You probably have been told that options are risky. Even worse, that you can lose your shirt trading them!

Well, what is the truth?

Let’s take a look at stock ownership. What can happen if you buy stock?

The price can go up.

The price can go down.

The price can go sideways.

In the first case, you can make money. In the second you lose money.

And in the third case you don’t directly win or lose but in fact it costs you money in two ways. The direct cost of brokerage and fees. And the indirect cost known as opportunity cost.

This is the cost due to lost opportunities. The fact that you aren’t able to be involved in other, potentially profitable trades.

So if you purchase stock you can only make money if the stock price goes up.

Now some of you may be thinking, “But what about shorting?”

Well yes, short selling stock is possible but it is quite a tricky strategy and has almost unlimited risk so it is certainly not an approach we recommend.

You see, when you short a stock, you actually sell a stock that you don’t own. And your intention is to then buy the stock back at a lower price. The price difference is your profit per share.

But can you see what the problem is here?

Well what happens if the stock price goes up? Particularly if it goes up a lot?

As you have sold the stock at a lower price you now have to buy it back at a higher price. And so your loss can be substantial.

So, to summarize, when you trade stock you can really only make money if the price increases.

Now there is one other aspect to this that I want to address. And this is that owning stock is expensive!

If you purchase 100 shares of a $50 stock it will cost you $5000. And if you buy it on margin it is still $2500.

That is a lot of money to outlay. And, more importantly it is a lot of money to put at risk. Especially seeing that you only have a one in three chance of the stock moving in the right direction.

Plus as stocks don’t trend all that often you not only need to pick the right direction, you also need to be able to pick the right time.

So stock trading is not that easy. And it’s expensive.

But options provide a great alternative.

For a start you only have to invest about 2% of what the stock was worth and yet you still control the same 100 shares.

So in the example above, instead of investing $5000, we might only have to outlay $100.

Plus, if you select the right strategy, you can profit no matter whether the stock price goes up; goes down or even goes sideways!

And finally, your risk is limited. The maximum you can lose is the amount you put into the trade. So in the example above - $100.

But the best thing of all is the leverage that options provide.

In the above example, if the stock price goes up by $5, the profit on the stock trade would be 10% or on margin, 20%.

But with this increase in stock price the value of the option might increase by 100%. And so the profit on the trade would be 100% - or ten times that of the straight stock trade.

So don’t just accept the common view that owning stock is safe and trading options is dangerous.

If you understand options and learn how to trade them they can be a great investment vehicle.

David Chandler

http://www.StockMarketGenie.com
http://stockmarketgenie.blogspot.com/

Ordinary People Making Extraordinary Profits!

The above comments are offered for educational purposes only. We are not providing you with financial advice. We are simply sharing with you what has and hasn’t worked for us personally. If you wish to trade or invest in the stock market you should obtain advice from a registered licensed advisor.

Options trading can increase the profits you make when trading Stocks if you understand how to use them and know what you are doing. Options can be a very useful tool that the average investor can use to enhance their returns.

This article - Options Trading Basics, looks at what options are and discusses some of the options trading strategies traders can use with these versatile instruments.

Options - An Overview

Options give the buyer the right, but not the obligation, to buy (a call option) or sell (a put option) the underlying Stock or futures contract at a specified price up until a specified date.

In other words, options are like tradable insurance contracts.

An investor can purchase a Put option as insurance against a decline in the Stock price or a Call option in case the Stock rises. Buying an option gives the purchaser time to decide whether they will buy or sell the underlying Stock. The price is locked in until the expiry date, which in the case of LEAPS can be years into the future.

Options trading has several advantages that every Stock Market investor should be aware of, such as high leverage, lower overall risk than owning the physical security, more versatility and the ability to generate extra income from a current Stock portfolio.

An option’s value fluctuates in direct relationship to the underlying security. The price of the option is only a fraction of the price of the security and therefore provides high leverage and lower risk - the most an option buyer can lose is the premium, or deposit, they paid on entering into the contract.

By purchasing the underlying Stock of Futures contract itself, a much larger loss is possible if the price moves against the buyers position.

An option is described by its symbol, whether it’s a put or a call, an expiration month and a strike price.

A Call option is a bullish contract, giving the buyer the right, but not the obligation, to buy the underlying security at a certain price on or before a certain date.

A Put option is a bearish contract, giving the buyer the right, but not the obligation, to sell the underlying security at a certain price on or before a certain date.

The expiration month is the month the option contract expires.

The strike price is the price that the buyer can either buy call) or sell (put) the underlying security by the expiration date.

The premium is the price that is paid for the option.

The intrinsic value is the difference between the current price of the underlying security and the strike price of the option.

The time value is the difference between current premium of the option and the intrinsic value. The time value is also influenced by the volatility of the underlying security.

Up to 90% of all out of the money options expire worthless and their time value gradually declines until their expiry date.

This clue offers traders a very good hint as to which side of an options contract they should be on…professional options traders who make consistent profits usually sell far more options than they buy.

The option contracts that they do buy are usually only to hedge their physical Stock Portfolios - that this is a powerful distinction between the punters and small traders who consistently buy low priced, out of the money and close to expiry puts and calls, hoping for a big payoff (unlikely) and the guys who really make the money out of the options market every month, by consistently selling these options to them - please think about this as you read the remainder of this article.

The seller of the option contract is obligated to satisfy the contract if the buyer decides to exercise the option.

Therefore, if he has sold Covered Call options over his Shares, and the Stock price is above the option strike price at expiry, the option is said to be in-the-money, and the seller must sell his shares to the option buyer at the strike price if he is exercised.

Sometimes an in-the-money option will not be exercised, but it is very rare. The option seller (or writer) has to be prepared to sell the Stock at the strike price if exercised.

He can always buy back the option prior to expiry if he chooses to and write one at a higher strike price if the Stock price has rallied, but this results in a capital loss as he will usually have to pay more to buy the option back than the premium he received when he originally sold it.

Many option writers simply get exercised out of the Stock and then immediately re-buy more of the same or another Stock and simply write more call options against them.

The buyer of an option has no obligations at all - he either sells his option later at a profit or a loss, or exercises it if the Stock price is in-the-money at expiry and he can make a profit.

The vast majority of options are held until expiry and simply decay in price until there is no point in the hapless buyer selling them. Very few options are actually exercised by the buyer. The vast majority expire worthless.

Having said all this, lets look at an example of how to use options to gain leverage to a Stock price movement when the trend does go in our favour…

For this example we will use MSFT as the underlying security. Let’s assume MSFT is trading for $24.50 a share and it is early January. We are bullish on this Stock and based on our technical analysis we think that it will go to $27.50 within two months.

In this example, we will ignore Brokerage costs, but they do have an effect on the percentage returns. The prices and price moves of the Stock and the options are hypothetical - they are intended as a guide only.

Buying 1000 physical shares will cost $24,500 and if we sell our position at $27.50 a share, we will make a profit of $3,000 or a 12% return on our capital. We will have $24,500 at risk if we take this position for a potential of 12% or $3,000 profit.

Instead of using cash to buy the physical Stock, we can buy 10 call options with an expiration that is at least three months into the future and a strike price that is close to current price of the underlying security.

10 contracts represents 1000 shares of the stock, a call option is bullish, three months until expiry gives us some time for a quick move, and buying an option with a strike price that is close to the current price of MSFT allows us to get the full potential of the intrinsic value.

We buy 10 MSFT $22.50 April Call options. These options are currently selling for $2.80 and they are in the money.

$24.50 (the current price of the Stock) minus $22.50 ( the strike price) is $2.00, which is our Intrinsic value. $2.80 (the option premium) minus $2.00 (the Intrinsic value) gives us $0.80, which is the Time value.

If the price rallies to $27.50, as we believe it will, the intrinsic value of these same options at that point will be $5.00 ($27.50 - $22.50). That means that if the Stock gets to $27.50 a share, our option premium would be at least $5.00 plus a small amount of time value, depending on the remaining time until expiry.

Ten option contracts will cost us $2,800 ($280 times 100) and if MSFT goes to $27,500, we could sell our option contracts for at least $5,000 ($500 by 10 contracts), maybe more.

We will have $2,800 at risk if we take this position, rather than the full price of the Stock ($24,500) for a potential of 80% or $2,200 profit, plus whatever time value is left in the option, probably another $100.

Our options buying strategy gave us a much larger percentage profit with a much smaller potential risk. Don’t forget though that, for us as the buyer, these options will expire worthless if not sold or exercised by the expiry date.

The option seller or writer simply has to sit back and wait until expiry to see if he is going to be exercised. If the Stock price is below the strike price at expiry, he keeps the premium and can write another option over the same Stock.

If the Stock price is above the strike price, he will most likely be exercised and will have to sell his Shares if he doesn’t exit the position by buying his options back on the open market (quite often at a higher price than he originally sold them for).

The downside of buying the option over the physical Stock is that if you bought the Stock itself, even if the price had not moved, you would still own it, but by buying the option, if the price doesn’t move in the desired direction, you lose part of your trading capital.

To make options trading work, the underlying security must move fairly quickly in the direction you expect, or you will lose money at an ever increasing rate as the expiry date draws nearer.

As you can see, options strategies can offer much higher percentage returns with less risk for the same trade. The majority of your cash is still safely in your trading account rather than being exposed to the market.

This is just one example of using options trading to increase your Stock Market returns. There are many more strategies and ways to use options and I encourage you to explore them further.

All options expire worthless if they are not in-the-money at expiry, so the buyer must close out or exercise his position on or before the expiration date or he will lose the entire premium.

The time value portion of the option premium decreases gradually until expiration date. The closer to expiry, the faster the time value reduces, as there is less time for the option to move in the desired direction for the buyer.

For buyers, top traders advise never to hold an option with less than 30 days to expiry due to the exponential rise in time decay during this period.

For sellers, it is usually most profitable to write options that have 30 days or less to expiry, due to this same time decay effect…the buyer of these options has the odds stacked against them and will require a large price movement in his desired direction to make a profit - remember, the vast majority of options expire worthless - so this is the side of these instruments the wealthy usually find themselves on - just a thought…

There are many other intricacies of options trading that investors and traders should be aware of. This article is only an introduction to options trading and there is a lot more information for you to learn.

For a more in-depth look at the various Options strategies available, visit AcornTrader.com.

This page has a series of articles on options trading and outlines some of the strategies traders can use to profit from these extremely flexible vehicles.

We encourage you to study these instruments carefully if you decide to trade them. Then use the trend trading strategies outlined in these stories and articles to position yourself on the right side of the market - whether as a buyer or a seller.

To Your Trading Success,

Tony Spann and Stock Trading Review Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

Copyright(C)2005 Stock Trading Review

Sidney felt sick as she looked at her latest OptionsXpress trading statement. In just 8 months, she had managed to turn her $120,000 account balance into less than $70,000.

Tears welled up in her eyes as she realized that the financial freedom she so desperately sought was slipping uncontrollably out of her grasp. For the first time since the accident, she felt desperately fearful of the future.

How would she be able to keep custody of her two young children, Paul and Sara, without an income once the money was gone? She just knew her violent ex-husband, Tom, would file for custody as soon as he discovered that she had no way of providing for her children, and then she would be on her own. Her situation seemed hopeless…

12 months earlier, she had received a compensation payment for a work related accident and at the time had no idea of what to do with the money.

Her injuries were so severe that the likelihood of her working again in the near future was slim at best. She needed financial advice, but who to turn to, she had no idea.

A well meaning friend had mentioned an options trading course he had attended and suggested that trading might be a way for Sidney to earn above average returns on her compensation payment money, as interest and dividends would not be able to provide enough income for the family to live on.

She thought about it for several weeks, $5000 was a lot of money to put up to learn something that seemed totally foreign to her. Her other friends, when asked for their advice, warned her not to even consider options trading - it was a casino and everyone who ventured there lost their shirt.

The thought of extra returns however was too much for her, so she signed up for an upcoming course and hoped she could learn enough to succeed where so many others had failed.

The weekend course came and went in a blinding flash of trendlines, moving averages, support and resistance and Bollinger bands. She didn’t know what had hit her.

At home the following day, she sat and stared at the course materials and was more confused than ever about options and spreads, puts and calls.

She looked at her two young children as they slept peacefully and decided that she simply HAD to get this right - she could see the potential - the course presenter had shown them trading statements showing profits of up to $25000 on a single trade, and no losses, so it was possible.

For the next two weeks, she read and re-read the course notes and listened to the CD’s of the event she had received in the post after shelling out another $1400 at the seminar for them.

It finally started to make some sense for her one Saturday afternoon when her seven year old daughter looked at the chart she had on her computer screen and said, "That line is going up, Mommy, what is it?"

She looked into her young child’s eyes and smiled, thinking "How simple was that?" She had just written out a trading plan for a put option trade based on her analysis of that very chart - she thought the price would go down; how wrong would she have been?

She stared at the chart for several long minutes and then she saw it.

She had been told that the safest place to buy put options was on the first lower top - at the start of a downtrend. However, she also had been told to place a 30 day simple moving average on the chart and never to trade against the direction of that indicator. The Stock had made a lower top, but the trend was still up.

These two conflicting filters had confused her until now. She re-read her notes and found that she must never trade against the direction of the 30 day moving average.

She felt like she had discovered the Holy Grail of trading.

She went back over her charts and looked at the 30 day moving average on each one - in all cases, that had been the trend direction and it just kept going - she had been trading against the trend! If she went with it she would be raking in the profits in no time.

Armed with this new insight, she decided that she would take the next trade that presented itself with real money and she was sure she was on her way.

The opportunity duly presented itself. She bought 10 (no use starting small) MSFT (Microsoft Corp) July Calls for $1.12, a total outlay of $11,200 plus commission.

The Stock promptly fell for three days straight. She panicked and sold the options at what turned out to be the low of the third day for $0.38 cents - a loss on her first trade of $7500! She was shattered. The next day, the Stock rallied and within two days it was at a new high for the move.

What had happened? She had sold at the very low of a reaction to the main trend. How could she have been so stupid?

She watched as the option premium quickly rose to $2.14 without her. This movement consumed her completely and she didn’t even bother looking at her other watchlist Stocks - she was mesmerized by the one that got away.

The Stock continued to climb, as did the option premium - $2.85, $3.41, $3.82. Each day she watched as it doubled, then tripled her original stake. She cried - why?

It seemed the trend was going to continue forever, so she decided to get over it and buy some calls at the bottom of the next 3 day reaction - yes, that was it.

The Stock was having reactions of 2 and 3 days, so at the end of the next one, she would buy calls and make her lost money back.

That week, the price of MSFT started to come off a little, and had three big days down.

She bought 20 MSFT calls (well she had to get her money back, didn’t she?) at a much higher strike price than the last ones and paid $1.31 for them, expecting the rally to come the next day.

Overnight, the US market fell 4% after terrorists attacked a Government building and threatened more similar attacks in the weeks and months that followed.

Sidney woke up to see the carnage in the US Stockmarket and just knew it was going to be a bad day.

MSFT opened down $1.30 along with the general market. Her call options were bid at $0.40 cents.

She remembered the last time this happened - she had sold in a panic. This time, she decided to hold on for a better price. The Stock continued to fall. The rally never came this time - the season had changed in the Stock Market.

Sidney held those options all the way to expiry - to zero, because she didn’t have the stomach to take another loss like the last one. In two trades, she had lost over a quarter of her compensation payment. Things looked grim.

Her trading continued on for the next few months in much the same way. Small profits, large losses.

She frequented the trading forum of the group that had held the seminar but couldn’t find any answers there either - most of the traders who posted comments were in the same boat.

Her friends kept saying "I told you so!" so she stopped hanging around with them. She was consumed with getting this thing right and nobody was going to stop her.

Then came that fateful day when she opened her monthly Options Account statement and saw the account balance had dipped below $70,000.

She wept uncontrollably for hours that day. She had failed. Her kids would be taken away by her ex husband and there was nothing but black for as far as she could see into the future - her life looked bleak.

In the midst of this horrible experience, her 12 year old daughter came home from School and found her mother in tears. "What’s wrong mom?" her daughter asked. "Oh, this option trading will be the death of me darling," Sidney sobbed.

"Why, what’s happened?" Sara asked. "Every time I buy an option, it goes down in value," her mother answered. "Who do you buy the options from, mum?" Sara asked after some thought. "Other traders," Sidney answered.

Then Sara said the most profound thing Sidney had ever heard a child say, "Mom, it sounds like those other traders are getting the best deal, and you are getting ripped off. Why don’t you do what they do?"

Sidney was about to explain why she was an option buyer instead of a seller, but stopped mid thought when she realized the power of what her daughter had just said.

Of course, every option that she had ever bought and then sold at a loss had made a profit for the seller, at her expense. She was speechless…

She had to change her strategy - immediately! She would become a writer of covered calls and sell options to others.

The next day, she went to the library and found three books on option writing and studied them cover to cover. It was simple…she would become an option writer and take the profits from the punters expecting extraordinary profits that rarely came.

To do this, she would start buying Stocks and writing covered calls over them. But which ones. She studied the pages of Investors Business Daily, looking for the options with the highest volatility, because she knew from her studies that she had to sell high volatility options to get good premiums.

She also wanted a low Stock price so she could buy more than a couple of thousand of them to minimise the effects of Brokerage fees on her profits.

The US options market appeared to be a goldmine for sellers because so many Stocks tended to hold strong trends, while still offering good premiums for their options - apparently many traders expected the trend to change every day, therefore bidding up the prices of options that were clearly not going to make them a profit if the trend continued - Sidney would use this to her advantage.

After careful study and several weeks of research on the Internet, Sidney chose one Stock to focus her initial attention and looked for a buy point.

Please Note - the following example is for illustration purposes only and does not constitute a recommendation to buy the Stock mentioned or any other Stock for that matter - please do your own research before undertaking any investment strategy mentioned - we cannot give you investment advice.

She waited for the trend to turn up, and bought 2000 Airtran Holdings (AAI) at $4.30 in January 2003 as the Stock had appeared to start a strong rally. The charts below show the trades Sidney took in this Stock. (Charts available at StockTradingReview.com)

She wrote (sold) 20 January $5.50 strike call options (one option contract covers 100 Shares) and received $440 after Brokerage.

Three weeks later, the Stock was trading at $6.00 (point 2). The options were exercised, as they were in-the-money at expiry and Sidney was forced to sell her Stock at the strike price of $5.50, netting herself a capital profit of $2400 plus the option premium of $440, a total of $2840 for three weeks or around 33% on her invested capital for the period!

She was hooked. "That was more like it," she thought.

She immediately bought 3000 more AAI and wrote 30 February call options with a strike price of $7.00. She received a total premium of $670.

The Stock price basically tracked sideways for that month, and the options expired worthless (point 3). "AHA," the light was coming on for her.

"That used to be me," she thought to herself, as she called the Broker and sold another batch of $7.00 strike price options, this time for March expiry. Another $680 was deposited into Sidney’s trading account. "Every little bit helps," she thought.

The Share price rallied during March, but come expiration day, AAI again failed to close above $7.00. The options expired worthless and Sidney again kept the premium (point 4).

Sidney’s total profit so far was $4190. And it had only taken her a few minutes a month to earn this income. "How long had this been going on," she thought to herself.

The buyers of all those options had to sweat out weeks of time decay only to receive a small profit in one case or a loss at the end of the time. "That used to be me!"

She decided to increase her stake, and purchased an additional 3000 AAI Shares at $6.85 at the beginning of April (for a total of 6000 shares). She then wrote 60, $8.00 strike price call options for a total premium of $1240, and then just waited for expiry.

On the day of expiry, the Stock price closed at $7.85 (point 5) - she again kept the all the premium and the buyers of those options lost all of their stake.

For May, Sidney sold 60 more call options at a strike price of $9.00 as the Stock continued to rally.

Her premium income was $1195. The Stock price moved sideways for the month and the options again expired worthless. (Charts available at StockTradingReview.com)

Sidney bought another 2000 AAI in June and wrote 80 $9.00 call options. Her premium income was $1585. She sold her call options a long way above the market because it looked like the trend was accelerating and she didn’t want to leave too much profit on the table by selling them too low.

During the month, the Stock did indeed rally strongly and closed on the day of expiry at $10.47 (point 6). Her call options were exercised and she received a total of $72000 from the sale of her Stock.

For July, she immediately reinvested this amount plus a little of her own funds and again bought 8000 AAI and wrote 80 call options with a strike price of $12.00.

She wrote a higher strike price this time around because the trend appeared to be accelerating and she didn’t want to miss out on too much capital growth if it continued to rally.

Her premium income was much less this month, due to the options being further out-of-the-money than previously.

She only received $650, but with the trend accelerating, she was confident that she would be exercised and stood to make a good capital gain if she was right. The price didn’t quite make it, closing at $11.83 on the day of expiry (point 7)…

She continued to buy more AAI Stock and write call options during August and September. Her total profits and premium income from trading this one Stock and strategy have made back nearly three quarters of her losses from the previous 8 months. Plus, she now had a good income to live on. Her children would be able to stay with her and the future looked much brighter.

The Stock continued to climb in price to above $20 and Sidney rode it all the way, writing call options over her ever increasing portfolio. When the trend eventually changed, she sold this Stock and moved on.

Sidney can now confidently continue to build on this initial success using other Stocks that are rising in price. There is a large universe of Stocks that are both optionable and often trend strongly, which give traders huge opportunities to profit from this strategy.

There are of course some ground rules to follow, but the fact that 85% or more of out-of-the-money options expire worthless puts the balance of probability on the side of the writer rather than the purchaser in most instances.

Some things to consider are -

1) When considering writing covered calls, always buy Stocks that are trending higher - if the 30 day moving average is rising and the price bars are above it, the trend is currently up - that doesn’t mean it’s going to continue in that direction but you will be trading with the balance of probability.

2) Always have a stop loss order in the market in case the trend reverses and you have to exit the Stock. You will have to buy back your sold call options prior to selling the Stock as the Shares are held as security by your Broker.

3) Start off slowly and build your position over time. Continue to look for covered call writing candidates and switch Stocks if you find something better than the ones you are currently trading.

I trust this example has given you an insight into writing covered calls. It is often a lower risk strategy than straight buying Stocks or options. It can provide a great income stream for people to live on or to build wealth for the future.

To Your Trading Success,

Tony Spann and the Stock Trading Review Team

Stock Trading Review is dedicated to helping you succeed as a trader by sharing with you simple and easy to follow tips and techniques.

Discover more insider secrets and the exact proven strategies to trade stocks profitably: http://www.stocktradingreview.com

Copyright(C)2005 Stock Trading Review

Spread trading is a technique that can be used to profit in bullish, neutral or bearish conditions. It basically functions to limit risk at the cost of limiting profit as well.

Spread trading is defined as opening a position by buying and selling the same type of option (ie. Call or Put) at the same time. For example, if you buy a call option for stock XYZ, and sell another call option for XYZ, you are in fact spread trading.

By buying one option and selling another, you limit your risk, since you know the exact difference in either the expiration date or strike price (or both) between the two options. This difference is known as the spread, hence the name of this spread treading technique.

VERTICAL SPREADS

A Vertical Spread is a spread where the 2 options (the one you bought, and the one you sold) have the same expiration date, but differ only in strike price. For example, if you bought a $60 June Call option and sold a $70 June Call option, you have created a Vertical Spread.

Let’s assume we have a stock XYZ that’s currently priced at $50. We think the stock will rise. However, we don’t think the rise will be substantial, maybe just a movement of $5.

We then initiate a Vertical Spread on this stock. We Buy a $50 Call option, and Sell a $55 Call option. Let’s assume that the $50 Call has a premium of $1 (since it’s just In-The-Money), and the $55 Call has a premium of $0.25 (since it’s $5 Out-Of-The-Money).

So we pay $1 for the $50 Call, and earn $0.25 off the $55 Call, giving us a total cost of $0.75.

Two things can happen. The stock can either rise, as predicted, or drop below the current price. Let’s look at the 2 scenarios:

Scenario 1: The price has dropped to $45. We have made a mistake and predicted the wrong price movement. However, since both Calls are Out-Of-The-Money and will expire worthless, we don’t have to do anything to Close the Position. Our loss would be the $0.75 we spent on this spread trading exercise.

Scenario 2: The price has risen to $55. The $50 Call is now $5 In-The-Money and has a premium of $6. The $55 Call is now just In-The-Money and has a premium of $1. We can’t just wait till expiration date, because we sold a Call that’s not covered by stocks we own (ie. a Naked Call). We therefore need to Close our Position before expiration.

So we need to sell the $50 Call which we bought earlier, and buy back the $55 Call that we sold earlier. So we sell the $50 Call for $6, and buy the $55 Call back for $1. This transaction has earned us $5, resulting in a nett gain of $4.25, taking into account the $0.75 we spent earlier.

What happens if the price of the stock jumps to $60 instead?

Here’s where the - limited risk / limited profit - expression comes in. At a current price of $60, the $50 Call would be $10 In-The-Money and would have a premium of $11. The $55 Call would be $5 In-The-Money and would have a premium of $6. Closing the position will still give us $5, and still give us a nett gain of $4.25.

Once both Calls are In-The-Money, our profit will always be limited by the difference between the strike prices of the 2 Calls, minus the amount we paid at the start.

As a general rule, once the stock value goes above the lower Call (the $50 Call in this example), we start to earn profit. And when it goes above the higher Call (the $55 Call in this example), we reach our maximum profit.

So why would we want to perform this Spread?

If we had just done a simple Call option, we would have had to spend the $1 required to buy the $50 Call. In this spread trading exercise, we only had to spend $0.75, hence the - limited risk - expression. So you are risking less, but you will also profit less, since any price movement beyond the higher Call will not earn you any more profit. Hence this strategy is suitable for moderately bullish stocks.

HORIZONTAL SPREADS

We now look a Horizontal Spreads. Horizontal Spreads, otherwise known as Time Spreads or Calendar Spreads, are spreads where the strike prices of the 2 options stay the same, but the expiration dates differ.

To recap: Options have a Time Value associated with them. Generally, as time progresses, an option’s premium loses value. In addition, the closer you get to expiration date, the faster the value drops.

This spread takes advantage of this premium decay.

Let’s look at an example. Let’s say we are now in the middle of June. We decide to perform a Horizontal Spread on a stock. For a particular strike price, let’s say the August option has a premium of $4, and the September option has a premium of $4.50.

To initiate a Horizontal Spread, we would Sell the nearer option (in this case August), and buy the further option (in this case September). So we earn $4.00 from the sale and spend $4.50 on the purchase, netting us a $0.50 cost.

Let’s fast-forward to the middle of August. The August option is fast approaching its expiration date, and the premium has dropped drastically, say down to $1.50. However, the September option still has another month’s room, and the premium is still holding steady at $3.00.

At this point, we would close the spread position. We buy back the August option for $1.50, and sell the September option for $3.00. That gives us a profit of $1.50. When we deduct our initial cost of $0.50, we are left with a profit of $1.00.

That is basically how a Horizontal Spread works. The same technique can be used for Puts as well.

For more information on spread trading, visit: http://www.option-trading-guide.com/spreads.html

Steven is the webmaster of http://www.option-trading-guide.com. If you would like to learn more about Option Trading or Technical Analysis, do visit for various strategies and resources to help your stock market investments.

Let’s assume that you want to make some serious money and you have chosen to take things into your own hands rather than depend upon a "professional trader" to make your trading decisions. This is usually only recomended if you can afford to lose the money that you are trading with, and you appreciate the fact that there is much more upside potential with this added risk. In any case, you have decided on 3 stocks that you like and are now at your computer ready to purchase them.

Before you decide to get into the market, you will want to do some research. Determining a good time to get into the stock market is very hard, but it can also be one of the most important decisions you make. When traders get carried away and think too optimistically, the market gets over valued and it is ripe for a downturn. After that downturn is when you want to enter the market. Once believe that time is now, the next step is to sign up for a online brokerage account. Then, you will want to choose at least 3 stocks from different sectors of the stock market. Perhaps you like Genentech- DNA or Phizer - PFE as a drug stock, google - GOOG or intel - INTC as a tech stock, and Exon Mobile - XOM or Valero - VLO as an energy stock.

Then, it’s as simple as entering the symbols for the stocks that you have chosen to invest in and setting a limit price. Or, if you prefer to have your trade placed instantly at the best available price, just make it a market order and it’s even simplier for you. Now, unless you have the time and interest, let your stocks sit for a year or more before you even consider selling them. This way you can avoid short term capital gains tax which can eat into your profits.

Of course, if you prefer a less risky approach consider purchasing a no load mutual fund. You will want to make sure it is a no load mutual fund otherwise you could be charged up to 5% or more by your broker on each trade you make. With all the competetion out there, don’t get sucked into a mutual fund with "hidden fees" like that.

I hope this article has given you an introduction to online investing and will help you.

Troy Smith is a freelance writer who also makes a living buying and selling stocks on a daily basis. Visit his Website: StocksOptionsTrading.com

If you’re like most stock market investors you have struggled with finding the best stocks to invest in.

There are several ways to find the best stocks to invest in. But first you need to decide what method works best for you.

Basically there are two main types of stock market investing

1. Investing in growth stocks
2. Investing in value stocks

Growth stocks are companies that are growing fast in earnings. There are a lot of high tech and medical growth stocks.

Value stocks are stocks that are undervalued because they trade at a lower price compared to the company’s fundamentals (i.e. earnings, dividends, sales etc…)

Growth stocks generally will fatten your bank account faster but there is more risk whereas value stocks will generally grow at a slower more sustainable pace but probably won’t give you ulcers.

Here’s what some investors look for in a growth stock (based on my understanding of the National Association of Investors Corporation (NAIC) criteria):

1. Strong Earnings Growth – either quarter to quarter or year over year

2. Strong Forward Earnings Growth – analysts estimate what earnings will be for the next quarter or year, if they estimate growth that’s a plus.

3. Profit margins – you’d prefer the company to be making a considerable amount of profit to sustain further growth

4. Return On Equity (ROE) – look for growth in ROE or a stable ROE

5. Doubling in 5 years or less – you’d prefer the stock to double in 5 years – look at what the analysts estimate for price potential.

Also here’s what some value investors look for:

1. Shares price below intrinsic value

2. Low Price to Earnings (P/E) ratios

3. Price to Earnings Growth (PEG) ratio below 1 is good

4. Stock price is less than tangible book value

5. A debt to equity ratio below 1

6. The company’s assets should be more than the company’s liabilities by at least a factor of 2

7. Dividend Yield within 1/3 of the amount of the AAA bond yield

8. Earnings growth of at least 7% a year for the past 10 years

There are all sorts of other ways to find the best stock to invest in but this should give you a starting point.

Reed Floren runs a stock market forum where you can find answers to all your stock market questions register for your free membership at this stock market forum

Option trading is one method of trading that you can partake in. But, in order to take advantage of it, you need to find out just what it is and how it works. This will help you to make decisions that will affect you throughout your trading experience. Here is some basic information about option trading to help you.

What Is An Option?

Your basic question of what an option is can be answered like this. It is a contract that allows two parties to come to an agreement that the buyer will have the right to buy or sell a parcel of the shares. It is set at a predetermined price and at a predetermined date. The buyer does not have to take the option though. He has the right but not the obligation to do so. To get this right, the buyer will provide a premium to the seller.

Call Options

There are two types of option trading that you need to know about. In a call option, the buyer has the right to buy underlying shares of a stock. It is set at a predetermined price and also a predetermined date. Again, the buyer has the right but not the obligation to do this.

Put Option

The second type of option is the put option in option trading. In this type of option, the taker has the same fundamentals but is selling underlying shares. He has the same set up of having the right to do so but not the obligation to do it. Also, the same standards of the predetermined price and date also apply. The buyer of a put option is required to deliver the underlying shares only if they exercise the option.

If you would like to learn more about option trading, you simply need to contact your financial advisor and find out how it can serve your needs.

for more information please see http://www.option-trading-advice.co.uk

Many people believe that the stock market can make you rich one day, but also make you bankrupt the next. Well, how eould you like to know about a method of stock trading that completely saves you from unlimited loss, but still leaves the door open for unlimited profit? That method is buying and selling stock options. How to trade stock options would best be explained using the following example.

Lets say a person who thought that a stock selling in the market at 50 would decline to possibly 30, that person could buy a Put stock option. Not, however, that in buying a stock options, one should have some idea to what extent the stock might move.

In inquiring what a Put stock option would cost, the person might receive a nominal quote of, say, $350 for a Put at the market for 90 days. Most options are negotiated "at the market," which means at "the current market," when the option can be obtained by the option-dealer.

Suppose that the stock is selling at 50 and the quoted price of $350 is satisfactory to you. You enter your order: "Buy a 90-day Put on 100 XYZ [the name of the stock] for $350." If you are trading through your stock-exchange broker, the broker will give your order to an option-dealer who will contact one of their clients who sells options on that stock and will attempt to buy the option for you.

When, after this contact or several others, the dealer has obtained the Put option for you, the dealer reports to the stock-exchange broker who gave him the order, and the broker in turn reports to the customer: "Bought Put 100 XYZ at 50 expires December 30 for $350." Let us say that the person who bought the Put option, expecting a decline in the stock, was wrong, and that the stock, instead of going to 30 (as expected), advanced to 70 and was selling when his option expired. The person would have lost the $350 that they paid for the Put option.

Bear in mind that the limit of the person’s loss was the cost of the Put option, or $350, no matter how high the stock rose and no matter how wrong the person was, and that the person would draw on the equity in the account to that extent only. Suppose, on the other hand, the person had sold the stock short in the market. The loss would have been 20 points and still no knowledge as to the possible extent of loss until the person covered the short sale. But in the purchase of the Put option the account would read:

Bought Put on XYZ at 50 for 90 days: Loss $350

Remember, too, that no trade has been made in the stock, so no stock-exchange commission has been paid. A regular stock-exchange commission is charged by your broker only if a transfer of stock is made in connection with the option.

On the other hand, suppose the person’s judgment was correct and the stock declined to 30. If the person had instructed the stockbroker to buy 100 shares at 30 and exercise the Put option, the account would look like this:

Sold 100 shares at 50 (through exercise of Put) $5,000

Total Receipts $5,000

Bought 100 shares in market at 30 3,000

Bought Put at 50

Cost 350

Total Cost 3,350

Profit on trade $1,650

The profit then would be almost 500 percent of the cost of the Put contract. The profit is the difference between the cost of the stock plus the cost of the Put option and the proceeds of the Put that was exercised.

In all of these examples showing the use of options, the commission cost has been ignored. But at no time could the loss have been more than the cost of the option - $350 - and any stock-exchange commissions would have been paid out of profit or out of possible recovery of part of the premium which was paid.

For more FREE information and articles on how to correctly buy stock options, when to trade, when to not trade, tips, tricks and advice — visit http://www.UnderstandingStockOptions.com.

The stock market is a fascinating exchange that always provides hope and promises traders the possibility of becoming rich overnight. The hope and promise comes in the form that one day they may hit a jackpot or home run as we have seen daily - stocks flashing past our eyes with wonderful up day or down day. One day, the common trader thinks that he will be able to catch this shooting stock just before it takes off.

For many novice traders they think that there must be a system out there that can provide reliable indications to jump on these stocks right before it takes off. So the common trader heads out to the market place seeking stock or investment gurus for the holy grail of trading. This Holy Grail will provide all the answers and solutions to finding the right timing and the right stock before it plummets or takes off like a shooting star.

Unfortunately, for the common trader, there is no such thing as a holy grail in trading. If there is, then the market would collapse as eventually nobody would lose money in the stock market. When there is no one to lose, then how can anyone gain?

However, there are plenty of successful trading systems in the market place that can be used for long term financial gains. Most of the time, traders are too impatient thinking that a winning system is one that cannot lose. A winning system is one that will win in the medium to long run but will still occasionally lose.

Some trading school of thought will say that it is best to take small losses and aim for the home run. These occasional home runs will more than cover the small losses that you would so often take. This is may be a good system provided that you are resilient and strong in self discipline to stick to the system. If you do not have a good discipline, you may take a series of small losses and decides to quit- just before your system is about to pick out a home run. So who is it to blame for your losses? The system or yourself?

Other school of thoughts will say that it is always good to take small short term profit and once in a while take a medium sized loss. The advantage of this is that you will always see good profit consistently. The disadvantage of this system is that for every losing trade that you may have it will probably take 2-3 trades of profit to cover 1 losing trade. Again, in the long run, if the winning probability is high, then this strategy will work out much better in the long run as you would be able to compound your returns for accelerated profit.

Trading strategies and systems are plentiful out there. Of course, there is no harm to have several portfolios that employ different investment strategies as long as you have the time to monitor your investments. But do not waste any of your time to search for the holy grail of trading as it does not exist.

At the first sign of loss, too often, traders will decide to change to a new system and abandon a system that may have worked. These traders will keep on changing everything they lose and eventually will be out of the game because they will never be able to keep to a strategy. Unfortunately, most novice traders will feel that a “Perfect System” exists and it will be a system that provides zero risk and zero loss. And so they continue their search for the perfect system each time they lose with an existing strategy.

The holy grail of trading is always nearby – in fact it exists within you. The holy grail of trading is self discipline. It is not the system that will determine success or failure but it largely depends on the discipline of the investor.

The key to your trading success is the need for you to identify a winning system and have the discipline stick to it. A winning system is not one that does not lose but is one that will grow your portfolio and net worth in the long run.

Copyright 2005 William Tan

CASHFLOW AVENUE is established to provide Low-Risk Options Trading Recommendations to the common traders in their pursuit of financial freedom and a better lifestyle. http://www.cashflowavenue.com

What are Put Options?

A Put is a contract on a particular stock, index or other security that allows the investor to sell the underlying stock at a set price (strike price).

The holder of his option has paid a premium (cost of the contract) to buy it. Put options are profitable when the market is in decline. If the investor has a put on a stock that has now fallen enough to cover the cost of the premium, the person would be profitable.

Ways to Profit with Put Options

Trading them:

If the Put is profitable, the investor can sell or trade the contract back to the market. The profit on the contract is shown by the premium increase on the option. As the market declines, the premium increases. This premium increase allows the investor to sell the contract. He is not "exercising the option". He is trading it out. This is how most options are done vs. exercising.

Exercising them:

When an investor exercises a Put Option, he or she is selling a stock they already own. The right of a put holder is the right to sell the stock at the strike price, regardless of the actual price in the market. If you owned a Put with a strike price of 50, and the market has declined to 40, you could purchase the actual the stock in the market at 40 and then exercise the put at 50. You would make 10 points on that stock, minus the premium paid.

The break-even for investors who own put options (disregarding commissions) is the strike price minus the premium paid. In the above example, if the investor paid $300 for the option - his break-even would be 47. Since the market in our example went down to 40, the actual profit for that person would be $700.

Writing a Put Option

When you sell or short a put option, you are "writing" the contract. The writer is someone who is bullish on the market. The seller collects the premium (as opposed to the buyer who pays the premium) and is hoping the option expires worthless. The premium is the writer’s maximum gain. So, obviously if the premium is all that he can make - having the option expire is the best case scenario.

Put option writing does carry risk. If the option is exercised (by the holder/buyer), the writer must purchase the stock from the holder at the strike price. In the example above, the writer would have had to buy the stock at $50 (the current price), while the market was at $40. He would be stuck with a stock 10 points above the market. His loss would be lessened by the premium received. The writer can buy back the put before it is exercised, but if the put has gained value, the purchase price would be higher than the premium he originally got - so, it would be a loss either way. The option is expiring is the best bet.

Covered Put Option Writing

Since the seller or writer of puts must purchase the underlying stock at the strike price, he must have the cash to do that. Selling stock short and using the proceeds to cover an exercised option can be done. Also, the premium received for selling the put option can assist a short position to get greater profit.

As with any option, time is the biggest factor. Put options expire monthly. All options carry large risks, but can present large profits. Educate yourself further and talk to your broker.

Learn More: Put Options

Nick Hunter is the President of American Investment Training (AIT) and the owner of http://www.brokerjobs.com - A financial career and education website.