Are you confused as to the question of how to deal with your incentive stock options? Or are you worried about owing a large amount of tax on options that you have not even exercised and do not have the cash to pay for it? Well, luckily, if you manage your affairs well and take on board some simple advice, you will be able to avoid owing too much tax on your stock options, and also postpone paying it until you have the cash to do so. In most cases, if you have a large amount of money tied up in stock options, then you should probably get some professional advice. This article is only intended to give you an idea of the steps that can be taken when tax planning with stock options.

First of all, you do not have to pay any tax owed immediately, if you do exercise your stock options. This is the case so long as you do not sell the stock you receive. If you exercise an option to buy some shares, then so long as you do not sell that stock, you do not have to pay any tax at that time.

The second piece of good news is that you can end up only paying 15% tax on the options when you do sell. This will apply if you hold on to the stocks for long enough to qualify for a long-term capital gain.

So things are starting to sound a lot better on stock options taxation. By postponing the tax owed until you sell the shares, you can avoid the hardship of having a tax fall due without any money coming in to pay for it. It is similar to the cases in the past where people received valuable paintings or other works of art in a will, and then immediately had to sell the painting in order to pay the tax that was owed on the inheritance. Also, 15% is quite a low rate of tax and it should also be remembered that this is the highest rate that can be payable on a long-term capital gain.

For more information, consult a qualified financial advisor.

Check out http://www.trading-futures.org for articles about eminis futures trading and commodity futures trading.

Option trading is fast becoming one of the hypes of this generation. Option trading has been and still is being taught all over the world as the definitive investment instrument for entry to the fast track. Popular speakers like Robert Kiyosaki and Robert G Allen have fuelled this option trading hype in a very big way. The steadily rising number of option contracts that have been traded over the past years is evidence to the rising popularity of option trading.

While option trading is one of the most versatile investment vehicles that have ever been created, it does have fundamental limitations.

First of all, the number of optionable stocks in the markets is really quite limited. Only 2649 out of 7277 tradable securities in the US markets offer stock options. This represents only 36% of the universe of tradable securities. This percentage is even lesser in other markets in the world. This results in a fairly limited choice for investors to choose from.

Secondly, the liquidity of most stock options up for option trading is also pretty limited. In fact, only a handful of stocks have options with liquidity to handle a respectable fund size. The result of which is that it may be difficult for investors with bigger funds to participate as freely in option trading as they may in trading shares. In this respect, option trading may be more productive as a hedging instrument against a large portfolio of shares.

Thirdly, due to its liquidity and its leverage effects, option trading is fast becoming the favorite of small investors with only a very small fund to trade with. However, many of the complex spread strategies that are being taught by option trading speakers all over the world require an extremely high commission outlay that is much higher than if you trade stocks. These high commissions frequently eliminate any possible profits from these complex spread strategies.

With these in mind, I hope you will be able to make an even more informed decision when applying option trading as part of your overall investment strategy. If who you are learning from is just telling you all the pros and none of the cons, then it is time you change teacher to someone who teaches the truths.

Jason Ng is the President of Masters ‘O’ Equity Asset Management. He is a fund manager specialising in options trading and his Star Trading System has helped thousands. Please visit http://www.MastersoEquity.com.

What is a Put Option?

In stocks, it’s a standardized exchange-traded contract that gives the buyer the right, but not the obligation, to sell a specified amount of stock (quantity), at a specified price (strike price), by a specified date (expiration date), for which the buyer pays a price (premium) to the seller.

Options trade just like stocks until the last trading day which is always the third Friday of the expiration month.

Option prices have two components: Intrinsic value and time value.

Intrinsic value is the amount by which the strike price is in the money. If the strike is out of the money, there is no intrinsic value.

Time value is the amount in excess of the intrinsic value.

Options may, or may not, have intrinsic value but they all have time value.

Comparing the strike price to the market price, options are described as being at-the-money, in-the-money, or out-of-the-money.

Depending on its use, the Put Option can provide protection, trading profits, or income as follows:

(1) As a form of insurance, protecting long positions against loss.

(2) Trading profits, as a substitute vehicle for short sales, in declining markets.

(3) Income, in the form of premiums received, from selling put options.

Examining the use of each in more detail, we find:

First, as a form of insurance, the simultaneous purchase of stock along with the nearest in-the-money Put Option fixes the amount at risk to the options’ time value only: Stock price + Put price - Strike price = Risk. If the implied volatility is low, that’s a cheap risk!

Second, as a trading vehicle, the purchase of a Put Option is superior to the short sale of stock, for the following reasons:

(1) Stock may not be available for lending (short stock has to be borrowed).

(2) Limited risk (no margin calls).

(3) Easier order fills (No "up tick" rule).

(4) Greater leverage (Put Options are cheaper than margin requirements).

(5) No dividends to make up (short sellers have to pay dividends back).

(6) Long term capital gains tax treatment is possible, if the Put Option lasts over 1 year (short sales can never qualify for long term capital gain treatment, no matter how long the position is held).

Need I go on?

Here’s a clue: In deciding which option to buy, never choose at-the-moneys (too much time value).

The longer your time horizon, the nearest out-of-the-money will give you better leverage.

Two strikes in-the-money provides higher delta which means greater price correlation to the underlying stock. The deeper in the money, the higher the delta; the higher the delta, the higher the correlation to the stock, almost tick-for-tick. How sweet it is!

Third, many investors, without ever owning the stock, make a living from selling Put Options for the premiums they take in.

In this respect, they’re like insurance companies selling "insurance" for the premiums and, of course, they steadily reinvest all those premiums. It’s called "compounding", you may have heard of it back in your grade school math class. It’s not without risk. Sometimes they have to pay off by having the stock "put" to them.

When your game is selling options, your profit comes from selling time value (otherwise known as "air" or "puff") and either buying them back cheaper or having them expire worthless and then repeating the process over and over and over again and again and again.

Get the idea?

Uncovered (aka "naked") options can only be sold in a margin account but, if you invest in T-bills and put them up as your collateral to meet your margin requirements, you get to take in interest and option premiums all at the same time. Can you say, "double dipping"? It does whole bunches of good for your ROI (return on investment).

And if the market should not cooperate by going into a decline? A follow-up strategy known as "rolling down and out" may be deployed.

Rolling down and out is a defensive maneuver where you buy back previously sold options and simultaneously sell new ones at lower strikes prices (rolling down) and further out in time (rolling out) to gain more time value (remember "air"? "puff"?).

Put Options: Flexibility on Steroids!

Because No One Cares More About Your Money Than You

http://dynamic-stock-market-strategies.com

Good trading,
Don Heggen

Stock option trading can be considered as one of the most financially rewarding strategies one can become involved in. Sometimes, this becomes a destructive investment plan, though. Stock option is the ‘right’ to purchase a stock at a given price within a specified time. Stock option trading is largely dependent on certain factors, such as name of the associated stock, strike price, expiration date, and the premium paid for the option, plus the stock broker’s commission.

Stock option trading involves trading standardized options contracts, which are listed by a variety of futures and options exchanges. In the United States, there are presently six exchanges where stock options are traded, including four open-outcry marketplaces and two electronic marketplaces. The open-outcry marketplaces are Philadelphia Stock Exchange (PHLX), American Stock Exchange (AMEX) in New York City, the Pacific Exchange (PCX) in San Francisco, and the Chicago Board Options Exchange (CBOE). The International Securities Exchange (ISE) and Boston Options Exchange (BOX) are included in the electronic marketplaces. In Europe, the main futures and options exchanges are Euronext.liffe and Eurex.

Another option to trade a stock is the ‘over-the-counter’ (OTC) trading, which is the opposite of exchange trading occurring in option exchanges or futures exchanges. The OTCs are traded not in exchanges, but between two independent groups; hence these transfers are the bi-lateral contracts. In this contract, at least one group is typically a large financial organization with a balance sheet big enough to guarantee such a contract. OTCs are administrated by an International Swaps and Derivatives Association agreement.

Stock option trading, with no intent to ever exercise the option, may be considered as a form of ‘leverage’. The ‘grant’ price (the price of an option) on a security might increase over the price of the security itself. For this reason, the entire value of trading in options has at times exceeded the total value of trading in stocks themselves.

Stock Options provides detailed information on Stock Options, Stock Option Trading, Employee Stock Options, Stock Option Software and more. Stock Options is affiliated with Stock Broker Career.

When the market is highly volatility, Buying deep in-the-money (ITM) options is favored over at-the-money (ATM) and out-of-the-money (OTM) options as when market begins to come back down to more ‘normal volatility’ levels the ATM and OTM are going to suffer.

Quick facts about Deep in-the-money (ITM) options

Deep ITM options have very modest time value and it is the time value or ‘extrinsic’ value of an option that is an outcome by increasing or declining implied volatility.

During volatile markets, if your timing is slightly off but right about direction then using deep in-the-money options can be more forgiving. For example if you have a stock with a strong essential uptrend that has experienced a healthy improvement and you enter a little too early by buying Calls before the stock starts trending up again.

ITM options have very small time premium, so they have the potential of ‘buffer’ should the stock move against you slightly or move sideways for a period before it starts trending again.

ATM and OTM both are critically determined by time value and therefore your timing in regards to the direction of the underlying needs to be precise and accurate. During high implied volatility, any phase of oblique movement, or a ’slowing’ to how much a stock is rising or falling, can result in sizeable wearing down in the time value premium for both at-the-money (ATM) and out-of-the-money (OTM) option holders. This is because both fall in implied volatility and also time decay.

Counteracting the outcomes of volatility, buying a deep in-the-money (ITM) option can be very successful.

It is questionable by many traders that buying deep-in-the-money (ITM) options are costly; also they are vulnerable to greater slippage due to a wider spread. But the fact remains that ‘expensive’ is not associated with deep in-the-money (ITM) options. The fact that they require a higher premium is due to their ‘existent’ inherent value. In regards to the wider spread, this is in most cases due to market makers not advertising their ‘true’ buy/sell price.

To sum up penetrating deep enough in the money, where the delta is 1 for calls and -1 puts, these alternatives will move point for point with the underlying stock. Certainly for sure it is beneficial for ’short-term’ directional traders.

To find additional information like this or about share trading visit – http://myinvestinginfo.com

http://myinvestinginfo.com was founded Jakob Culver. Jakob has a background and large knowledge in and about Invetsing.

If you’re trading stocks or bonds, there are a whole range of strategies you can follow, which range from the long term buy and hold, right through to day trading using technical analysis. Options trading is very similar.

Understanding exactly what an option is one of the trickiest things to understand when you’re starting out. Basically, an option is a contract that gives you the right to buy (a call option) or sell (a put option) a stock or bond at a set price (the strike price) on or prior to a set date (the expiration date). You might need to read that a few times to get the hang of it!

There are different types of options available in the marketplace, with ‘American’ options able to be exercised anytime between purchase and expiration, and ‘European’ options only able to be exercised on the expiry date. Although the terms are geographical, nowadays the location where you buy options doesn’t automatically mean you’ve bought one type or the other. As a general rule of them, American-style options are mostly used for stocks and bonds, whereas European-style options are for indexes.

Officially, options expire on the Saturday after the third Friday of the expiry month of the contract. However as US markets are shut on Saturdays, that makes the Friday the effective expiry day. Talk about confusing!

Now that you have a basic understanding of what an option is and how it works, let’s take a look at some basic strategies. I’ll just focus on American-style options for stocks.

When you buy or sell an option, you basically have two choices - you can hold it to maturity, or you can choose to exercise it prior to expiry. A large proportion of investors do hold their options until maturity before exercising it to trade the underlying asset. Let’s look at an example.

You’ve purchased a call option for $1, with a strike price of $25. As options contracts are generally for 100 share lots, your purchase (ignoring commissions) would cost you $100, and you’d have the right to purchase $2500 of stock through the option. Now, if the expiry date arrives and the stock is worth $27, it makes sense to go ahead of buy the stock, because you only have to pay $25. That means you’ve made an immediate profit of $2 per share if you sell them again immediately on the stock market. However you still have to factor in what you paid to buy the option, which was $1 a share. So after your purchase costs are deducted, your overall profit is $1 a share. Well done!

But what happens if the share price doesn’t hit $27 - or even $26, which is your breakeven point for this option. Well, if there is still time to expiry and the share price is above $26 but appears to be dropping, it may be a good idea to exercise the option immediately so you can get out of the contract without loss. If the share price is under $26, you might still be able to sell the options for a smaller amount than you paid, for example 20c a share, and recoup some of your losses. If the option is now worthless, you basically just let the contract run in the hope that the price might jump up again, but accept that you’ve lost your $100. One of the good things about options is that you’ve only bought the option to purchase or sell - you’re not under any obligation to do either upon expiry. So your risk is limited to the amount you spend buying the option in the beginning.

One thing to be aware of is that option prices aren’t just influenced by the price movements of the underlying assets - they’re also affected by their time to expiry. As the expiry date approaches, option prices tend to drop rapidly. So if you have an option that you don’t want to hold until expiry, it may be worth selling out early to avoid being too badly hurt by the price dropping as expiry approaches.

Timothy Gorman is a successful Webmaster and publisher of Online Stock Trading Secrets. He provides more stock advice, information and ways to make money with options trading that you can research in your pajamas on his website.

Buying options as an investment strategy offers distinct advantages, primarily, more efficient use of ones’ capital.

Two stand out advantages of buying options: Leverage and limited risk.

Typically, when a trader identifies a possible directional trade, a risk/reward analysis is made.

First, a determination of how much capital to commit to the trade (money management).

Next, an estimate is made of the potential gain if the trade is profitable. Then, an estimate is made of the potential risk involved if a stop-loss point is triggered and the trade is "stopped out" (trade management).

These are, necessarily, "working" hypotheses because when working with "stop orders" nothing is "etched in granite".

If the potential reward compares favorably to the amount at risk (at least 3:1, at a minimum) the order is entered.

However, buying options, rather than positioning the underlying stock, to facilitate the trade can not only improve the risk/reward ratio due to the option leverage, the risk is no longer an estimate but a definite known quantity. A desirable feature, to be sure.

Other advantages are the avoidance of margin debt interest expense, in the case of using call options as a substitute for buying stock, and the total avoidance of owing dividends, the "hassle" of borrowing stock, and no "up tick" rule, in the case of using put options as a substitute for selling stock short.

And the total avoidance of margin calls in either case.

In buying options, one does pay for "time" value. Time value is highest with at-the-money options. This can be reduced by positioning options that are in-the-money.

In-the-money options more correlate with or "track" the value of the underlying stock. The deeper in the money, the higher the correlation.

This correlation relationship also provides another advantage when buying options versus positioning stock.

If the option starts off two strikes in-the-money and the stock price moves against your position, while you lose back "intrinsic" value you should also gain back "time" value as the option moves closer to being at-the-money, thereby mitigating your loss.

For instance, a stock selling for $19.38 has in-the-money $17.50 calls available with 5 months time remaining trading at $2.70. That computes to $1.88 intrinsic value plus $.82 time value.

Also available are out-of-the-money $20.00 calls with the same amount of time remaining trading at $1.15, all time value.

Which is the better buy? The lower priced, more leveraged, out-of-the-money or the higher priced, less leveraged, in-the-money?

The answer depends upon how high the trader thinks the stock will go.

The $17.50 calls cost more but already have a head start and are closer to break-even. Once passed break-even, the leverage kicks in.

The $20.00 calls are further away from their break-even but, once passed that point the leverage is also greater.

You tell me where the stock will go and I’ll tell you what the better buy is.

The down side risk is limited in either case. The total potential loss is probably not greater than the planned stop-loss point would be. The "whip-saw" risk is completely eliminated and the capital outlay is much less. The excess capital can rest securely in U. S. Treasury bills earning interest.

The potential also exists for the trader to be able to engage in additional trading strategies, such as "legging" into vertical or diagonal spreads, if the traders’ outlook should change.

Because No One Cares More About Your Money Than You

http://dynamic-stock-market-strategies.com

Good trading,

Don Heggen

Are you confused as to the question of how to deal with your incentive stock options? Or are you worried about owing a large amount of tax on options that you have not even exercised and do not have the cash to pay for it? Well, luckily, if you manage your affairs well and take on board some simple advice, you will be able to avoid owing too much tax on your stock options, and also postpone paying it until you have the cash to do so. Sounds complicated? Not necessarily so. In most cases, if you have a large amount of money tied up in stock options, then you should probably get some professional advice. Financial advisors can help you put together a strategy that maximizes the value of your options. This article is only intended to give you an idea of the steps that can be taken when tax planning with stock options.

First of all, you do not have to pay any tax owed immediately, if you do exercise your stock options. This is the case so long as you do not sell the stock you receive. If you exercise an option to buy some shares, then so long as you do not sell that stock, you do not have to pay any tax at that time.

The second piece of good news is that you can end up only paying 15 percent tax on the options when you do sell. This will apply if you hold on to the stocks for long enough to qualify for a long-term capital gain.

So things are starting to sound a lot better on stock options taxation. By postponing the tax owed until you sell the shares, you can avoid the hardship of having a tax fall due without any money coming in to pay for it. It is similar to the cases in the past where people received valuable paintings or other works of art in a will, and then immediately had to sell the painting in order to pay the tax that was owed on the inheritance. Also, 15 percent is quite a low rate of tax and it should also be remembered that this is the highest rate that can be payable on a long-term capital gain.

For more information, consult a qualified financial advisor. Financial advisors can help you better understand tax basics and tricks, and the withholding, reporting and filing rules governing your incentive tax options.

Check out http://www.trading-futures.org for eminis futures trading and commodity futures trading.

Many people are turning to the stock exchange to make some extra money on their savings, or to even replace their normal income. Options are another tool you can use to trade on the stock exchange, and can be used for normal stocks, futures and indices. If you spend some time learning about how trading options works, it’s possible to make consistent, good returns on your money. For simplicity’s sake, I’ll use trading options on stocks for the examples that follow.

An option is really another way of saying you have the right, or the choice, whether to go ahead with buying or selling a number of stocks on a certain date. When you purchase the right to buy stocks, that’s known as a call option. When it’s a right to sell your securities, it’s called a put option. Initially, most people start out simply, either buying a call option for a stock they’re interested in purchasing anyway, or else buying a put option on stocks they already hold, to protect their investment if the price plunges suddenly. All of the contracts have an agreed price. So in the case of a put option, the stock may be trading at $5.00, and you buy a put option that gives you the right to sell the stock you hold at $4.50 in two months time, if you choose to exercise that option. This means that if the price drops to $4.00, you’ve protected yourself. If the price doesn’t drop, then you let the option expire and keep your shares.

Buying an option requires paying a premium. It’s important to calculate out how much you’re willing to pay for an option, so that it remains cost effective. Options are more expensive the further they are from expiry, and gradually their value falls as the expiry date approaches. The good thing about options is that you can spend a small amount of money (the premium) to control a large holding of stocks. If you spot a stock that you think is about to go up in price, rather than spending $10,000 buying the stock outright, you can purchase a call option for, say, $500. Then, if your analysis is correct and the stock goes from $5.00 to $6.00, you can exercise your call option to buy the stock at $5.50, and make an immediate profit.

If, however, you’re wrong, and the stock price doesn’t move or even falls, you can let the option expire and all you’ve lost is your premium. Again, using the above example of 2000 shares at $5.00 a share. If the stock falls to $4.00 and you’d bought the stock outright, you’d have lost $2,000. With the call option, though, all you’ve lost is the $500 you paid for the option. You go into the trade knowing the maximum amount you can lose - your premium.

Trading options takes some skill, so it’s often a good idea to start out by learning how to trade stocks successfully. Once you’re confident you can spot profitable trades, then you can look at using options to leverage your available funds.

If you want to read more about trading options, click over to David’s site at http://www.tradingoptionsplus.com

I am amazed at how many investors have no idea about what Options really are. Many continue to provide the argument on how Options Trading is very risky…I would have to disagree as Options Trading is safer than just trading stocks. Now hold on a minute and let me explain. You are correct in that Options Trading does have risks. But, so does any strategy used in the Stock Market as no one knows what the stock will be in the future. So, let’s say you purchase stock in DELL so you are looking for an increase in value so that your investment increases. Now, what happens if DELL drops in price? Your portfolio value drops along with DELL. A $5.00 drop in stock price and you will be down $500 on your investment in DELL.

What would I have done differently? Let’s say I match your investment in DELL and purchase 100 shares as you have done. I however would sell a call again DELL ( in other words, sell someone the option to purchase my shares from me at a fixed price above what I paid for the stock) other wise know as a Covered Call. For selling these calls I would immediately receive $100 (or $1 per share for such a call sale).

Time to compare situations…your account value would be down $500 but mine would only be down $400. Therefore, I have effectively provided some downside protection while also reducing my per share cost in DELL. I would be able to do this every month to generate income and at some point I could exit DELL with a profit even though it never gained a penny in value while you on the other had would still be down $500. Now…does Options Trading seem as risky as you first thought?

Covered Calls are just one of the many option trading strategies I use in trading the Stock Market. Although Options Trading does involve risk there are ways in which they greatly help to reduce the risks of trading. Therefore, make sure you have a good understanding of any trading strategy before you invest your money

http://www.stockmarketcashmachine.com helps traders learn the advantages of writing covered calls. Covered Calls are often misunderstood but when used correctly can assist investors in generating monthly income as well as providing downside protection.

Covered Calls