Archives for January 2013

Selling calls is a bearish options trading strategy that is also known by the name vertical bear calls. When an investor feels bearish on the market, a good strategy may be to engage in selling calls or selling bear calls. This is considered a bearish strategy because the trader profits if the underlying stock decreases in value. Basically, the strategy is to buy out-of-the-money call options and sell in-the-money call options on the same stock with the same expiration date. The plan is that the in-the-money stock closes lower than its strike price at its expiration date. Not the trader realizes maximum profits from selling calls.

When selling calls, the investor will experience maximum loss, when the stock price increases above the higher out-of-the-money call option strike price at the expiration date. This loss will be the difference between the two strike prices minus the net credit of the spread when it was originated. While there is risk involved this strategy allows investors to find profits even when the market is bearish by selling calls.

The downside of selling calls is that while it is lower risk than simply buying puts options, it also has limited profit potential. The break-even is at the lower strike price plus net credit. The maximum profit potential is when the stock decreases below the in-the-money call option strike price.

For example, an investor wants to sell calls on ABC, Corp. The stock price is $39.875. The trader sells an in-the-money call option with a June expiration at a strike price of $35 for $5. At the same time, the investor buys an out-of-the-money call option with a June expiration at a strike price of $40 for $1.56. Selling a call such as this is a net credit of $3.44 (spread of $5) or the difference between the costs of the two options. If the stock price is lower the in-the-money strike price on the expiration date, this would be a maximum profit of the net credit when selling the calls. ($5.00 – $1.56= $3.44 x 1 contract (100 shares) for a maximum profit of $344) Conversely, the maximum loss would be if the stock closed above the out-of-the-money strike price on its expiration date. ($5.00 Call Spread – $3.44 net credit received = $1.56 x 1 contract for a maximum loss of $156.00) Because the risk is low, the risk reward ratios when selling calls are still very good.

A successful trader will adequately investigate such a move prior to selling calls. That way he or she can be assured that the trade has a high probability of success. As with any trade the investor needs to understand the risks and potential profits involved in order to make a wise decision. Using a stock trading system such as Japanese Candlesticks, the investor has access to charts that are understandable and powerful data in the attempt to sell calls to make a profit.

In addition to Free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

Learn how you can quickly learn to read stock charts and make money trading using candlestick patterns.

Buying puts is a bearish options trading strategy and is also referred to as “buying in-the-money puts.” It is a somewhat speculative technique in which the investor anticipates that a stock will decrease in price during a specific 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. The profit potential is limited because a stock price can never go below zero. When buying puts, if the price of the stock remains steady or rises during the option period, it is possible for the trader to lose the initial investment. This risk is however limited to the amount paid for the premium on the put option.

Buying puts is dependent on the timing and the charting of a stock’s movement to catch a downward price movement. Accurate charting of a stock and the technical analysis of its performance, as well as direction are critical when buying puts. There are a variety of events that can move the price of a stock down as desired, such as poor earnings reports, buyout or acquisition of the company, and new product introduction. These types of events can shape the views of investors and impact the stock market. This strategy of buying puts can also put more money in the pockets of successful traders.

The downside of buying puts tends to be the possibility of an error of judgment. If an investor decides to buy puts on a stock without properly researching its position or charting its movement, it is possible that the stock will be bullish or that it will change from bearish to bullish. In essence, if a stock reaches its bottom or is rising, the trader may move at the wrong time and is in danger of losing the premium for the trade.

Buying puts is actually an alternative to selling short on a stock. While it is similar to buying calls, the advantage of buying puts over selling short lies in the ability to leverage the transaction and make your trading more successful. Since the puts can be purchased on the margin, it is possible to control a much larger number of shares, thereby increasing the profit potential on the purchase. Downward movements in stock prices and their underlying put options create much larger returns than by simply selling short.

The price of a premium for buying puts is affected by two variables. First, the time period involved for the option is a determining factor in price. The longer the time between purchase and expiration dates, the higher the price. Second, the movement of the underlying stock affects the price of the premium, especially in relation to the stock’s strike price. A stock that has been in a bearish trend will have a higher premium than a stock in a bullish trend.

Throughout his investment career, Stephen Bigalow has directed his investment acumen towards developing improved methods for extracting profits from the investment markets. His research, encompassing all fundamental and technical methods, resulted in verifying that Candlestick analysis was superior to any other method when evaluating stocks.

In addition to Free tutorials, videos, and live trading room hosted by Stephen Bigalow weekly, you  can access Steve’s daily market comments that provide insight into the markets. View member benefits for more information.

Learn how you can quickly learn to read stock charts and make money trading using candlestick patterns.

Don’t forget to note the Stock Market Holidays for 2013 as well!