risks, high leverage, rapid returns, no margin interests etc. The disadvantages include higher chance of loss (especially to new traders) and the requirement of high concentration levels and time. The requirement to payoff interest on margin and transaction costs can make the situation more serious. It is estimated that over 80% of day traders have to afford loss.

About the AuthorPraveen Ortec works for NobleTrading.com, a discount broker providing online stock day trading on 4 different online day trading systems . Checkout this online broker comparison table .

Options Trading For Beginners: Making More Of Your Money

noreply@blogger.com (Paul Orion) — Sun, 31 Aug 2008 07:42:53 PDT

With our current economic environment many people are looking for ways to still make money on their money. Options trading maybe a good place to try but read over this article to make sure that you know the risk/reward before you invest.

Options trading is an investment vehicle for experienced investors, who track their investments proactively. It is not a suitable vehicle for investors looking to maintain assets without direct management, as it's very much a timing related purchase and float. Options trading is an excellent technique for using financial leverage to make bigger purchases.

A very simple example of an options trade would be this: If you're selling a commodity worth $100,000 (say 1,000 shares of a stock worth $100 per share), and a prospective buyer likes the price, they can offer to pay for an option to buy all of those commodities, while spending the time researching other investments. Say, for example, they're offering you $1,000 to hold that price for them while they gather the rest of the funds, which they say will take three months.

When three months passes, they either pay the remaining $99,000 for the shares of the stock, or forfeit the option. If the stock goes up in price to $110 per share from $100, they can either buy the stock, or sell the option to someone else for the difference between the old price and the new price. Either way, the person holding the option stands to make a tidy profit.

Options trading has its own set of terminology, which we'll get into a bit later, but the basic premise is this: You buy an option to purchase a stock or commodity at a given price; the option expires after a given time period (American style options trading), or the option must be exercised on a specific date (European style options trading).

There are two principle types of options that are traded. Calls increase in value as the stock price rises, and puts increase in value as the stock price declines. (There's a lot of fiscal mathematics behind both of these, but the layman's explanation will suffice.) In most cases, options are sold to other investors just before they expire; most options traders don't end up holding shares in the stock they have options for; the options are bought, sold, liquidated and transacted before their expiration dates. It is possible to have both call and put options on the same commodity or stock; this is a "straddle" strategy.

Options trading is not a casual investment strategy; it's a strategy used by people who are investing as their profession, or who intend to manage their own wealth directly. The benefits of options trading is flexibility, coupled with (in the case of put options) a bit of a countercyclical strategy for bear markets.

The key to options trading is market research on specific stocks; an options trader will be researching stocks that are either slated for a price spike (call options) or are likely to undergo a price decline (put options). How quickly these options express themselves is a measure of market volatility, and most options traders will try to take a neutral position – they'll put in put and call options to cover both directions, and to cover themselves against broad market trends.

Options arbitrage is a lower risk strategy done by floor traders, and can be short term profitable, with good liquidity. The aim is to swap options with other traders before certain factors influence the market, or to get rid of underperforming options while still getting some profit out of them. Options arbitrage is perhaps the best place to start in options trading for a novice.

About the AuthorCraig Thornburrow is an acknowledged expert in his field. You can get more free advice on options trading and basic trading strategies at http://www.optiontradingsuccess.com

Stock Options Trading - Trading Losses Are Part Of The Journey

noreply@blogger.com (Paul Orion) — Sun, 31 Aug 2008 07:34:37 PDT

Stock Options Trading - Trading Losses Are Part Of The Journey
No matter how skillful or how long you've been doing in your stock options trading, it's natural to encounter trading losses along the way. Such trading losses could derive out of our inexperiences, skill levels and sometimes due to unpredictable market reaction.

It's certainly a harrowing experience to loss money trade after trade during stock options trading, watching our hard earned money taken away by the market mercilessly. But painful as these trading losses might be, we should accept them as obstacles we must overcome in every other endeavor and pick up the lessons learned from each trading losses.

We should certainly not brood over such losses too long. The longer we let these losses overcome us, the longer it'll take us to have the courage to re-enter our stock options trading for the chance to sharpen our skills further. A stock options trading journey is all about having the discipline to follow a trading plan and stick to it if it sometimes yields a losing trade, we have to analyze the cause behind this hiccup and refine our trading plan so that we would be prepared the next time the same scenario turned up again.

Thus, it's important to analyze where we've done wrong so that we become wiser and won't commit the same mistakes again. We must accept losses as part of our stock options trading journey and don't give up too easily.

Here are some ways to minimize your losses during stock options trading and how you could learn from them :

1) Keep every trade to 5% or less of my capital

No matter how confident you are of a particular trade, maintain the discipline of not committing more than 5% of your capital in any stock options trading position.

Understand that every trade carries risks. I've picked up some costly mistakes when I was greedy and had plunged a great portion of my capital into so-called "sure bets" and ended up having my hard-earned money eaten up alive by the market. Don't be fooled that you could take money easily from the market, trading is a professional trait just like any specialized field and you need years of skills and experiences to understand how the market works.

Be cautious that although sometimes every technical indicators might have been lined up perfectly for the so-called "sure-win" trade based on your analysis, things could still go wrong where the market reacted opposite to what you've analyzed and you ended up losing money. So you should always remind yourself never to "bet the farm" on any "sure-win" trades. But if you maintain every position within 5% or less of your trading capital, even when you encountered a few losing trades, you would still have balance capital to fight another battle.

2) Jot down your mistakes in your trading journal

I've realized that keep a trading journal of all my trades has been one of the most important step that I've undertaken in my trading journey. In my trading journal, I would record my analysis of the stocks that I would be trading an option with. Such details include daily trading volume, market capitalization, Stock Scouter Rating (from MSN MoneyCentral), past earnings history, gapping up/down analysis based on earnings announcement etc of the particular stock that I'm analyzing. I would also enter into my journal the reasons why I enter or exit a position.

Whenever I encountered a losing trade, the journal would become even more significant because I would write down explicitly the reasons behind the losing trade and what I've learned from this expensive mistake. It might be painful when these details were recorded during that time but they trust me they would return as important reminder to caution us when a similar trading setup is happening again.

So, take this simple advice and start a trading journal to record all your trades and decisions for entering them. Most importantly, write down the lessons behind the losing trades so that you'll remind yourself not to commit them again.

3) Give and You Shall Receive

I think you might have heard the above phrase before. Although I'm no expert in this philosophy, I somehow experienced in my real life some truth in this statement. I tend to receive more when I naturally give more. I believe that if we want to be more successful in our trading, we should also develop the virtue of giving, although not necessary in monetary terms. It could be donation-in-kinds or simply an act of love or forgiveness. Of course, you should also give your devotion towards sharpening your trading skills each and everyday because the market would definitely reward you when you put in much efforts to understand how it works.

As always, I wish everyone successful in his or her stock options trading journey.

About the AuthorTony Chai has been doing stock options trading, particularly US stocks, since he graduated from Live Freely Options Trading Seminar 2 years ago. His stock options trading technique involves buying options based on earnings gapping analysis. In his stock options trading web-site, you'll find a number of informative articles written by himself and seasoned options traders to sharpen your stock options trading skills. Tony also record his stock options trades and the analysis behind each trades in his stock options trading blog.

The CandleStick Warrior - New, Fun and Easy way to learn Candlestick Charting !!

noreply@blogger.com (Paul Orion) — Wed, 27 Aug 2008 05:51:45 PDT

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Forex Auto Pilot -Earn Money While You Are Asleep !!!

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