Option Strangle Magic » Online Options Trading

Online Options Trading â Portfolio Measures and Trade Performance Metrics

admin — Wed, 06 Jan 2010 21:52:50 +0000

The Reward of Profit and the Risk of Losses for retail option trading needs to be managed at 2 related levels of performance: Portfolio and Trade Specific.At the Portfolio level for online options trading, there are 3 types of Targets that must be set, even before you trade.Maximum Return Target: complete achievement of the âidealâ measure. Dream of the âidealâ that stretches you beyond what is practical. For example, earn 2-3 times your monthly living expenses with the monthly trading profit. This is to stretch your imagination well beyond mediocrity. Even if you fail, you just might end up with more than your original target.Minimum Return Target: the lowest acceptable measure, achievable under most conditions, excluding a catastrophic market event. Use the historical annualized return of the S&P 500 between 10%-12% (prior to the 2008 financial pandemic), as the lowest acceptable boundary.Â The S&P 500 being a widely accepted benchmark for trading equities is adequate to base the minimum target off, though your portfolio needs to be profitable â being ahead of the $SPX in negative territory does not count.Â Below the historical annualized return range of 10%â12%, is the 3 Month T-Bill, presently near zero.Â While the T-bill theoretically represents an âabsolutelyâ zero risk investment, even the safest investments will still carry a residual amount of risk no matter how small that risk is.Â The point is this.Â You got into options and all that Greek terminology, not to make salads; but to beat the performance of equities as an asset class.Â If your portfolio’s return is between what is near zero-risk and 10%â12% per annum, you are just delaying reaching a point of pain that marks failure in grasping the base-line ability to control risks.Â If the returns of your portfolio are between 0%â12% and you plan to continue trading options, processes within your trading process will need to be reâengineered.”Halt Trade” Target: cumulative losses reach an absolute amount below the Minimum Return, making it necessary to stop trading altogether for a stated period.Â 10% of [(60% x Cash Balance at the start of the year); or Net Liquidating Value].Â Example, for a $50,000 trading account, 10% x (60% x $50,000) = $3,000 of losses in total, is the absolute amount to halt trading.Â Why 10%? Blowing up your self-funded capital is final.Â There is no bail out package, as a home options trading business does not have access to bank loans; or, shareholdersâ equity to finance your personal trades.Now, drilling down to Trade Specific performance measures.Even before you calculate the metrics, characteristically, what makes for a consistently managed portfolio are these traits:

Where can I see this step up function in a consistently profitable portfolio, with these portfolio measures and trade performance metrics? Follow the link below, entitled âConsistent Resultsâ to see a model retail option traderâs portfolio that shows these traits.Moving onto the hard metrics.Â Thereâs 2 ways to count the Return on your trading capital.

In both cases, you can minus the Total Cost of Commissions from Total Profit, to get a Total Net Profit number.Â The, divide the Total Net Profit by the Start of Year Cash Balance; or, Net Liquidating Value.Â Net Liquidating Value is how much your entire trading account is worth, which is equal to Total Cash + Options Value + Stocks Value + Commodities Value + Bonds Value. The Start of Year Cash Balance is straightforward â it is the money in the account at the beginning of that trading year. Cash increases when you are short securities; but, cash decreases, as you get long on securities.To review your performance, calculate these metrics using the Profit (wins) and Loss (losers) from your account:

The Average Win divided by the Average Loss measures how RESPONSIVE you are in taking profits and cutting losses.Combine the Accuracy ratio with the Responsiveness ratio to get your Performance Ratio.Performance Ratio = (Win/Loss Probability) x (Average Win / Average Loss).Â Always aim to maintain the Performance Ratio above 1.00. Why?Â The commonly known money management rule is to allocate 2%-5% of (60% x Net Liquidating Value of the account) per trade.Â What is not commonly practiced is the discipline of moderating a +/- 1% in trade allocation between the 2%-5% allocation.

This is how to achieve a ladder effect in stepping up profits and stepping down losses. This mechanism of stepping up/down is an indispensable tool for rewarding profit and to discipline the risk of losses.Â It forces you to improve both ACCURACY and RESPONSIVENESS before raising your position size.

Where can I learn more about portfolio measures and trade performance metrics as part of a total trading system? Follow the link below, for 55 hours of video-based learning of online options trading from home.

What Is Options Trading?

admin — Mon, 28 Dec 2009 20:58:40 +0000

An option contract is an agreement between two parties to buy/sell an asset (In this case, the asset refers to stock) at a certain price and specific date.
It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.
There are two types of option contracts – Call options and Put options. A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.
A simple example: Peter buys a Call option contract from Sarah. The contract states that Peter will buy 100 Microsoft shares from Sarah on the 5th May for $25. The current share price for Microsoft is $30.
Note: this is an example of a Call option as it gives Peter the right to buy the underlying asset.
If the share price of Microsoft is trading above $25 on the 5th May, then Peter will exercise the option and Sarah will have to sell him Microsoft shares for $25. With Microsoft trading anywhere above $25 Peter can make an instant profit by taking the shares from Sarah at the agreed price of $25 and then selling the shares on the open market for whatever the current share price is and making a profit.
The $25 value, which is stated in the agreement, is referred to as the Exercise (or Strike) Price. This is the price at which the asset will be exchanged.
The date (in this case 5th May) is known as the Expiry (or Maturity) Date. This date is the deadline for the option contract. At this date, the option buyer is to decide if a transaction of the underlying asset is to occur.
Outcomes: Let’s imagine that at the expiration date, Microsoft is trading at $30, then Peter will buy the shares from Sarah at the agreed $25 and then he can sell them back on the open market for $30 and make an instant $5.
Alternatively, if Microsoft is trading at $20, then buying the shares from Sarah at $25 is too expensive as he can buy them on the open market for $20 and save $5. In this situation, Peter would choose not to exercise his right to buy the shares and let the options contract expire worthless. His only loss would be the amount that he paid to Sarah when he bought the contract, which is called the Option Premium – more on that a little later. Sarah would, however, keep the option premium received from Peter as her profit.
All in all, there are more than 50 strategies you can deploy in options trading by combining many different strike prices and expiration. But do you need to know all?
The good news is you do not have to!In fact, most of them allow you to make money very slowly or limited.

Online Option Trading – Make Your Fortune Today

admin — Sat, 26 Dec 2009 21:46:51 +0000

Online option trading fortune has become one of the most popular money makers among all forms of financial instruments available on the investment floor. Its high profitability has increased its popularity and is now considered the most common and preferred investment tool. Option trading online amounts to trillions of dollars being exchanged daily. This has made it the largest option trading market, larger than all other markets combined. Ironically this is the only option trading market that does not have a trading floor.
Online option trading deals with the trading of currencies. It is a big financial market where different national currencies are bought and sold in relation with other currencies. The trading in this market does not involve actual commodities like shares. The market exist base on the network of banks and the World Wide Web. The fact that it is easily accessible via the net and is thus available has been a big boost to the continuous growth.
Online trading offer the opportunity for option trading fortunes. You can increase your capital investment a hundred times over from the comfort of your home or offices if you have the necessary know how. Your cost of participation is very low as you don’t need expensive ads or to promote anything online. You don’t need a warehouse or even an office. All you really need is the knowledge and an internet connection.
The internet contains countless companies and site offering different online trading services. E-books, training, simulations are just a few. They even offer to sell specialized software or trading strategy. To begin you need to open a bank account with a broker, many of them are available on the net and some require as low as $400 as minimum balance. A key strategy is to buy when currency is at rock bottom, the prices rise almost by the seconds and that’s when you sell. Good forecasting, timing and business sense is needed.
Trading online does not necessary mean you have to watch the market every hour. You can set a desired selling price and the system would only sell if that price level is determined. These are obtained using specialized software. Like any venture with possibility for high returns their also exist a high possibility to lose too. The market is very volatile. It is up to the investor to seek how to minimize his risk and losses.
To be quite successful, speak to professionals, join forums and brush up your knowledge on economics. Listen to news around the globe as this affects the price variations. You must also have very sound money management. Know when to cut your losses.

Advantages and Disadvantages of At-the-money Option, In-the-money Option and Out-of-the-money Option

admin — Tue, 15 Dec 2009 21:52:58 +0000

An at-the-money option has both advantages and disadvantages over stock and in-the-money options. First, the at-the-money option will be cheaper then both the stock and the in-the-money option. So there is less capital requirement and less total risk.

Remember, when buying an option, you can only lose what you spend. The problem is the amount of extrinsic in the at-the-money option.

In order for you to profit from buying an at-the-money option, you need the stock to make a move very quickly. Because you have so much extrinsic value, you will be battling against the option?s daily rate of decay.

So, the movement of the stock must happen quickly enough and large enough to offset the amount of money you will be losing daily as expiration draws near.

With this said, the best chance you have to make money when buying a naked at-the-money option is to use it as a short term trade. The longer you hold onto this option, the harder it is for you to be profitable due to the options decaying extrinsic value.

At The Money Call vs. In The Money Call

An out-of-the-money option presents many of the same advantage & disadvantage parameters to the investor. The out-of-the-money option is even cheaper then the at-the-money option which means more leverage and less risk.

However, with a smaller delta, the stock must move much more than either the in or at-the-money options in order for the options to become profitable. Again, we need the option?s delta to outpace the option?s rate of decay.

Now, with the out-of-the-money option, there is less extrinsic value than the at-the-money option so the amount of total possible decay (cost of the option) and the rate of this decay is less than the at-the-money option.

By being further out-of-the-money, this option needs more movement from the stock. As a naked option, this out-or-the-money example is extremely speculative and should only be used naked when the investor feels there is a very good chance of a stock having a large percentage move.

An investor must understand that the odds of them profiting from the purchase of a naked out-of-the-money option is very slim. When purchasing a naked out-of-the-money option, be prepared to lose your entire investment.

Out of The Money Call vs. At The Money Call

Although options can be traded by themselves for directional plays, and can perform well under the right conditions, they are much better used in coordination with stock or other options in formatted strategies which will be discussed in the next section.

While buying naked calls and puts can provide some of the biggest leverage and highest returns, they can also involve the most risk. This strategy should only be used by experienced options traders or traders using risk capital.

Earn from Home by Investing in Online Options Trading

admin — Sun, 06 Dec 2009 23:51:29 +0000

One of the easiest ways to start earning at the comforts of your home is to invest in online options trading. Options trading would be similar to stock trading because buying and selling assets are involved. However, trading options is more versatile and involves fewer risks if you are a conservative trader. You can make this type of portfolio investing as a side job to augment your primary income. But if you find options trading too complicated and risky, then you can simply start an affiliate site and offer Overstock promo code for consumers. It is easy to start investing in online options trading. Basically, you have to find a reliable options broker first so you can create a trading account. When choosing a broker for options trading, you have to make sure that it can provide excellent customer support. Online options trading would be a little complex for the novice trader so you need all the help and support of your broker to start earning from the market. The broker should have several channels of communications like telephone support, email and live chat services. It must also provide regular tutorials and study modules so you can refine your skills in online options trading. It is also important to carefully scrutinize the trading platform of the broker. A reliable broker would be able to give different market charts so you can study the movement of the market. Your broker should be capable of quickly executing your market order and entering it into the market as options contract. These are the qualities that you need to find in a broker to ensure that your investments in the options market will become profitable. Of course, the costs of commissions being charged by the broker should also be considered. Your profit margin at the options market can be affected by the commissions taken by the broker. You have to understand that online options trading entail some risks. You can lose a lot from this type of investment if you are not careful with your trades. On the other hand, options trading can provide huge rewards especially if your open contracts will gain profits. If you want to avoid risks and want a home business that you can run easily, then you can simply offer Overstock promo code for consumers. Overstock is an online retail shop that sells discount items. It issues discount coupons to attract more buyers. If you become an affiliate, then you can offer Overstock promo code on your website so you can earn commissions from the online retailer giant. There are many ways how you can earn from the Internet. Establishing an online business can become very lucrative if you can manage it well. If you want big rewards, then you can start trading options and earn money from the market. This may be risky but it also has greater profit potential. You can also offer Overstock promo code if you want to avoid risks. Simply build your own site and drive consumers to the Overstock website.

Textbook Options Strategies or Real Options Strategies

admin — Tue, 01 Dec 2009 14:17:25 +0000

What is the difference? Some may shout.

There is indeed a very BIG difference. I used to search for options strategies all the time as I thought it will make me a better trader. But does it really help a trader to trade better?

My answer is Yes (30%) and No (70%). Most “options strategies” searches (both online or offline) normally lead to what I call the textbook strategies. Textbook strategies are those that you can find in the books from any bookstores or even FREE online. In case you do not know, there are more than 50 types of textbook options strategies in the market. They are like the “straddles, strangles, butterfly spread, calendar spreads, iron condor and whatsoever”.

The answer was a 30% Yes because it may help you adjust your trades at times and 70% No because in most cases, you don’t need them.

In the past, I used to want to know all the strategies but after mastering the 26th, I stopped. Because I start to realise that I use less than 5 of them to profit from the market. And the best part is, most of my trades are purely based on buying calls and puts contracts.

Whenever people ask, “if you are only trading calls and puts, why don’t you just stick to stocks?” And the questions usually come from the people who know many textbook strategies. But my answer is always simple. “Options trading offer me the leverage and flexibility that stocks cannot provide.”

And for me, I chose not to focus on all these textbook strategies and instead focus on real options strategies.

What are real options strategies? In another words, it is analysis. I prefer to just stick to the simple buy call and put contracts rather than to perform a complicated trade and end up paying more commission (although it is cheap).

I focus on studying the market movement, when to enter and when to exit. And once I have identify when to enter, I will just buy a call if I believe the market will continue going up or buy a put otherwise.

This way, I keep my trading as simple as possible so that I can use the rest of my time to accompany my loved ones. Isn’t that why you picked up or plan to pick up trading for? If yes, then keep things simple!

However, I am not asking you to just know how to buy calls and puts. There are some textbook strategies that will be useful for you and you may want to read on and understand. Those that I believe are useful are the spreads.

If you do not know what they are, go grab any options trading book and study debit and credit spreads. It will be useful for you if you wish to be on the road of options trading.

Remember; keep trading as simple as possible.

If you are in search for a real options strategy to add into your arsenal, then I recommend you my book, Huge Profits Options Trading with Simple Analysis.

This is a no nonsense or textbook strategy book. All the information presented in this book is about sharing with you how to study the market, when to enter and when to exit and take profits. Whether you are into stock or stock options trading, this book is for you.

Go to my website, www.BuyLowSellHighTips.com to witness the extraordinary stock options trading ebook that was personally written by me.

Options Trading – Calls and Puts

admin — Sun, 29 Nov 2009 10:23:18 +0000

Options are contracts on an underlying trading instrument such as shares of stock, bonds, a commodity, a mortgage loan and many others. However, there are common features among all options. It does not matter if it is a share of stock or a mortgage loan; they all have certain things in common. One such commonality is the contract feature that specifies what the option owner has actually contracted.
Options traders have two situations that may influence their buying and selling: calls and puts. There terms are used to indicate specific behaviors of options at various points of the option’s life.
CALLs
A call bestows on the contract holder the right to purchase an asset at a particular price on or before the option’s expiration date. This is only a right to buy, it is not an obligation. The call owner always has the choice to allow the option to expire. This does mean that all the initial money that was invested in purchasing the contract is lost, but the choice still stands.
Call buyers are gambling on the underlying asset’s behavior; that it will increase in price before it reaches its expiration date. Also that it will not only rise, but will rise significantly enough to show a profit.
In order to show a profit, the price must rise enough to cover the difference between the market price and the strike price. The strike price is that price at which the stock must be bought. But, because the option has a cost attached to it, the price must exceed that amount enough to cover the additional amount. This cost is referred to as the premium.
The premium of an option, whether call or put, is determined by a variety of elements. These include, but are not limited to, the price of the underlying asset, the strike price and the time remaining on the option.
The time remaining on an option is vital. The shorter the time remaining, the greater the risk and vice versa. For example, if there are 90 days left to exercise an option, the risk is somewhat lower than if there was only 1 day left. This is because within that 90 day period the price could rise enough to show a profit. With just 1 day remaining, however, the odds are considerably lower.
For example, on April 1, MSFT (Microsoft) has a market price of $27. Call options for June 30 are selling for $3 with a strike price of $30. One contract for 100 shares is purchased.
If the contract is held until the expiration date, the trader either loses $300 ($3 X 100, the initial price of the contract not including commission) or the trader can purchase the underlying stock at $30. If the current market price was $35, then the trader has profited by $200 ($35 – ($30 + $3) = $2 per share X 100 shares, sans commission).
When the market price of a share rises above the strike price, the option holder is “in the money.” If the market price drops, then the holder is “out of the money.”
PUTs
A put gives the option buyer the right to sell an asset at a particular price by a specified date. Again, like a call, this is a right, not an obligation.
Put buyers are anticipating the stock prices to fall before the option’s expiration date. Therefore, in such cases, the market price must drop below the strike price in order to show a profit from exercising the option. For simplicity purposes, the cost of the put is ignored. Under those circumstances the option holder is in the money.
Still using the previous example, maintain the same situation, but this time the option is a put. If the market price falls to $25, the profit would be as follows:
First, $3 x 100 = $300 = Cost of put, excluding commissions.
Purchase 100 shares at $25 per share = $2,500 this is to repay the broker ‘loan’ (this broker loan is a part of shorting stock which is borrowing shares you don’t own, then repaying later).
Sell 100 shares at Strike price = $30, 100 x $30 = $3,000
Profit = ($3000 – $2500) – ($300) = $200.
It is the broker who handles the underlying mechanics. All the investor has to do is order the trades at a given time and date.
Wise investors do their homework and research their strategies, no matter if they are investing in calls or puts. Options trading does present risks and is rather complicated when compared to simple stock trading, although all trading contains an element of complication and risk. But investors in this line should study the history, volatility and other vital factors of both the option contract and the underlying asset.
A trader should never enter the market blindly and trade without doing the proper research first. The failure to do adequate research and go into the trade informed puts the trader at a must greater risk of losing money and not showing a profit.