Diversified Options Trading » options trading

Monthly Trader Alert | April 22, 2010

DavidF — Fri, 23 Apr 2010 05:29:57 +0000

The market consolidated again today which, in almost every case (sideways action), means that the market will continue higher.

It’s making it’s way to the 61.8% retracement level on both the DOW (11,247)
and the S&P 500 (1227).

We are waiting now for the best shorting opportunity since October 2007 when
it hits these levels.

A subscriber asked me what will possibly cause the market to go down
at this point.

The answer is never revealed until it happens but I’m guessing that it could be
any one of dozens of reasons:

1. The Health Care Bill backlash that’s building
2. The Tea Party momentum
3. The Greece debacle that’s starting to boil (Greek credit default swaps are hit a historic high this morning)
4. Excessive government debt and lack of bond buyers
5. Goldman Sachs fraud – it’s just the tip of the iceberg
6. And much more…

Trade With Confidence
Daily Market Advantage

The Advantages of Trading Stock Options

DavidF — Tue, 16 Mar 2010 21:22:50 +0000

Stock options are only recently getting the attention which they deserve from traders. The implications made by popular figures that trading options are too risky have been lingering for some time now. This is not something that you should take to heart. While some talk of the disadvantages one must always know that where there are disadvantages there are also advantages. As with any other business it will consist of losses and gains. There are no two ways about it, a loss will always be present but you must have the knowledge to cut your losses fast and let your profits take you home.

Stock options are well capable of leveraging or borrowing money in order to increase profits. A strategy known as stock replacement will allow you to mimic stocks in a cost efficient way. Consider if you are able to purchase 200 shares of $50 stock, a payment of $10 will be maid but at the same time if you were going to buy $20 stock options representing 100 shares each then one would only pay $4 instead of $10. This would allow you to profit $6 to use in your discretion. Of course it won’t be as quick as just stated but the right stock is chosen then your strategy would be a success.

With stock options you can actually be able to spend less money and still make the same profit. With this you can make a higher percentage of profit as with normal stock trading. As compared to traditional stocks these options can offer much more strategic alternatives due to these options being more flexible. Options are the rights to trading a particular stock so you can see how it will allow you to see endless possibilities. Many ways can be used to profit one’s self by exploring different options for that stock.

The use of stock options allows the investor to trade more freely. These trades don’t only depend on the stock movement but also the passage of time and the unpredictable movements in the market. This can be extremely beneficial to the trader as most stocks rarely move significantly. These options offer a trader to do business in every type of market, allowing them to earn more profit. These are some of the many advantages of trading stock options and as you can see it is more than enough a reason to tell that this will benefit you tremendously. It is no surprise that stock options are part of financial circles today with its low costs, access through the internet and with endless benefits.

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Using Option Strategies in Your Trading Portfolio

DavidF — Mon, 15 Mar 2010 22:30:30 +0000

You may be new to option trading but have knowledge of buying puts & calls. Puts & calls are the 2 basic option strategies that rookie traders tend to lean towards. These strategies are very low risk, simple and much easier for a rookie trader to handle. When buying a put you would want the underlying to drop in value and when buying a call you hope that it will rise. No matter what is done the risk taken is limited according to the amount of premium you pay or buy the contract for. If for whatever reason the contract turns worthless you only loose the cost and nothing else.

No matter the level of experience you have we all see this is safe and profitable. It is a potential option which can provide tremendous return without betting a lump sum. At the same time however we all wish at some point to advance and become more of a professional when investing in these options. The numerous options that can be done only make it that much easier to profit. Let us now take a look at some of the options strategies you might want to explore.

Being a seller of an option contract means that you are writing options. This can cause a risk depending on the circumstances but not including covered calls. This is considered as one of many conservative options available to you. With this option it means that writing strategies because your contract is backed up with the ownership of the stock. Perhaps you own 400 shares of Microsoft and you know that Microsoft is not very volatile; this makes it ideal for cover call writing. It is best when writing calls that you write them on the stocks that are not very volatile this is because you are going to be writing out of the money calls to collect an income as a premium. May be they are trading at $24. You may write calls for $35 strikes on the month’s contract and the only risk would be if the stock grows higher than the price before expiration. It is clear to see why it is you must own the stock that you are writing cover calls for and why they should be range bound.

A married put trade is only considered a popular conservative strategy. These puts are very much like covered calls meaning that you already own stocks and will be buying an certain amount of puts that is equal to the exact number of shares owned. You will be long on these puts but by owning the stock it only acts as the hedge which means that you can still make money is the stock drops. Spreads are also various option strategies that you can use. A strategy most popular of the set is known as bull call spread. This is when you are buying calls at a strike price and then selling at a greater price. The underlying security and month of expiration must be the same for this to be called a bull call.

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Non Directional vs Directional Trading

DavidF — Mon, 15 Mar 2010 20:13:25 +0000

We all would like to know if the market price will go up or down but does it really matter?

Non Directional Trading

Non directional trading has shown to be useful in the financial markets due to the profits these trades can make in a flat market. Due to their ease use and less risk, these non directional trading strategies or neutral strategies are now becoming more and more popular. It does not matter whether the financial tools goes either up or down for profit to be made via non directional trading but rather the volatility of the prices which would determine your profit. This is what is known as neutral strategy. Here are some examples of non directional strategies. The condor strategy is an example to non directional trading strategies. This will involve selling out of the buy calls and the money calls at a much higher strike price and simultaneously buying puts at a low strike price while traders will sell out of money puts. Another example would be the straddle strategy. This strategy holds and takes both put and call positions at the same expiration.
Position will only become money making if the underlying financial instrument has a change in value, whether it be high or low and also will involve the short and long straddles. Some other examples include the strangle strategy and also risk reversals. To sum up, non directional means that the method of trading does not require the trader to have a permanent side in a trading market. The only direction the trader should follow is that which is winning and succeeding. The main element in mastering non directional trading schemes is to identify the direction the market is taking and where you should place the investments.

Directional Trading

Directional trading makes up the majority of traders in the financial market today. They are those who try to predict the direction the market is going to turn. They are also cause for much headache for others. To master or to be average in directional trading a massive amount of time needs to be spent on training and practicing, also there is the need to be behind the computer watching over each and every transfer. A directional trader needs to keep up to date with all news concerning the market, new news is so important to a directional trader. Of course from this little overview you can tell that it takes a lot of patience and dedication to fully succeed as a directional trader. This level of trading and constant access to the market will also affect your broker fees making them more expensive. As a directional trader you must also be on the go, meaning that at odd times you will have to be checking the market to see what is moving where and take necessary action. You must also be very quick when deciding what decision to make hence the reason why they must remember all strategies possible.

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Trading Iron Condor Options

DavidF — Mon, 15 Mar 2010 05:06:03 +0000

Iron condor options are meant to find the best between reward and volatility. When in a fixed range you profit the most, however those that are most boring with low betas are more than likely to remain fixed and also will be the lowest in volatility and in turn produce the least reward. The spread is divided into 4 legs, 2 money puts and 2 money calls, all which will expire at the same time. The strike prices of calls are also the exact same as with the difference between the puts. As you may have understood you will be selling both a call and put spread.
When selling a call it means that you both buy and sell a call that has a lower strike price. Due to the low strike price the premium received from the sale will be much higher than the amount spent on buying the call. This basically will mean that you will start with a surplus of cash. By the underlying security remaining lower than both they will be worthless by the time they expire which will leave you with the original cash profit. If however it may go higher than the strike price you will be at a loss when the price falls between the 2 strike prices. Be this as it may, the loss that was taken will be the difference between them due to the market price going above the highest strike price, and this call will grow in value while the call sold will not.
When you are selling a put spread this will mean that you both buy and sell a put option as a much higher strike price. This will cause you to have a surplus of cash after the profit made from selling the put at a higher strike price that what was paid for the lower strike price put. By the underlying security remaining above the both of the strikes then they will be worthless after expiring and you will be left with the initial cash being your profit. If however it may go higher than the strike price you will be at a loss when the price falls between the 2 strike prices. Be this as it may, the loss that was taken will be the difference between them due to the market price going above the highest strike price, and this put will grow in value while the put sold will not.
Both the put and call are hedges which will prevent any large amount of loss your position in case the security goes down or up. Now it is important that you don’t get greedy as some have and you don’t spend that money. With this type of spread you are selling both a put and call spread which are out of money. This way maximum profit is made from the security which would not go up to that lower strike price of the calls nor would is fall to the high striker price of the put.

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Options as a Strategic Investment

DavidF — Sat, 13 Mar 2010 06:25:48 +0000

In the ever changing market of today we all want to be able to ensure that our investments will perform very well no matter the scenario in the market. This can sometimes be a very difficult task when trading futures or stocks. For this we have the solution of options trading which is the financial instrument which will provide an investor or trader with limited risk, profit and flexibility that is needed to fully take advantage of any investment that may come your way. No matter if the market is bearish, bullish, choppy or even quiet option trading will increase the opportunity to make a substantial profit.

From since the CBOE first opened and allowed trading we have since then much evolved to broad and active markets. The standardization of expiration dates and strike prices has cleared the a way for maximum growth to follow.

Options today are now considered to be dieing assets. The depreciation rates are much faster than cars and shows that these stock options will soon to be worthless. To the disbelief of option players high risks does not always come with a high return. With this option they are only fooling themselves into believing the more that they put out there to lose the more in return they will receive. This is the total opposite of a smart option trader. To really have success in this business one has to be very careful with the decisions he or she is making. It a market at first glance seems to not be worth it may be a perfect stock option if proper analyze is done resulting in a gain and not a loss. If you were to buy stock which would be risky then it should not come as a surprise that it would be even more risky to sell. There can always be the possibility that you lose more money than what you put in, no trader would want to have this option hanging over his head.

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Monthly Trader Alert-March

DavidF — Fri, 12 Mar 2010 06:00:09 +0000

After a brief pullback at the beginning of last month, we’ve seen
the rally continue in the market.

Of course this much to the disappointment of people like me who
understand that the market is being manipulated, and is nowhere
even close to a reflection of reality.

Make no mistake about it. History has proven that the market will
correct itself. It’s not a matter of if, but when.

Nevertheless, we cannot allow our sentiment to dictate our trading.

We are also bearish long-term.

Yes we’re going to make a killing when the market goes down, but we
want to keep growing our portfolios in the mean time.

So we have to stick to the plan and manage our portfolios by the
numbers.

For today’s tip, we want to give you a bonus video.

It is a 32-minute video which was created as the “weekend review”
for the February 21st edition of the Daily Market Advantage.

This video covers the current market conditions,
but also provided some good insight into the mentality of retail
investors, and how it is playing into the market.

You can grab it here:

http://www.diversifiedoptionstrading.com/daily_DMA/sample0221.zip

(The zip file is 62MB)

Members of the Daily Market Advantage receive this kind of insight
EVERY trading day.

If you’re not yet a member you can get more info at:

www.diversifiedoptionstrading.com/go/DMA

In addition to the daily reviews, there will also be “mid-day updates”
from time to time, with valuable up-to-the-minute tips.

For example, today an update was posted at 11:39AM EST, at the exact
moment the market reached a high point (10,469… currently the
high of the day).

It said a short-term move lower was most likely about to start.

I am writing this an hour and a half later, and already it’s proven
to be a great day trade.

It also cautioned to be alert. As mentioned in last
night’s review, there’s a good chance we could go up to the 10,500
level on the Dow, and we won’t be sure of a further decline unless
we see a serious sell-off down to the 10,187 level.

Maybe you’re wondering how Dave in the video knew that the market was reaching a
temporary top at 10,469?

He knew it from his technical analysis (including the FIB
retracement, which is explained in the daily videos), as well as a
strong signal from his proprietary MarketDNA indicator.

If you do not own the MarketDNA indicator, you can check it out at:

www.diversifiedoptionstrading.com/go/MarketDNA

Best of trades.