The Basics of Managing Options Trading Risk

Managing Options Trading Risk is very important because trading options carries the risk of losing all of the trading capital committed to trading options, since options can expire worthless if their strike price is not achieved prior to the option expiration date.  To mitigate this risk of total trading capital loss, there are a number of options trading strategies that can employed for managing options trading risk.

What really makes options interesting and useful from a risk management prospective is that unlike stocks, managing options trading risk can be absolutely defined when an options trader executes a well designed risk management options trade.  In other words, a well designed risk management options trade will limit an options trader’s risk of capital loss to a fixed amount that the trader can calculate.  This is done by buying and selling various types of options to cancel out the potential for an option to expire worthless upon expiration.  Such a strategy limits profit potential when trading options, but the trade off is well worth it to options traders looking to protect trading capital in the event that the options that they hold do not hit their strike price upon expiration.

Strategies for Managing Options Trading Risk

Managing options trading risk involves the execution of a number of different well designed risk management options trades.  The type of options trade utilized to manage risk in a particular situation depends upon the objective of the options trade, current market circumstances, and the anticipated move that an options trader expects from the underlying stock or commodity on which an option is based upon.  The following is a list of options trading strategies for managing options trading risk.

• Option Straddle – An option straddle involves buying a call option and put option at a stock or commodity’s current trading price with same strike price and month for both options.  A profit can be made on an option straddle if the stock or commodity moves above or below the strike price enough to cover the premium paid for the put and call options.  There is a risk of losing the premium paid for the options, if the stock or commodity does not move away from the options strike price before expiration; therefore, an option straddle should be used during times of market volatility and uncertainty.
• Option Strangle – An option strangle involves buying the same quantity of a call option and a put option for the same stock or commodity, but at different strike prices that are away from a stock or commodity’s current trading price, which are known as “out of the money” options.  While a premium is paid to create an option strangle trade, that premium is protected by the opposing option positions, as either the call or put option will gain in value as the stock or commodity moves up or down in price.  A strangle option trade is usually less expensive than a straddle option trade since “out of the money” option contracts are less expensive than option contracts that are at the current trading price of the underlying financial instrument.
• Option Ratio Spread - An option ratio spread involves buying a quantity of call or put options and selling a quantity call or put options for the same stock or commodity and the same expiration date, but at different strike prices.  If an options trader is expecting a stock or commodity to increase in price, they would initiate an option ratio spread trade by buying a greater number of call options at or near the current trading price and then selling a lesser number of put options at a higher strike price.  An options trader would do the opposite if they are expecting a stock or commodity to decrease in price.  The premium paid for an option ratio spread is reduced by selling puts when initiating a long option ratio spread and selling calls when initiating a short option ratio spread.  The premium paid for an option ratio spread is protected by the opposing option positions.

Those who wish to trade options are encouraged to learn as much as possible about managing options trading risk and the various ways options can be traded.

Stay up to date on Managing Options Trading Risk by getting on our FREE eMail list!

Trading Options For Income –Options Trading Basics

Trading options for income has the potential to provide consistent profits that can serve as a primary or secondary income.  Trading options for income requires a trader to focus on the stock and commodities markets and upcoming stock and commodity moving events, since the value of options is directly related to the movement in price of the underlying stocks or commodities on which the options are based.

An Option is a financial product that is comprised of a contract to buy or sell a specific amount of the option’s underlying instrument (which is a stock or commodity) at a specified price on a future date.

An Option contract to buy a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Call Option.  An Option contract to sell a specific amount of the option’s underlying instrument at a specified price on a future date is known as a Put Option.

Trading  options for income is not as simple as buying and selling stocks because making money trading options requires the underlying stock or commodity that the option is based upon to go above (call option) or below (put option) the options strike price (target price) before the option expiration date to make a profit.  If the underlying stock or commodity does not reach the strike price, then the option expires worthless.

The Advantages of Trading Options For Income

One of  the advantages of trading options for income rather than trading stocks for income is that options can be purchased for just a fraction of the cost of buying shares of a stock.  This allows options traders seeking income to commit a much smaller amount of money to play a stock’s anticipated price movement higher or lower versus actually buying or sell short a stock, which frees up their trading capital for other trading opportunities.

For example, if a trader anticipates a move higher in the price of Apple, Inc.’s stock (AAPL), the trader would pay a hefty price to buy stock in AAPL, since it trades for hundreds of dollars.  On the other hand, call options that have strike prices slightly above the current AAPL trading price can be purchased for a few dollars.  If the price of AAPL stock goes up as anticipated, then the options that were purchased for just a few dollars also go up in value and the trade becomes profitable.  This allows a trader that is trading options for income to control a lot more stock by leveraging their trade via
options.  It also allows an options trader to spread out their risk, since the extra trading capital that is available using options to trade versus stock, allows a trader to commit trading capital to a variety of different options trades.

Since trading options for income carries the risk of losing all of the trading capital committed to trading options, there are a number of options trading strategies that can employed to greatly reduce the risk to options trading capital.  See Managing Options Trading Risk for more details on options trading strategies.

Those who wish to start trading options for income are encouraged to learn as much as possible about the options market and the various ways options can be traded.

Stay up to date on Trading Options For Income by getting on our FREE eMail list!

Why Learn How to Day Trade Options?

Learning how to day trade options can open up many new investment opportunities. While options are similar to other types of futures in a many ways, they also have a number of qualities which distinguish them. All futures contracts specify and the quantity and time that a stock will be bought, as well as the price it will be bought for. The price is based on a prediction of the stock’s future value, with a discount given to account for the risk. Investors make money based on the difference between what they pay and the stock’s actual value. Options are similar contracts, but the buyer is not obligated to complete the transaction. Instead, they buy the right to complete it if they choose.

Knowing how to day trade options allows you to buy and sell options that have already been written. Options bought from an investment firm, or directly from a company, are considered to be over the counter (OTC) options. When you buy an OTC option, it is customized to your terms. Once you have bought it, however, you can list it to trade on the day trading market. Day traded options are not bought or sold through an investment firm. They are listed by various futures and options exchanges.

The Benefits of Knowing How to Day Trade Options

While OTC options can be customized, and are not subject to the same restrictions as listed options, those who know how to day trade options enjoy a number of benefits. For one thing, the contract is supported by the credit of the exchange, which usually has a rating of AAA. Additionally, all transactions are protected by market regulations, meaning that they must be both fair and transparent. Many investors also appreciate the fact that regulated markets retain their structure and order. This makes it much easier to learn how to trade day options, even when trades are happening at a fast rate and at a high volume.

Get more info on how to day trade options from our FREE email list:

Care Is The Critical Factor In Trading Options For Dummies

Trading options for dummies is not as easy as it sounds. Naturally, anybody with the requisite amount of capital to risk can play on the options market. It is important to recognize that options trading is a counter-intuitive investment vehicle that requires the trader to place his bets contrary to the consensus of market wisdom, in order to make any money.

If, for example, everyone expects Stock ‘X’ to rise in value from forty dollars to seventy dollars in the next six months, a futures contract would seem to be a guaranteed winner. This is not really true, unfortunately. If everyone expects the stock to rise thirty dollars, then a contract that hits that target is likely to yield just about nothing in profit, since everyone else is placing the same financial bet. The key concept to trading options for dummies is that one has to place a bet on something that the market does not expect to happen, in order to make any significant amount of profit on the transaction.

Trading Options For Dummies Is Not Really A Good Strategy For Dummies

Since most amateur investors lack the necessary detailed analysis of worldwide trends that might make an informed options strategy possible, it needs to be recognized that this is often a form of gambling, rather than a form of investing.  Like any form of High Risk, High Reward activity, the returns can be amazing. The losses can be incredible as well. For most small, individual investors, the only place in which options trading possibly belongs in a portfolio is in a case where short options are used to guard against temporary market fluctuations.

In these situations, savvy investors use short plays to guarantee their profits by taking a small option payment up front as opposed to leaving a position exposed to the wild swings of the current economic climate. Trading options for dummies is only a sound strategy when the purpose of the trade is to obtain certainty, as opposed to spinning the roulette wheel of fortune.

Learning How To Trade Currency Options

The first step in learning how to trade currency options is gaining an understanding of exactly what a currency option is. Purchase of a currency option gives the buyer the right, but not the obligation, to buy or sell a form of currency at a specific time for for a specific price. In order to maintain this right, the holder must pay a fee to a broker. This fee varies depending on the amount of contracts purchased. Essentially, a foreign currency option makes it possible for an investor to profit from the changes in international exchange rates.

There are two types of currency options available to your average foreign exchange trader when learning how to trade currency options. The traditional alternative is the call option. This has the same characteristics as a stock option. It comes in two forms: the American and the European. The former type of option allows the holder to exercise his right to purchase the currency at any time up until the expiration date of the contract. The latter only allows the holder to exercise this right at the moment of expiration. These options are only rights to buy currency. They are not quantities of actual currency. If they expire, the holder only loses the money he or she paid in fees.

How To Trade Currency Options In Single Payment Options Trading

A special alternative to learning how to trade currency options in these traditional formats is single payment options trading. This is a very creative way of handling currency options. A trader describes a possible scenario that may occur in the exchange rates between two currencies. If the scenario, such as the rise in the value of a specific currency beyond a certain point, comes to pass then the trader receives a payout. If you learn how to trade currency options, you will be able to participate in this kind of market wager.

How to Trade Futures Options: Buying

The first step for how to trade futures options is to buy the options in the first place. There are, in fact, two main ways you can do this. The first way is to buy an option from an investment firm or a private company. Options bought privately are referred to as over the counter options. They can be customized to your exact specifications, meaning that you decide on terms such as the specified quantity and date of the transaction. Over the counter futures options are not held to the same, strict regulations that day traded options are, which makes them appealing for many investors.

Even if you do not want to buy over the counter options, you can still learn how to trade futures options. You can, for example, buy futures options that are already being traded on the market. Because you do not write these options, or set the terms yourself, you may not be able to find any that fit your exact specifications. That said, many investors find day trading to be much less of a hassle. Because the options are listed on regular futures exchanges, they are subject to normal exchange regulations of transparency and fairness. Additionally, the market gives structured order to a process that can sometimes seem overwhelming when trading is happening quickly. 

How to Trade Futures Options: Selling

For many investors, buying futures options is their main goal. If you want to increase your chances of a large return, however, it is a good idea to understand the selling aspect of how to trade futures options. If you have an option you would like to sell, you can list  it on the day trading markets with the other futures options. Most investors choose to do through an online broker. Once you have made a few trades, and understand how to trade futures options, you should begin to see increased returns.

What You Should Know Before You Learn How to Trade Options

Probably the single most important thing people can have before they began to learn how to trade options is an understanding of what an option really is. There are two types of options that can be traded. One is called a call option, and the other is called a put option.

It is impossible to learn how to trade options if you do not know what they are. Basically, options are an agreement between two people or entities to buy or sell stocks or a futures contract for a fixed price. In addition, the transaction must take place before a fixed future date.

Terminology to Know before You Learn How to Trade Options

One term individuals should know before they learn how to trade options is what a call option is. A call option gives a person the right to buy a particular asset at a fixed price, called a strike price, at any time before it the option expires. The person who created the option, called an option writer, is obligated to sell the call option to the buyer as long as he or she exercises his or her buying rights before the option’s expiration date.

A put option works differently than a call option, and it is also important to understand it before individuals learn how to trade options. A put option gives a person the right to sell a particular asset at the strike price. As long as this right is exercised before the expiration date the option writer must purchase the put option at the strike price.

To the novice trader, options trading may appear complicated. However, it is really nothing more than the buying and selling of assets by a particular point in time. Individuals will find that it is easier to learn how to trade options if they take the time to learn some of the terminology associated with this type of trading.

Trading Penny Options – What Is A Penny Option?

Trading penny options that derive their value based on the underlying value of a stock can be a powerful trading tool that stock market traders and investors can use to profit in the stock market from price action moves in stocks.  Trading penny options, as opposed to options that trade in nickel or dime increments, can also save stock market traders and investors a lot of money on their options trades.  If you do not understand how to trade options or how options work, it is a good idea to read Option Trading Basics and Trading Call Options before proceeding with this article on trading penny options.

Penny options are technically known as Penny Priced Options (PPOs) on Wall Street.  Traditionally, options on stocks have traded in nickel or dime increments, which is the spread between an option’s bid and ask.  While nickels and dimes might not sound like a big spread, options traded with penny spreads can offer substantial savings for stock market traders and investors that trade options.  Trading options priced in penny increments offers a 80% savings over options priced in nickel increments and a 90% savings over options priced in dime increments.  These savings add up when options are traded regularly, and can increase options trading profits for successful options traders.

Trading options priced in penny increments provides traders and investors an additional advantage since it reduces the price that a holder of an option needs the underlying stock to reach to make money on an options trade before the option expires.  This is because of the reduction in price that the penny option was brought at and the higher price that the penny option can be sold for upon completion of the trade reduces the break-even level for a stock option trade.

Trading Penny Options Is Limited

Trading options in penny increments started as a pilot program in 2007 that only included options associated with thirteen stocks.  Since then, trading penny options has expanded to options associated with many additional well known stocks, but penny increment options still do not include all of the stock options that trade.  To facilitate trading penny options, many online brokers now offer options trading in penny increments.

Those who wish to start trading penny options as part of their investing and trading strategies are encouraged to learn which stock options can be traded in penny increments and learn about the options market and the various ways options can be traded.

Stay up to date on Trading Penny Options by getting on our FREE eMail list!

Option Trading Tips – Trading Options Is Not Difficult

There are many option trading tips and strategies that a stock market investor or trader needs to consider.  Many investors and traders shy away from options because they think trading options is complicated and difficult.  Trading options can be complicated, but it is only as complicated as the strategy which a trader or investor deploys.  There are simple options trading strategies that are no more complicated or difficult to execute than trading stocks.

If you do not understand how to trade options or how options work, it is a good idea to read Option Trading Basics and Trading Call Options before proceeding with this article on option trading tips.

Option Trading Tips For Solid Option Trading Strategies

Since options are used by investors and traders many of reasons via a wide variety of strategies, not all options trading tips and strategies will apply in every options trading situation.

Before you consider buying an option, make sure that you understand what the target (strike) price is for the option that will make the trade profitable and make sure you know when the option expires.  Upon expiration, if the underlying stock or index that the option is based upon has not reached the target price, then the option expires as worthless.  Therefore, it is very important to consider when the option expires and whether the price moving event that you are buying the option for will occur within that time frame.

Make sure you know the correct symbol for the option you are considering buying, since an option symbol is unique to the target price and expiration date for the option you are considering buying.  Your online broker should have option symbol information for an option you are considering buying.  If you cannot find the correct option symbol or are unsure of it, then contact a live broker for assistance.

The further out an option is from its expiration date, the higher the premium (fee) will be to account for the additional risk taken by the person writing the option.  As the expiration date draws closer, the premium decreases and the option slowly loses value, which is known as price decay.  If you anticipate a sharp move in the price a stock or index to occur within a short amount of time, then buying an option that expires in the next month or two to save on the cost of the premium is a good strategy.  However, if you are unsure about whether a stock or index is going to make a move or when the move might occur, then buying an option that has an expiration date many months in the future (it could be well over a year) is a good strategy.  You will pay a higher premium, but if a price change occurs in the underlying stock or index in a direction that increases the value of your option, the change in value of the option will likely be more than the premium, and you can exit the trade with a profit.

As is the case when trading stocks, it is recommended to use limit orders when buying and selling stock and index options.  This will ensure that you receive the price you expect to receive when executing an option trade.

Holding onto an option trade that is not working as expected can be even worse than holding onto a stock trade that is not working out.  This is because unlike stocks that retain some value over time and can and sometimes do make dramatic price recoveries, the price of options decay over time as the expiration date approaches and it then goes to zero and becomes worthless upon expiration, if the target price has not been reached.  This is the most important of all options trading tips that options investors and traders should keep in mind.

Stay up to date on Option Trading Tips by getting on our FREE eMail list!

GET A JUMP START ON INVESTING WITH STOCK OPTIONS BASICS

The current state of the economy has made some investors wary about putting capital into market speculation, but a few stock options basics are all that is necessary to keep your portfolio healthy and productive. Stocks, like any other investment, are calculated risks, with the tendency to change drastically in both the short and long term. This makes many people nervous about committing their savings, especially when brokers employ confusing terminologies and complex mathematical formula in order to describe the performance of stocks.

Do you know why stock options basics are different from bonds and surety investments? Guaranteed increases, from Treasury Bills or Certificates of Deposit, will see the value of your money grow. This growth is quite small, however, with five percent yields topping the charts. Furthermore, you are not able to manipulate the investment. Investing in options, however, makes your money more fluid, as options are exactly what they sound like. They are an optional form of investment rather than an obligation, allowing you to withdraw or increase your stakes with nothing more than the push of a button.

STOCK OPTIONS BASICS MAKE YOU RE-THINK CAPITAL

Imagine you have just agreed upon an option to purchase an amusement park for a thousand dollars. The best case scenario is a success that makes millions each year in profit. The worst case is that the rides break and the park will lose money. As you have not purchased the park, only an option, you can wait to see which plays out. Should it be positive, you can cash in: should it be negative, you cut your losses. The most aspect of all stock options basics is the perceived value of an option, giving the investor the chance to hedge their bets in speculative ventures without running the risk of complete failure.

Get FREE stock options basics from our eMail list!