Eliminating Emotions

The psychology of investing not only affects individual investors but also affects the market as a whole. Many investors often underestimate or are unaware of the affects that our emotions have on our return on investment. Many well educated and competent traders lose money due to trading anxiety and trading emotions. In today’s article we will discuss various emotions felt everyday by online stock investors and how each emotion affects trading decisions and trading performance.

Eliminating Emotions:

Greed and Fear
Greed causes traders to buy at high prices or buy a large amount of the same share, therefore increasing risk. Fear causes investors to exit the markets too early causing a loss of otherwise attained profits. Traders suffering from fear are afraid that the price will decrease further so they get out before the timing is correct, instead of letting the trade play out.

Overconfidence
Traders who are overconfident tend to trade more rapidly and tend to over trade. These traders lose money in commissions, taxes in addition to simply losing out on trades themselves due to the illusion of control. Greater participation in trading stock makes some traders feel more in control even though they are not. These traders also tend to invest in smaller and riskier companies and lack portfolio diversification.

Herding 
The psychology of investing tells us that many investors tend to follow the crowd. They hear of hot stocks and they jump on the bandwagon only to lose money. What they fail to realize is that those stocks were hot until you and everyone else in “the herd” heard about them. Pass on these hot stock market picks. Even if they were money makers at some point, that time has passed. Find your own stocks to invest in based on your own proven research and analysis.

Confirmation Bias
Too often investors believe what they want to believe. We pay attention only to the information that supports what we believe, and ignore information that does not support what we “think we know.” Confirmation bias directly results in poor investment decisions and a loss of profits. An example of confirmation bias is when we become attached to a certain stock. Perhaps it performed very well in the past so we ignore all signs that it is currently not performing as well as it did and we invest anyway.

There are many factors to consider when studying the psychology of investing and how it affects stock traders every day. Successful investors understand investment psychology and all it entails, they have determined their strengths and their weaknesses, and they proactively practice and develop the skills necessary to controlling their trading emotions so that they are successful in the stock market.

Learn more about Eliminating Emotions. The most profitable skill that can’t be taught!

 

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Stock Options 101 T-W

Stock options 101 includes options trading terms below.

Terms
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.

Theoretical Value
The price of an option, or a combination of options, as computed by a mathematical model.

Theta
A measure of the rate of change in an option’s theoretical value for a one-unit change in time to the option’s expiration date.

Time Decay
A term used to describe how the theoretical value of an option “erodes” or reduces with the passage of time.

Time Value
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.

Underlying Security
The security subject to being purchased or sold upon exercise of the option contract.

Undervalued
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.

Unit of Trading
The minimum quantity or amount allowed when trading a security. The normal minimum for common stock is 1 round lot or 100 shares. The normal minimum for options is one contract (which normally covers 100 shares of stock).

Vega
A measure of the rate of change in an option’s theoretical value for a one-unit change in the volatility assumption.

Vertical Spread
Most commonly used to describe the purchase of one option and sale of another where both are of the same type and same expiration, but have different strike prices. Also used to describe a delta-neutral spread in which more options are sold than are purchased.

Volatility
A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.


Write
To sell an option. The investor who sells is called the writer.

Be sure to understand all basic definitions associated with trading stock options. Happy investing!

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Trading Stock Options R-S

Trading stock options is a great way to invest. Read the terms below as well as other options trading terms.

Ratio Calendar Spread
Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.

Ratio Spread
Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of more out-of-the-money options.

Ratio Strategy
A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.

Ratio Write
Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.

Return if Exercised
The return that a covered call writer would make if the underlying stock were called away

Series
All option contracts of the same class that also have the same unit of trade, expiration date and strike price.

Settlement Price
The official price at the end of a trading session. This price is established by The Options Clearing Corporation and is used to determine changes in account equity, margin requirements, and for other purposes.

Short Position
A position wherein a person’s interest in a particular series of options is as a net writer.

Spread Order
An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders, not held orders, or orders with discretion

Spread Strategy
Any option position having both long options and short options of the same type on the same underlying security

Straddle
The purchase or sale of an equal number of puts and calls having the same terms.

Strike Price
The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

Synthetic Put
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.

Be sure to read more about how to trade options.

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Options for Dummies Glossary Term N-P

Learn options for dummies by reading the below terms.

Neutral
Describing an opinion that is neither bearish nor bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock or index

Non-Equity Option
An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options

Opening Purchase
A transaction in which the purchaser’s intention is to create or increase a long position in a given series of options.

Opening Sale
A transaction in which the seller’s intention is to create or increase a short position in a given series of options.

Opening Transaction
A trade which adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities.

Open Interest
The number of outstanding option contracts in the exchange market or in a particular class or series.

Options Clearing Corporation (OCC)
The issuer of all listed option contracts that are trading on the national option exchanges.

Out-of-the-money
A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Over-the-Counter Option (OTC)
An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates

Position Limit
The maximum number of put or call contracts on the same side of the market that can be held in any one account or group of related accounts. Short puts and long calls are on the same side of the market. Short calls and long puts are on the same side of the market.

Premium
The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract.

Put
An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.

Learn more about options by reading the options trading terms A-B. You can also learn other stock trading terms in this blog as well. Happy investing!

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How to Trade Options Glossary Terms G-M

Learn how to trade options by starting with the options glossary terms below.

Gamma
The rate of change in an option

Holder
The purchaser of an option.

Horizontal Spread
An option strategy in which the options have the same striking price, but different expiration dates.

Implied Volatility
A measure of the volatility of the underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price changes of the underlying stock

Index Option
An option whose underlying entity is an index. Most index options are cash-based

In-the-money
A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-the-money if the security is below the striking price.

Intrinsic value
The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. 

Last Trading Day
The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month.

LEAPS®
Long-term Equity Anticipation Securities, or LEAPS®, are long-term stock or index options. LEAPS®, like all options, are available in two types, calls and puts, with expiration dates up to three years in the future.

Leg
A risk-oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction to establish the position (a spread, for example), the trader first executes one side of the position, hoping to execute the other side at a later time and a better price. The risk materializes from the fact that a better price may never be available, and a worse price must eventually be accepted.

Listed Option
A put or call option that is traded on a national options exchange. Listed options have fixed striking prices and expiration dates

Margin Requirement (for options)
The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.

Married Put and Stock
The simultaneous purchase of stock and the corresponding number of put options. This is a limited risk strategy during the life of the puts because the stock can be sold at the strike price of the puts.

Married Put Strategy
A put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge.

Read more options trading terms as well as the Western and Japanese technical stock terms.

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Options Glossary Terms E-F

Early Exercise (assignment)
The exercise or assignment of an option contract before its expiration date. <P clas

Ex-Dividend
The process whereby a stock’s price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock on the ex-date will receive the dividend, and those who are short stock must pay out the dividend.

Exercise
To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise Limit
The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from “cornering” the market in a stock.

Exercise price
The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. It is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. For listed options, the exercise price is the same as the Striking Price.

Exercise settlement amount
The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

Expiration cycle
An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.

Expiration date
The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. Holders of options should indicate their desire to exercise, if they wish to do so, by this date.

Expiration time
The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30PM on the business day preceding the expiration date. The times are Eastern Time.

Fair Value
Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. Also sometimes used to indicate intrinsic value

Float
The number of shares outstanding of a particular common stock.

Be sure you read stock options trading terms C-D as well as options trading terms A-B.

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Stock Options Trading Terms C-D

Learn stock options trading terms by reading through the list below.

Call

An Option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Cash-Based
Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, either stock or commodity, is received or delivered.

Cash Settlement
The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock.

CBOE
The Chicago Board Options Exchange; the first national exchange to trade listed stock options.

Class
A term used to refer to all put and call contracts on the same underlying security.

Closing Purchase
A transaction in which the purchaser’s intention is to reduce or eliminate a short position in a given series of options.

Closing Sale
A transaction in which the seller’s intention is to reduce or eliminate a long position in a given series of options

Closing Transaction
A trade that reduced an investor’s position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions.

Combination
Any position involving both put and call options that is not a straddle.

Cover
To buy back as a closing transaction an option that was initially written.

Covered
A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security.

Covered Call
An option strategy in which a call option is written against long stock on a share-for-share basis.

Covered Call Option Writing
A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security.

Covered Put Write
A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.

Covered Straddle
An option strategy in which one call and one put with the same strike price and expiration are written against 100 shares of the underlying stock.

Cycle
The expiration dates applicable to various classes of options. There are three cycles: January/April/July/October, February/May/August/November, and March/June/September/ December.

Debit
An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.

Deliver
To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.

Delivery
The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity from the seller of the futures contract to the buyer. Equivalent delivery refers to a situation in which delivery may be made in any of various, similar entities that are equivalent to each other (for example, Treasury bonds with differing coupon rates).

Delta
The amount by which an option’s price will change for a one-point change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option’s price change, so that the delta will be altered for even fractional changes by the underlying entity.

Delta Spread
A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.

Be sure that you learned about options trading terms A-B.

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Options Trading Terms A-B

View some options trading terms below. You can also view other stock trading terms that are helpful in this blog. Happy investing!

Ask Price

The price at which a seller is offering to sell an option or stock.

Assignment

The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

At-the-money

An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

Automatic Exercise

A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.

Bearish

An adjective describing an opinion or outlook that expects a decline in price, either by the general market or by an underlying stock, or both.

Bear Spread

An option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date.

Beta

A measure of how a stock’s movement correlates to the movement of the entire stock market. The Beta is not the same as volatility.

Bid Price

The price at which a buyer is willing to buy an option or stock.

Box Spread

A type of option arbitrage in which both a bull spread and a bear spread are established for a near-riskless position. One spread is established using put options and the other is established using calls. The spread may both be debit spreads (call bull spread vs. put bear spread) or both credit spreads ( call bear spread vs. put bull spread). Break-Even Point–the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A “dynamic” break-even point is one that changes as time passes.

Bullish

Describing an opinion or outlook in which one expects a rise in price, either by the general market or by an individual security.

Bull Spread

An option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date. Either puts or calls may be used for the strategy.

Butterfly Spread

An option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three striking prices are involved, with the lower two being utilized in one spread and the higher two in the opposite spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position.

Be sure to read about the Western and Japanese technical stock terms if you haven’t already as well.

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Options Trading Advisor

Selecting an Options Trading Advisor
Selecting an options trading advisor is an important step in preparing to trade options. Before we break down the different types of accounts, let’s talk with the beginners first. If you have experience investing in the stock market, you probably already know that you can trade options with you current account.

Selecting an Options Trading Advisor
For the beginner, this is a very important step. In fact, selecting an options trading advisor and creating a stock trading plan are the two most important things you can do prior to entering the market. The critical factors in selecting an options trading advisor are:

  • Know Yourself – Be honest in evaluating your tendencies; are you a risk taker? Do you like to study and do research? Do you enjoy the idea of investment risk? Do you realize that you have more dollars than sense? You know the answers to questions like these; it is important that you understand your tendencies because there are options trading advisors for every personality type.
  • Knowing The Available Advisors – Sounds difficult but once you have done a self-evaluation, you are well on your way to finding the right options trading advisor for you. Investment firms offer a number of different accounts types based on the needs you have.
  • What Are The Different Types of Accounts?
  • Trading accounts vary based of level of service, cost and available resources. The list below will give you an idea of the different types of accounts available:
  • Discount Trade – This type of account is intended for the experienced trader; you will not have the security of an options trading advisor. Because you will be calling your directly to the order desk or the floor, you will receive nearly instantaneous placing of orders. The commissions for discount trades are low but little is available as far as research or recommendations from an options trading advisor.
  • Internet Trade – Is it important to you to talk with an options trading advisor? If not, Internet trade may be the way for you to go. You can place trades, cancel replace orders, view your account status and get real time quotes, all with the click of your mouse. Since you are handling your own account, commissions are low, ranging from $10 to $40 per transaction. Like discount trades, this isn’t recommended as the best alternative for beginners because there is little support beyond implementing positions.
  • Broker Assisted Accounts – If you have some experience in the stock market but still need the guidance of an options trading advisor, this is an excellent option. In addition a beginner who is extremely disciplined and dedicated to learning might be interested in this level of support. Options trading advisors are available to help you with information, advice, placing orders and charting. Prices are in the $50 range per transaction which falls directly between discount trades and full service brokers.
  • Full Service Recommendations – With this type of options trading advisor you will likely be on a first-name basis, since he or she will probably be assigned to your account. Such advisors will be able to help you form an investment philosophy as well as placing trades, offering investment advice and reviewing your individual trades. This is the most expensive option but the best for the beginner or the investor that doesn’t want to spend the time to research and chart potential positions. Commissions for a service such as this range upwards of $100.
  • Day Traders – Do you want to participate in the lightening quick trading of day trading? If you want to regularly trade in and out of positions on the same day? If you are committed to turning your positions every day, this is a good account for you. Commissions are reasonable and range from $10 to $25.

Conclusion
Along with the trading rules in your stock trading plan, selecting an options trading advisor and trading account will likely be your most important decisions in the stock market. Analyze your personal approach and tendencies and select your options trading advisor based on your needs.

Be sure to learn more about options as well as how to develop your options trading plan.

 

 

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Options Exchanges

A Discussion of Options Exchanges
An important part of formulating a stock trading plan is provisions for options trading as well. In the options exchange, options orders are agreements between two investors where one party agrees to deliver something in the stock market to another party within a specific time period and for a specific price. Ownership, as normally defined, does not exist because you don’t need to possess a particular stock in order to implement a position.

In the options exchange, 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 purchase the designated options; in addition, the holder is entitled to simply let the options order expire without investing further.

Options Exchanges
When formulating a trading plan for options, your investment philosophy will be unaffected by the options exchange and their locations. With the use of the Internet and options trading advisors, location is not much of an issue. Some of the better known options exchanges are:

  • Philadelphia Stock Exchange (Philadelphia, PA)
  • Chicago Stock Exchange (Chicago, IL)
  • American Stock Exchange (New York, NY)
  • Chicago Board Options Exchange (Chicago, IL)
  • Pacific Stock Exchange (San Francisco, CA)
  • Cincinnati Stock Exchange (Chicago, IL)
  • International Securities Exchange (New York, NY)
  • New York Board of Trade (New York, NY)
  • New York Stock Exchange (New York, NY)
  • NASDAQ Stock Market (New York, NY)
  • Boston Stock Exchange (Boston, MA)
  • Kansas City Board of Trade (Kansas City, MO)
  • Philadelphia Board of Trade (Philadelphia, PA)

Types of Options Orders
Options orders cover in a number of different scenarios, offering the investor the ability to buy or sell and setting conditions for the transactions. The following are some of the options orders that are available:

  • Buying Calls – Buying a Call in the options exchange is a bullish options order on an underlying stock value. The investor has the opportunity to speculate on the rise of the stock’s value for the term of the contract with a predetermined risk. Most investors will look to sell their contract at a profit, while others may intend to exercise their right and purchase the underlying shares.
  • Buying Puts – Buying Puts in the options exchange is a bearish, somewhat speculative options order in which the investor anticipates that a stock will decrease in price during a set period of time. The trader realizes a profit when the stock and its underlying put option decrease in price during a set amount of time.
  • Selling Puts – When you sell puts in the options exchange, you are selling someone the right to sell you the underlying asset at a fixed price, on or before the expiration date of the option order. You can use this options order when you are bullish on the market and feel that it isn’t likely to go down in the short term, you can sell puts on a quality asset that you would like to own at a discount.
  • Selling Covered Calls – Selling a covered call is an order in the options exchange where investors are willing to pay for the right to take a stock if it reaches a much higher price. It is an excellent strategy to implement while waiting for a stock to reach your identified sell point.
  • Buying Strangle – A strangle buy in the options exchange is implemented by purchasing a call option and a put option on the same asset with the same strike price and expiration date.
  • Buying Straddle – A buy straddle is implemented by purchasing a call option and a put option on the same asset with the same strike price and expiration date. In the options exchange this is a desirable move because the risk is limited to losing the premium paid but its reward is unlimited.

Improving Your Odds In The Options Exchange
Is there anything else you can do to increase your chances of success in the options exchange? Yes there is; using a trading system like Japanese Candlesticks adds a powerful charting system, especially in the options exchange. Candlesticks was invented over 300 years ago as a method for trading in the rice markets of ancient Japan. The success of the system has grown and developed and it is an amazing tool for today’s options exchange. With the charting abilities you will gain from Japanese Candlesticks you could literally have a view inside the directions of options before they even move. Added to your trading plan, Candlesticks can put you in the right company for successful trading in the options exchange.

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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