Options Markets

Deciding On Your Investment Options
When formulating a trading plan for options, it is important to think about what approach you want to take in the options markets before you trade. It is important to develop an investment philosophy that reflects the strategy you have for your trading.

Understanding Options Markets Trading
Understanding the options markets is a product of understanding options trading. Options are an agreement between two parties where one agrees to sell a stock to the other party within a specific time period and for a specific price. Ownership as commonly defined does not apply since you don’t need to own a stock in order to implement a position.
A stock order, whether it is a “call” (an agreement to purchase) or a “put” (an agreement to sell), gives the holder the right to trade options. The holder is able to simply let the options order expire without investing further or go ahead and purchase the stock as agreed.

Preparing To Enter The Options Market
With an understanding of options the next step before entering the options market is to solidify your trading rules or your trading plan. These rules should include:

  1. Verification – This is a critical part of the process. You would not want to drive a car that wasn’t inspected prior to you getting behind the wheel; the same principle is true with your trading plan.
  2. Strict Guidelines – Your trading plan must be specific and precise. Having a tested, reliable trading plan we give you something solid when you hit a losing period.
  3. Testing – you can successfully test your trading plan via paper trading on the Internet. Without testing, your trading plan is left to chance. Does it work or fail? Testing will give you the confidence you need to be a successful trader.

Basic Options Market Orders
The final step is to enter the options market and start trading. There are two basic kinds of options market orders, “Calls” and “Puts”. Calls are contracts made by a buyer offering the conditions under which he or she will buy a particular stock. Puts are contracts offered by sellers outlining the conditions under which he or she will sell a particular stock. Each contract consists of the following information:

  • Purchase Item – This is the stock
  • Strike Price – This is the price that is the target for the contract
  • Expiration Date – The day on which the investment timing is no longer binding
  • Quantity – Usually in groups of 100

These items are included whether the options market order is a Call or a Put. When buying a call, if the terms are not met, the contract is not binding. In addition, if the terms are met but the options market conditions have changed to make the deal unfavorable the buyer can simply let the contract expire and if desired, purchase the stock from the open options market.

Improving Your Odds In The Options Market
There is one more thing you can do to increase your odds of success in the options markets. By implementing a trading system like Japanese Candlesticks you will add a powerful charting system for your options markets investing. Candlesticks was invented over 300 years ago as a method for trading in the rice markets of ancient Japan. The system has become an amazing tool for today’s options markets. With the charting abilities you will gain from learning candlestick patterns, it can literally give you a clear view of the directions of options before they even move. Added to your trading plan, Candlesticks can help you to be a successful trader in the options markets.

Learn more about paper trading options as well as part of your options trading education.

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Options Trading

Options trading provides a unique investment vehicle to even the beginner investing in the stock market and provides many advantages including leverage, limited risk, insurance and profits in bear markets.

Leverage
Leverage is the ability to “buy in bulk”. First, remember that in options trading you are not actually buying or selling anything. This is an agreement between two investors if a transfer of assets actually takes place. Also take note that when someone buys an option they pay an amount known as a “premium” to the seller; this premium is the cost of the option.

That being said, leverage in options trading occurs when purchasing options. In the U.S., options are traded with a contract multiplier of 100; this is the number of shares per option traded. With this contract multiplier, even small investors are able to trade a large exposure, or leverage, on a small amount of capital. Successful trading in this manner can be quite profitable.

Limited Risk
Limited risk is another tremendous asset of options trading. Whether you are learning how to invest in the stock market or you currently have limited funds to invest, options trading offers a perfect vehicle for your trading. When you are trading options, you have a great advantage over traditional stock trading because you can take a view on the market direction with limited risk while at the same time having unlimited profit potential. This is because option buyers have the right, not the obligation, to exercise the contract for the underlying at the exercise price. If the price is not right at the time of expiration, the buyer will forfeit his/her right and simply let the contract expire worthless.

Let’s have a little option trading education. We have decided to buy an option on MEW Industries with the following information:

  • Company: MEW Industries
  • Option Type: Call Option
  • Position: Long
  • Strike Price: $20
  • September 8th

At the time of the trade, MEW Industries was trading at $25; the Call Option was trading at $6.50. This is known as the premium and it is the amount we paid for the right to possess this option. Therefore if we take into account the premium and the strike price, we will break even at $26.50; anything less would be a loss and anything more would be a profit. The beauty of options trading in the stock market is that if the stock price falls, we can simply allow the option to expire and lose only the premium. While this can be expensive, it is far better than being forced to buy one hundred shares $15 stock for $26.50 each!

Unlimited Profit Potential
Now you should be able to see how this type of options trading strategy gives you the best of both worlds; both limiting your risk and at the same time leaving you open to make unlimited profit if the market rallies.

Not all option strategies have this payoff benefit. Only if you are buying options can you limit your risk. For option sellers, this is the reverse – they have unlimited risk with limited profit potential. While this sounds very bad, once you understand the options available to you and how to use them, you can limit even the unlimited risk of a sell strangle! (if you don’t know this options trading strategy, click the link)

Insurance
There is another way in options trading to protect yourself and your stock portfolio; this technique can give the investor who is uncomfortable with exposing himself or herself to risk some insurance. Options such as a Put Hedge can insulate an investment even during bearish periods.

A put hedge is the stock option trading strategy of buying puts during a bearish market to protect stock shares that, while the trader is reluctant to sell, are vulnerable to a decline in the market. Successful traders utilize strategies such as a put hedge to insulate their portfolios from loss in a bearish market. This method also has the potential of unlimited profits, while at the same time limiting the potential loss by the investor.

Conclusion
Options trading is a valuable and unique way of learning to trade in the stock market as well as making consistent profits without tremendous outlays of capital. While there is risk with options trading, it is usually limited and it has the ability to make you quite the successful trader.

 

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Paper Trading Options

It is always nice when someone gives you something for nothing, an extra doughnut at the bakery or that tool you need. Other people want to give you something for free as well; an education paper trading options. Paper trading options is a process in which you can simulate the real decision-making process of options trading without committing real money.

You approach paper trading options the same as you would a real trade in the stock market, taking into account everything you would consider if you were making a real investment, and implementing your positions on the computer. By analyzing how your theoretical investments perform you can evaluate whether your stock trading plan and your technical analysis tools are working without the pressures of possible financial loss.

Why Paper Trading Options Is A Good Idea
Paper trading options gives you the opportunity to practice and learn without the financial danger of real losses. You can fine-tune your stock trading system, test it and improve your investment philosophy in theory before going live. You can learn stock market terms, techniques and practices without pressure.

It is also easier for you to test your trading rules in a simulated trading environment than in the real market. When you have actual money at stake, emotional reactions such as greed and fear can sometimes affect sound judgment. If you can resist those feelings and follow your stock investing system, and your paper trading options approach, later your live options trading will be much more successful.

A Little Explanation of Options
Options trading is different from typical stock market investing or bonds since you don’t actually own anything. In options trading, a stock option is not a physical thing like holding shares in a company. Instead it is a contract between two parties. When you own stock you actually own part of a company. An option is an agreement, or contract, where one party agrees to deliver something to another party within a specific time period and for a specific price.

This distinction is important because with options you are not borrowing anything. For example, in the case of stock, you must first borrow the stock if you are selling short; with options there is nothing to borrow so you can short options without the worry of borrowing first. Options are popular because they can help you leverage your positions, meaning that you don’t move on a few shares but hundreds or thousands. Instead of buying a stock outright, you can enter into an options contract which can be much cheaper but have the same, or even better, returns.

The Profit Potential of Options Trading
With options trading, you have the best of both worlds; limiting your risk and at the same time leaving you open to make unlimited profit if the market rallies. It is important to say that not all stock option trading strategies have the same payoff benefit. Only if you are buying options can you limit your risk. For option sellers, this is the reverse since they have unlimited risk with limited profit potential. While this sounds dangerous, once you understand the options available to you and how to use them, you can limit even the unlimited risk when you sell strangle.

Getting Started Paper Trading Options
There are a large number of companies on the Internet that offer free options paper trading; a simple search will give you more choices that you can imagine. These companies offer this service in hopes that after you get comfortable paper trading options, you will open a commodity account with them. In the meantime, once you have registered simply follow the directions of the stock market investing software and you are ready to begin.

What You Might Notice
If you try to implement positions before you understand options trading, you will probably be surprised; options trading has a different set of terminology, different strategies and even the trading software will probably be confusing. So before you try to begin giving yourself an option trading education; learn the terms, learn the techniques, and learn the stock trading software where you are paper trading options.

Does Paper Trading Options Really Matter?
In and of itself, paper trading options is not crucial; it is merely a simulation of the things required to trade options in the real world. What is important while paper trading options is your mental approach; if you treat this like a game or don’t understand the importance of learning options trading, you should seriously reconsider attempting to trade options. This is a skill and the consequence is losing your money so don’t take paper trading options lightly.

Conclusion
Getting something for free does not happen every day, especially in the business world. It is time that you put down that free doughnut and take advantage of this unique opportunity and start paper trading options today.

For more on options be sure to read the blog article options trading for beginners.

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Options Trading For Beginners

Options Trading For Beginners – Getting Started
No matter what you do in life there is always a first day. Walking as a baby, driving a car or starting a new job all fall into this category. This is true of beginner’s options trading in the stock market as well. Even if you have experience trading stocks you might not know the difference between a call and a put but don’t worry because this isn’t going to lead to a pop quiz. We will look at options trading for beginners and give you some of the basics to get you started. If you have never been exposed to options trading, welcome to your first day!

What Are Stock Options?
Let’s start our beginner’s options trading discussion with the topic of what options are not. Stock options are not ownership in anything; unlike stocks, the holder of an option does not possess part ownership in a company; this is simply an agreement between two investors that one party agrees to deliver something to another party within a specific time period and for a specific price. This eliminates the ownership part of the agreement as well as the idea that you must possess a particular stock in order to implement a position. Interested in selling short an option? In the stock market you have to borrow the stock to do it; in options trading beginners only need to understand that there is no ownership and no problem making the transaction.

What Are the Advantages of Stock Options?
Options have a number of nice advantages that options trading beginners should understand. Among these benefits are:

  • Leverage – Options also have the advantage of leverage. Your option is purchased with a multiplier of 100 so your fortunes are affected by 100 shares of stock and not only one.
  • Limited Risk – This is not true of all options investing, but overall options trading does have limited risk. When buying options, your risk is limited to the price of the premium, or the amount you paid for the option. For example, if you buy straddle (the name for a particular option) and the price of the stock is wrong for your position, you can, in essence, allow the option to expire. This offers a great start in options trading for beginners since they can purchase options without the fear of staggering losses.
  • No Risk Paper Trading – Thanks to the power of the Internet, paper trading options has become a valuable asset for the options trading beginner. You simply register to use the software and follow the directions of the site. You will be able to implement positions and see the effects of your decisions on your “account”. Lose your money? No problem, it was only virtual money but a real experience beginner’s options trading.

What Do You Need To Do To Get Started?
Getting started is never really difficult. Remember, it is your first day. However, there are several things you need to do as a beginner in options trading:

  1. Start Learning – There is no substitute for education. Read books about options trading, talk with others that trade options and search the Internet for information about options trading. Once you start investing your own money, you will be glad to understand options trading.
  2. Create a Stock Trading Plan – This is just as important as your education. You need to outline your goals and objectives as well as your strategies in an unemotional manner. This way, when emotion tries to creep into your decision making process, you will have already decided your course of action.
  3. Select a Broker – This is a personal, but important part of the process. You can implement your own trades but you need someone to actually place the orders. Some full-service brokers offer more services and most Internet brokers offer lower commissions. Even though you’re a beginner in options trading, define what you want from your broker and find someone who meets your needs.
  4. Use Japanese Candlesticks – This powerful charting system will help not only the beginner in options trading but is valuable to the “expert” as well. Candlestick patterns help you to find the trends in the market that most others miss.

Conclusion
Have enough information for your beginner’s options trading lesson? Remember that this is your first day but everything you do will build off of it.

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Trading in the Stock Market, Trading Options, Trading Futures, and Options on Futures, involves substantial risk of loss and is not suitable for all investors. Past Performance is not indicative of future results. CandlestickForum.com, Candlestick-Trading-Forum.com, StephenBigalow.com, and Candlestick Forum LLC do not recommend or endorse any specific trading system or method. We recommend that you research all trading systems, methods and market strategies thoroughly. Full Disclaimer here