Options are by nature a more complex investment than simply buying and selling stocks. For example, when you buy options, not only do you have to be right about the direction of the move, you also have to be right about the timing. Also, options tend to be less liquid than stocks. So trading them may involve larger spreads between the bid and ask prices, which will increase your costs. Finally, the value of an option is made of many variables, including the price of the underlying stock or index, its volatility, its dividends if anychanging interest rates, and as with any market, supply and demand. Option trading is not something you want to do if you just fell off the turnip truck. But when used properly, options allow investors to gain better control over the risks and rewards depending on their forecast for the stock. It seems like a good place to start: buy a call option and see if you can pick a winner. Many veteran equities traders began and learned to profit in the same way. However, buying OTM calls outright is one of the hardest ways to make money consistently in the options world. If you limit yourself to this strategy, you may find yourself losing money consistently and not learning very much in the process. Consider jump-starting your options education by learning a few other strategies, and improve your potential option earn solid returns as you build your knowledge. When you buy options, however, not only do you have to be right about the direction of the move, you also have to be right about the timing. Not surprisingly, though, these options are cheap for a reason. The price is relative to the probability of the stock actually reaching and going beyond the strike price. Therefore, the price of the option will reflect that probability. As your first foray into options, you should consider selling an OTM call on a stock that you already own. By selling the call, you take on the obligation to sell your stock at the strike price stated in the option. For taking on this obligation, you earn cash from the sale of your OTM call. The risk is actually in owning the stock - and that risk can be substantial. The maximum potential loss is the cost basis of the stock less the premium received for the call. Although selling the call option does not produce capital risk, it does limit your upside, therefore creating opportunity risk. In other words, you do risk having to sell the stock upon assignment if the market rises and your call is exercised. If the market remains flat, you collect the premium for selling the call and retain your long stock position. On the other hand, if the stock goes down and you want out, just buy back the option, closing out the short position, and sell the stock to close the long position. Keep in mind you may have a loss in the stock when the position is closed. As an alternative to buying calls, selling covered calls is considered a smart, relatively low-risk strategy to earn income and familiarize yourself with the dynamics of the options market. Selling covered calls enables you to watch the option closely and see how its price reacts to small moves in the stock and how the price decays over time. Option trading is remarkably flexible. It can enable you to trade effectively in all kinds of market conditions. But you can only take advantage of this flexibility if you stay open to learning new strategies. Buying spreads offers a great way to capitalize on different market conditions. All new options traders should familiarize themselves with the possibilities of spreads, so you can begin to recognize the right conditions to use them. A long spread is a position made up of two options: the higher-cost option is bought and the lower-cost option is sold. These options are very similar — same underlying security, same expiration date, same number of contracts and same type both puts or both calls. The two options differ only in their strike price. That means the net effect of time decay is somewhat neutralized when you trade spreads, versus buying individual options. The downside to spreads is that your upside potential is limited. Frankly, only a handful of call buyers actually make sky-high profits on their trades. Most of the time, if the stock hits a certain price, they sell the option anyway. So why not set the sell target when you enter the trade? An example would be to buy the 50-strike call and sell the 55-strike call. Even though the maximum potential gain is limited, so is the maximum potential loss. The maximum risk for the long call spread is the amount paid for the 50-strike call, less the amount received for the 55-strike call. There are two caveats to keep in mind with spread trading. First, because these strategies involve multiple option trades, they incur multiple commissions. Second, as with any new strategy, you need to know your risks before committing any capital. You should have an exit plan, period — even when things are going your way. You need to choose in advance your upside exit point and your downside exit point, as well as your timeframes for each exit. Trading with a plan helps you establish more successful patterns of trading and keeps your worries more in check. Whether you are buying or selling options, an exit plan is a must. Determine in advance what gains you will be satisfied with on the upside. Also determine the worst-case scenario you are willing to tolerate on the downside. If you reach your upside goals, clear your position and take your profits. If you reach your downside stop-loss, once again you should clear your position. The temptation to violate this advice will probably be strong from time to time. You must make your plan and then stick with it. Far too many traders set up a plan and then, as soon as the trade is placed, toss the plan to follow their emotions. All seasoned options traders have been there. Time decay, whether good or bad for the position, always needs to be factored into your plans. Close the trade, cut your losses, or find a different opportunity that makes sense now. Options offer great possibilities for leverage on relatively low capital, but they can blow up just as quickly as any position if you dig yourself deeper. Take a small loss when it offers you a chance of avoiding a catastrophe later. Simply put, liquidity is all about how quickly a trader can buy or sell something without causing a significant price movement. A liquid market is one with ready, active buyers and sellers at all times. Stock markets are generally more liquid than their related options markets for a simple reason: Stock traders are all trading just one stock, but the option traders may have dozens of option contracts to choose from. Stock traders will flock to just one form of IBM stock, for example, but options traders for IBM have perhaps six different expirations and a plethora of strike prices to choose from. More choices by definition means the options market will probably not be as liquid as the stock market. Of course, IBM is usually not a liquidity problem for stock or options traders. The problem creeps in with smaller stocks. Take SuperGreenTechnologies, an imaginary environmentally friendly energy company with some promise, but with a stock that trades once a week by appointment only. If the stock is this illiquid, the options trader SuperGreenTechnologies will likely be even more inactive. This will usually cause the spread between the bid and ask price for the options to get artificially wide. Trading illiquid options drives up the cost of doing business, and option trading costs are already higher, on a percentage basis, than for stocks. For example, to trade a 10-lot your acceptable liquidity should be 10 x 40, or an open interest of at least contracts. Any opening transactions increase open interest, while closing transactions decrease it. Open interest is calculated at the end of each business day. Trade liquid options and save yourself added cost and stress. There are plenty of liquid opportunities out there. This mistake can be boiled down to one piece of advice: Always be ready and willing to buy back short options early. If your short option gets way out-of-the-money and you can buy it back to take the risk off the table profitably, then do it. It pays to keep track of earnings and dividends dates for your underlying stock. This is especially true if the dividend is expected to be large. In order to collect it, the option trader has to exercise the option and buy the underlying stock. Impending dividends are one of the few factors you can identify and avoid to reduce your chances of being assigned. Earnings season usually makes options contracts pricier, for both puts and calls. Again, think of it in real-world terms. Options can work like protection contracts; they can be used to hedge the risk on other positions. Definitely when the weatherman predicts a hurricane is coming your way. The same principle is at work with options trading during earnings season. Just go in with an awareness of the added volatility and likely increased options premiums. You must know the ex-dividend date. First things first: If you sell options, just remind yourself occasionally that you can be option. Lots of new options traders never think about assignment as a possibility until it actually happens to them. Beginning traders might panic and exercise the lower-strike long option in order to deliver the stock. Then you can deliver the stock to the option holder at the higher strike price. Early assignment is one of those truly emotional, often irrational market events. It usually only makes sense to exercise your call early if a dividend is pending. The best defense against early assignment is simply to factor it into your thinking early. Otherwise it can cause you to make defensive, in-the-moment decisions that are less than logical. Sometimes it helps to consider market psychology. For example, which is more sensible to exercise early: a put or a call? Exercising a put, or a right to sell stock, means the trader will sell the stock and get cash. That means puts are usually more susceptible to early exercise than calls, unless the stock is paying a dividend. Exercising a call means the trader has to be willing to spend cash now to buy the stock, versus later in the game. Most experienced options traders have been burned by this scenario, too, and learned the hard way. Trade a spread as a single trade. Individual stocks can be quite volatile. For example, if there is major unforeseen news in one particular company, it might well rock the stock trader a few days. Trading options that are based on indices can partially shield you from the huge moves that single news items can create for individual stocks. Consider neutral trades on big indices, and you can minimize the uncertain impact of market news. Sudden stock moves based on news tend to be quick and dramatic, and often the stock will then trade at a new plateau for a while. Index moves are different: less dramatic, and less likely impacted by a single development in the media. Like a long spread, a short spread is also made up of two positions with different strike prices. But in this case the more expensive option is sold and the cheaper option is bought. Again, both legs have the same underlying security, same expiration date, same number of contracts and both are either both puts or both calls. The effects of time decay are somewhat reduced since one option is bought while the other is sold. A key difference between long spreads and short spreads is short spreads are traditionally constructed to not only be profitable relative to direction, but even when the underlying remains the same. So short call spreads are neutral to bearish and short put spreads are neutral to bullish. An example of a put credit spread used with an index would be to sell the strike put and buy the 95-strike put when the index is around If the index remains the same or increases, both options would remain out-of-the-money OTM and expire worthless. This would result in the maximum profit for the trade, limited to the credit remaining after selling and buying each strike. Bear this in mind when making your trading decisions. Connect with Andrew Hart as he discusses his three favorite ways to approximate short-term market reversals. Brian Overby discusses alternatives for managing your covered call when the trade goes in-the-money. This includes Join Nicole Wachs as she explains the three most important words in trading: Outlook, Outlook, and Outlook. Topics Options involve risk and are not suitable for all investors. Options investors may lose the entire amount of their investment in a relatively short period of time. Online trading has inherent risks due to system response and access times that vary due to market conditions, system performance and other factors. An investor should understand these and additional risks before trading. See our FAQ for details. The commission credit takes one business day from the funding date to be applied. Commission credit covers equity, ETF and option orders including the per contract commission. Exercise and assignment fees still apply. You will not receive cash compensation for any unused free trade commissions. Offer is not transferable or valid in conjunction with any other offer. Open to US residents only and excludes employees of TradeKing Group, Inc. TradeKing can modify or discontinue this offer at anytime without notice. Offer is valid for only one account per customer. Other restrictions may apply. This is not an offer or solicitation in trader jurisdiction where we are not authorized to do business. Quotes are delayed at least 15 minutes, unless otherwise indicated. Market data powered and implemented by SunGard. Company fundamental data provided by Factset. Earnings estimates provided by Zacks. Multiple-leg options strategies involve additional risks and multiple commissionsand may result in complex tax treatments. Please consult your tax adviser. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Investors should consider the investment objectives, risks, charges and expenses of mutual funds or exchange-traded funds ETFs carefully before investing. ETFs are subject to risks similar to those of stocks. Some specialized exchange-traded funds can be subject to additional market risks. All bids offers submitted on the Knight BondPoint platform are limit orders and if executed will only be executed against offers bids on the Knight BondPoint platform. Knight BondPoint does not route orders to any other venue for the purpose of order handling and execution. The information is obtained from sources believed to be reliable; however, its accuracy or completeness is not guaranteed. Information and products are provided on a best-efforts agency basis only. Please read the full Fixed Income Terms and Conditions. Fixed-income investments are subject to various risks including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. Any third-party content including Blogs, Trade Notes, Forum Posts, and comments does not reflect the views of TradeKing and may not have been reviewed by TradeKing. All-Stars are third parties, do not represent TradeKing, and may maintain an independent business relationship with TradeKing. Testimonials may not be representative of the experience of other clients and are not indicative of future performance or success. No consideration was paid for any testimonials displayed. Supporting documentation for any claims including any claims made on behalf of options programs or options expertisecomparison, recommendations, statistics, or other technical data, will be supplied upon request. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. Foreign exchange trading Forex is offered to self-directed investors through TradeKing Forex. TradeKing Forex, Inc and TradeKing Securities, LLC are separate, but affiliated companies. Forex accounts are not protected by the Securities Investor Protection Corp. Forex trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Before deciding to trade forex, you should carefully consider your financial objectives, level of investing experience, and ability to take financial risk. Any opinions, news, research, analyses, prices or other information contained does not constitute investment advice. Read the full disclosure. Please note that spot gold and silver contracts are not subject to regulation under the U. TradeKing Forex, Inc acts as an introducing broker to GAIN Capital Group, LLC "GAIN Capital". Your forex account is held and maintained at GAIN Capital who serves as the clearing agent and counterparty to your trades. GAIN Capital is registered with the Commodity Futures Trading Commission CFTC and is a member of the National Futures Association NFA ID TradeKing Forex, Inc. Open your TradeKing account today! For example, when you buy options, not only do you have to be right about the direction of the move, you also have to be right about the timing Also, options tend to be less liquid than stocks. Finally, the value of an option is made of many variables, including the price of the underlying stock or index, its volatility, its dividends if anychanging interest rates, and as with any market, supply and demand Option trading is not something you want to do if you just fell off the turnip truck. Many veteran equities traders began and learned to profit in the same way However, buying OTM calls outright is one of the hardest ways to make money consistently in the options world. Therefore, the price of the option will reflect that probability How can you trade more informed? Keep in mind you may have a loss in the stock when the position is closed As an alternative to buying calls, selling covered calls is considered a smart, relatively low-risk strategy to earn income and familiarize yourself with the dynamics of the options market. But you can only take advantage of this flexibility if you stay open to learning new strategies Buying spreads offers a great way to capitalize on different market conditions. All new options traders should familiarize themselves with the possibilities of spreads, so you can begin to recognize the right conditions to use them How can you trade more informed? That means the net effect of time decay is somewhat neutralized when you trade spreads, versus buying individual options The downside to spreads is that your upside potential is limited. The maximum risk for the long call spread is the amount paid for the 50-strike call, less the amount received for the 55-strike call There are two caveats to keep in mind with spread trading. You need to choose in advance your upside exit point and your downside exit point, as well as your timeframes for each exit What if you get out too early and leave some upside on the table? Trading with a plan helps you establish more successful patterns of trading and keeps your worries more in check How can you trade more informed? Take a small loss when it offers you a chance of avoiding a catastrophe later Mistake 5: Trading illiquid options Simply put, liquidity is all about how quickly a trader can buy or sell something without causing a significant price movement. More choices by definition means the options market will probably not be as liquid as the stock market Of course, IBM is usually not a liquidity problem for stock or options traders. Take SuperGreenTechnologies, an imaginary environmentally friendly energy company with some promise, but with a stock that trades once a week by appointment only If the stock is this illiquid, the options on SuperGreenTechnologies will likely be even more inactive. Open interest is calculated at the end of each business day Trade liquid options and save yourself added cost and stress. Impending dividends are one of the few factors you can identify and avoid to reduce your chances of being assigned Earnings season usually makes options contracts pricier, for both puts and calls. Definitely when the weatherman predicts a hurricane is coming your way The same principle is at work with options trading during earnings season. Then you can deliver option stock to the option holder at the higher strike price Early assignment is one of those truly emotional, often irrational market events. Otherwise it can cause you to make defensive, in-the-moment decisions that are less than logical Sometimes it helps to consider market psychology. That means puts are usually more susceptible to early exercise than calls, unless the stock is paying a dividend Exercising a call means the trader has to be willing to spend cash now to buy the stock, versus later in the game. Consider neutral trades on big indices, and you can minimize the uncertain impact of market news How can you trade more informed? Index moves are different: less dramatic, and less likely impacted by a single development in the media Like a long spread, a short spread is also made up of two positions with different strike prices. The effects of time decay are somewhat reduced since one option is bought while the other is sold A key difference between long spreads and short spreads is short spreads are traditionally constructed to not only be profitable relative to direction, but even when the underlying remains the same. So short call spreads are neutral to bearish and short put spreads are neutral to bullish An example of a put credit spread used with an index would be to sell the strike put and buy the 95-strike put when the index is around If the index remains the same or increases, both options would remain out-of-the-money OTM and expire worthless. Email What is Implied Volatility? Options: The Basics Related Strategies All-Star Analysis On-Demand Videos Options involve risk and are not suitable for all investors. Options investors may lose the entire amount of their investment in a relatively short period of time Online trading has inherent risks due to system response and access times that vary due to market conditions, system performance and other factors. This is not an offer or solicitation in any jurisdiction where we are not authorized option do business Quotes are delayed at least 15 minutes, unless otherwise indicated. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct Investors should consider the investment objectives, risks, charges and expenses of mutual funds or exchange-traded funds ETFs carefully before investing. Fixed-income investments are subject to various risks including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results Any third-party content including Blogs, Trade Notes, Forum Posts, and comments does not reflect the views of TradeKing and may not have been reviewed by TradeKing. No consideration trader paid for any testimonials displayed Supporting documentation for any claims including any claims made on behalf of options programs or options expertisecomparison, recommendations, statistics, or other technical data, will be supplied upon request All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. SIPC Forex trading involves significant risk of loss and is not suitable for all investors. Commodity Exchange Act TradeKing Forex, Inc acts as an introducing broker to GAIN Capital Group, LLC "GAIN Capital". Securities offered through TradeKing Securities, LLC, member FINRA and SIPC. Forex offered through TradeKing Forex, LLC, member NFA Options involve risk and are not suitable for all investors. Forex offered through TradeKing Forex, LLC, member NFA.
5 Option Strategies that Every Option Trader Should Know!
5 Option Strategies that Every Option Trader Should Know!
I lectured at Humboldt University in Berlin a few years ago, it was claimed that.
There are a number of ways to interpret the relationship between the townspeople and the minister.
Kusmanto, Robin Agung (2009) Modeling and simulation of an optimized wireless network in a Naval ship system of systems.