High effective options trading pattern called «Guide»

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Contents

4 Effective Trading Indicators Every Trader Should Know

When your forex trading adventure begins, you’ll likely be met with a swarm of different methods for trading. However, most trading opportunities can be easily identified with just one of four chart indicators. Once you know how to use the Moving Average, RSI, Stochastic, & MACD indicator, you’ll be well on your way to executing your trading plan like a pro. You’ll also be provided with a free reinforcement tool so that you’ll know how to identify trades using these forex indicators every day.

The Benefits of a Simple Strategy

Traders tend to overcomplicate things when they’re starting out in the forex market. This fact is unfortunate but undeniably true. Traders often feel that a complex trading strategy with many moving parts must be better when they should focus on keeping things as simple as possible. This is because a simple strategy allows for quick reactions and less stress.

If you’re just getting started, you should seek the most effective and simple strategies for identifying trades and stick with that approach.

Discover the Best Forex Indicators for a Simple Strategy

One way to simplify your trading is through a trading plan that includes chart indicators and a few rules as to how you should use those indicators. In keeping with the idea that simple is best, there are four easy indicators you should become familiar with using one or two at a time to identify trading entry and exit points:

  • Moving Average
  • RSI (Relative Strength Index)
  • Slow Stochastic
  • MACD

Once you are trading a live account a simple plan with simple rules will be your best ally.

Using Forex Indicators to Read Charts for Different Market Environments

There are many fundamental factors when determining the value of a currency relative to another currency. Many traders opt to look at the charts as a simplified way to identify trading opportunities – using forex indicators to do so.

When looking at the charts, you’ll notice two common market environments. The two environments are either ranging markets with a strong level of support and resistance , or floor and ceiling that price isn’t breaking through or a trending market where price is steadily moving higher or lower.

Using technical analysis allows you as a trader to identify range bound or trending environments and then find higher probability entries or exits based on their readings. Reading the indicators is as simple as putting them on the chart.

Trading with Moving Averages

One of the best forex indicators for any strategy is moving average. Moving averages make it easier for traders to locate trading opportunities in the direction of the overall trend. When the market is trending up, you can use the moving average or multiple moving averages to identify the trend and the right time to buy or sell.

The moving average is a plotted line that simply measures the average price of a currency pair over a specific period of time, like the last 200 days or year of price action to understand the overall direction.

Learn Forex: GBPUSD Daily Chart – Moving Average

You’ll notice a trade idea was generated above only with adding a few moving averages to the chart. Identifying trade opportunities with moving averages allows you see and trade off of momentum by entering when the currency pair moves in the direction of the moving average, and exiting when it begins to move opposite.

Trading with RSI

The Relative Strength Index or RSI is an oscillator that is simple and helpful in its application. Oscillators like the RSI help you determine when a currency is overbought or oversold, so a reversal is likely. For those who like to ‘buy low and sell high’, the RSI may be the right indicator for you.

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The RSI can be used equally well in trending or ranging markets to locate better entry and exit prices. When markets have no clear direction and are ranging, you can take either buy or sell signals like you see above. When markets are trending, it becomes more obvious which direction to trade (one benefit of trend trading ) and you only want to enter in the direction of the trend when the indicator is recovering from extremes.

Because the RSI is an oscillator, it is plotted with values between 0 and 100. The value of 100 is considered overbought and a reversal to the downside is likely whereas the value of 0 is considered oversold and a reversal to the upside is commonplace. If an uptrend has been discovered, you would want to identify the RSI reversing from readings below 30 or oversold before entering back in the direction of the trend.

Trading with Stochastics

Slow stochastics are an oscillator like the RSI that can help you locate overbought or oversold environments, likely making a reversal in price. The unique aspect of trading with the stochastic indicator is the two lines, %K and %D line to signal our entry.

Because the oscillator has the same overbought or oversold readings, you simply look for the %K line to cross above the %D line through the 20 level to identify a solid buy signal in the direction of the trend.

Trading with the Moving Average Convergence & Divergence (MACD)

Sometimes known as the king of oscillators, the MACD can be used well in trending or ranging markets due to its use of moving averages provide a visual display of changes in momentum.

After you’ve identified the market environment as either ranging or trading, there are two things you want to look for to derive signals from this indictor. First, you want to recognize the lines in relation to the zero line which identify an upward or downward bias of the currency pair. Second, you want to identify a crossover or cross under of the MACD line (Red) to the Signal line (Blue) for a buy or sell trade, respectively.

Like all indicators, the MACD is best coupled with an identified trend or range-bound market. Once you’ve identified the trend, it is best to take crossovers of the MACD line in the direction of the trend. When you’ve entered the trade, you can set stops below the recent price extreme before the crossover, and set a trade limit at twice the amount you’re risking.

Learn More about Forex Trading with our Free Guides

If you’re looking to boost your forex trading knowledge even further, you might want to read one of our free trading guides . These in-depth resources cover everything you need to know about learning to trade forex such as how to read a forex quote, planning your forex trading strategy and becoming a successful trader .

You can also sign up to our free webinars to get daily news updates and trading tips from the experts.

Six Options Strategies for High-Volatility Trading Environments

The recent rise in volatility means it could be time to talk about strategies designed to capitalize on elevated volatility levels.

Key Takeaways

  • High-vol bullish strategies include short puts and short put vertical spreads
  • High-vol bearish strategies include short call vertical spreads and “unbalanced” butterfly spreads
  • High-vol neutral strategies include iron condors and long butterfly spreads

Trading options is more than just being bullish or bearish or market neutral. There’s volatility. Limitations on capital. Stronger or weaker directional biases. Whatever the scenario, you have the choice of a logical option strategy that can be risk-defined, capital-effective, and/or have a higher probability of profit than simply buying or shorting stock.

By sorting each strategy into buckets covering each potential combination of these three variables, you can create a handy reference guide. You could even print it out and tape it to your wall. Doing so might help you run through the process of making speedy trading decisions should you need or if warranted.

We’ll help you get started with this list of strategies designed for a high-volatility market environment. N otice how most of them are composed of the basic vertical and calendar spreads. As you review them, keep in mind that there are no guarantees with these strategies. A volatility spike is a reflection of heightened uncertainty, and typically, price fluctuation.

6 Strategies for High-Volatility Markets

Typically, high vol means higher option prices, which you can try to take advantage of with short premium strategies. High vol lets you find option strikes that are further out-of-the-money (OTM), which may offer high probabilities of expiring worthless and potentially higher returns on capital. Pushing short options further OTM also means that strategies have more room for the stock price to move against them before they begin to lose money. Here are a few bullish, bearish, and neutral strategies designed for high-volatility scenarios.

Bullish Strategy No. 1: Short Naked Put

STRUCTURE: Sell put

CAPITAL REQUIREMENT: Higher

RISK: Technically defined, as a stock can go all the way to zero, but no lower. So while it’s defined, zero can be a long way down. See figure 1.

Those with an interest in this strategy could consider looking for OTM options that have a high probability of expiring worthless and high return on capital. Capital requirements are higher for high-priced stocks; lower for low-priced stocks. Account size may determine whether you can do the trade or not. Many traders may look for expiration in the short premium “sweet spot,” typically between 20 and 50 days out, depending on the level of implied volatility, upcoming news or company announcements, among other factors. Targeting the sweet spot aims to balance growing positive time decay with still-high extrinsic value. Choose a stock you’re comfortable owning if the stock drops and short put is assigned. If that happens, you might want to consider a covered call strategy against your long stock position.

Bullish Strategy No. 2: Short OTM Put Vertical

STRUCTURE: Sell put, buy lower-strike put of same expiration.

CAPITAL REQUIREMENT: Lower; depends on difference between strikes

RISK: Defined. See figure 2.

Traders consider using this strategy when the capital requirement of short put is too high for an account, or if defined risk is preferred. Traders might target credit for a short vertical around 1/3 of the width of the strikes (i.e. $0.33 if the strikes are $1 apart). Traders commonly consider looking for expiration in the short premium “sweet spot,” again, typically around 20 to 50 days out. Some traders create a short OTM put vertical by looking for OTM put that has high probability (perhaps 65-70%) of expiring worthless, then look at buying further OTM put to try to get the target credit, typically one or two more strikes OTM.

Bearish Strategy No. 1: Short OTM Call Vertical

STRUCTURE: Sell call, buy higher-strike call of same expiration.

CAPITAL REQUIREMENT: Lower, but depends on difference between strikes

RISK: Defined. See figure 3.

Some traders look to target the credit of the trade at 30% of the difference between strikes (i.e. $0.30 if the strikes are $1 apart). Consider looking for expiration in the “sweet spot,” typically between 20 to 50 days out. Create by looking for an OTM call that has a high probability of expiring worthless (again, perhaps 65-70%) , then look at buying a further OTM call to try to get the target credit, typically one or two strikes further OTM.

Bearish Strategy No. 2: Long Unbalanced Call Butterfly

STRUCTURE: Buy 1 call, sell 3 higher-strike calls, buy 2 higher-strike calls; strikes equidistant.

CAPITAL REQUIREMENT: Lower; depends on difference between long and short strikes

RISK: Defined. See figure 4.

Combination of a short OTM call vertical and long at-the-money (ATM) or slightly OTM call butterfly. This should be a credit spread, where the credit from the short vertical offsets the debit of the butterfly. This is not aggressively bearish, as max profit is achieved if stock is at short strike of embedded butterfly. But if an unbalanced call butterfly is initiated for a credit, it should not lose money if the stock drops and the options in the position expires worthless.

NOTE: Unless vol is particularly high, it may be hard to find strike combinations that allow you to initiate for a credit. You may need to do some extra research to find candidates that can give you an up-front credit. If instead of a bearish bias, your bias is bullish, you could consider an unbalanced put butterfly, which consists of the same 1-3-2 ratio, only working down from the ATM and in equidistant strikes. Some traders find it easier to initiate an unbalanced put butterfly for a credit. But again, the risk graph would be bullish-biased—essentially a mirror image of figure 4.

Neutral Strategy No. 1: Iron Condor

STRUCTURE: Sell lower-strike put vertical, sell higher-strike call vertical; distance between long and short strikes same.

CAPITAL REQUIREMENT: Lower; depends on difference between strikes

RISK: Defined. See figure 5.

Consider targeting the credit to a fixed percentage of the trade, such as 40% of the difference between long and short strikes (i.e. $0.80 or higher in a $2-wide iron condor). Traders generally look for expiration in what some consider to be the the short premium “sweet spot,” typically between 20 and 50 days out, to balance growing positive time decay with still-high extrinsic value. Higher vol lets you find further OTM calls and puts that have high probability of expiring worthless but with high premium. Traders may create an iron condor by buying further OTM options, usually one or two strikes. You might not want to put it on for too small of a credit no matter how high the probability, as commissions on 4 legs can sometimes eat up most of potential profit.

Neutral Strategy No. 2: Long ATM Call or Put Butterfly

STRUCTURE: Buy 1 lower-strike option, sell 2 higher-strike options, buy 1 higher-strike option; all calls or puts, all strikes equidistant.

CAPITAL REQUIREMENT: Lower

RISK: Defined. See figure 6.

Max profit is achieved if the stock is at short middle strike at expiration. Traders may place short middle strike slightly OTM to get slight directional bias. The probability of profit is usually under 50% due to the narrow profit range of a long butterfly. High volatility keeps value the of ATM butterflies lower. Butterflies expand in value most rapidly as expiration approaches, so traders may look at options that expire in 14 to 21 days. Short gamma increases dramatically at expiration (i.e., increases the magnitude of the options change in value) if the stock is at the short strike. Consider taking profit—if available—ahead of expiration to avoid butterfly turning into a loser from a last-minute price swing.

NOTE: Butterflies have a low risk but high reward. They’re often inexpensive to initiate. Some traders would say they’re inexpensive for a reason, which is that maximizing the return from a butterfly requires not only a pinpoint target in the stock price, but also pinpoint timing.

Let’s face it; periods of high volatility can be unsettling. After all, volatility is related to uncertainty, and, where money is concerned, uncertainty can be unpleasant. But if volatility has you feeling like you’ve been handed a bag of lemons, experienced options traders can consider these strategies as a way to try and make some lemonade.

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Key Takeaways

  • High-vol bullish strategies include short puts and short put vertical spreads
  • High-vol bearish strategies include short call vertical spreads and “unbalanced” butterfly spreads
  • High-vol neutral strategies include iron condors and long butterfly spreads
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TradeWise strategies are not intended for use in IRAs, may not be suitable or appropriate for IRA clients, and should not be relied upon in making the decision to buy or sell a security, or pursue a particular investment strategy in an IRA.

The naked put strategy includes a high risk of purchasing the corresponding stock at the strike price when the market price of the stock will likely be lower. Naked option strategies involve the highest amount of risk and are only appropriate for traders with the highest risk tolerance.

The covered call strategy can limit the upside potential of the underlying stock position, as the stock would likely be called away in the event of substantial stock price increase.

Please note that the examples above do not account for transaction costs or dividends. Options orders placed online at TD Ameritrade carry a $0.65 fee per contract. Orders placed by other means will have additional transaction costs.

Spreads and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades.

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

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Getting Started in Options Trading

To start trading options, you will need to have a trading account with an options brokerage. Once you have setup your account, you can then place options trades with your broker who will execute it on your behalf.

Opening a Trading Account

When opening a trading account with a brokerage firm, you will be asked whether you wish to open a cash account or a margin account.

Cash Account vs. Margin Account

The difference between a cash account and a margin account is that a margin account allows you to use your existing holdings (eg. stocks or long-term options) as collaterals to borrow funds from the brokerage to finance additional purchases. With cash accounts, you can only use the available cash in your account to pay for all your stock and options trades.

Minimum Deposit

There is usually a minimum deposit required to open a trading account. The amount required depends on the type of account that you are opening as well as the brokerage firm. Little or no deposit is required to open a cash account while federal regulations require a deposit of at least $2000 to open a margin-enabled account.

Online Brokerage vs. Offline Brokerage

To trade options effectively, I find it necessary to trade via an online brokerage account as there are simply too many variables in a typical options trade, as compared to a stock trade. Having to communicate too many details in one trade to your broker over the phone also increases the chance of miscommunication which can prove very costly.

With technology so advanced these days, online brokerages for options now offer highly intuitive user interfaces where it is far easier to place option trades online than having to do it over the phone. Moreover, while a human broker can only handle one client at a time, online brokerages can handle thousands of orders simultaneously. Thus, it is no coincidence that the rise of option trading also coincide with the rapid advancement of internet technologies.

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Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Options Trading: What It Is, How It Works & BEST Strategies

It’s important to know about all sorts of trading strategies. So let’s take a little time to talk about some options trading examples and how it all works.

Even though I don’t do options trading, that doesn’t mean you can’t or shouldn’t.

Why am I taking the time to do this? Because I understand that trading isn’t one size fits all.

I made my fortune trading penny stocks, and that’s what I teach my students. But I also think it’s important to learn all about the different trading strategies out there so you can decide for yourself what you want to pursue.

Becoming a self-sufficient trader is all about finding out what works for you and refining your methods over time.

For some traders, options have proven a successful strategy. Could it be a good fit for you? Read on to learn more — I’ll cover some fundamental basics, key terms, and strategies for options beginners.

Table of Contents

What Is Options Trading?

Options are a specific type of security called a derivative.

There are lots of examples of derivative investments. They’re a type of financial security that’s valued based on either a single or a group of underlying assets.

Some examples of these underlying assets include bonds, commodities, currencies, stocks, and market indexes.

Derivatives can be traded like stocks, either OTC (over the counter) or via an exchange. Their price can and will fluctuate based on the value of the underlying stock. That’s where the inherent risk comes in.

Option prices are derivatives of the stocks they represent.

Options Trading Rights and Obligations

With options, you get the right — but not the obligation — to purchase or sell a certain amount of stock (or other securities) at a pre-arranged price and on a specific date. That price is derived from the stock’s price.

Options are contracts, but they give you the rights to buy or sell — not an obligation. They’re different from regular stock plays and futures because you can decide not to go through with the contract.

Options Trading Examples: How Can You Succeed?

Before I answer that question, I gotta say this: I’m not an options trader and I’m in no way giving you trading or financial advice. All trading is risky. Never risk more than you can afford. Do your due diligence.

To succeed as an options trader, your education is vital. You need to know how it works and how trades play out.

Keep reading to learn options trading basics along with some examples to help you start to put it all together.

How Does Options Trading Work?

Think of how options trading works in terms of selling a car to a private buyer.

  • You meet the buyer who looks over the car and gives you a deposit to hold the vehicle.
  • You get to keep the deposit even if the buyer decides not to return with the full purchase price by the agreed-upon date.
  • The prospective buyer has bought the option to buy the car by whatever deadline you set.
  • If the buyer doesn’t, you can sell the car to someone else — maybe even for a higher price — and you already have the deposit in your pocket.

Options trading is far more complicated than that, but it can be easier to understand when you have an example outside of stock market options.

I really want to stress that you need to learn the basics of options trading before you execute any contracts.

Otherwise, you’ll lose money like thousands of other traders who jump into options trading without the right knowledge.

Options Trading Brokers

Just like with stocks, you need a broker to trade options. However, not all brokers offer options trading.

If you’re happy with your current broker, check with them first to see if they offer options trading. And if they do, find out what their requirements are.

If your broker doesn’t offer options trading, you’ll need to find one that does. Remember: don’t take this decision lightly. Be sure to do plenty of research on options brokers before settling on one.

While this post focuses on choosing a stockbroker, many of the tips are relevant for choosing an options trading broker too.

Types of Options

With options, you have … well, options. Let’s talk about some of the different types.

Long vs. Short Options

With stocks, you can go long or take a short position. With options, you can trade either call or put options. Here’s a brief synopsis of what they are and how they work…

Call Option

A call option is a potential future trade.

For example, say you want to purchase 1,000 shares of Stock X at $4.20 per share at some point in the future because you believe it’ll go up in price.

You can purchase a call option to make this purchase at any point within a finite period. You’re kind of calling dibs or locking in that price.

However, the person selling doesn’t necessarily just want you calling dibs without getting something in return.

As the buyer, you’ve got to put down a premium — that’s the price of the options contract.

The benefit is that if the stock goes up in value, you can still complete the purchase at the agreed-upon price during the contract period. The premium you pay acts as a down payment.

However, if the option’s expiration date passes and you don’t move forward, you don’t get the premium back.

Put Option

A put option is a contract where you as a contract holder have the right to sell the asset in question at any time within a predetermined, finite period.

Say you want to sell shares of a stock. You set your strike price — say it’s $5. With a put option, you can sell your shares for that price at any point before the expiration date.

The benefit of this method is that even if the stock value goes down dramatically, you can still get the agreed-upon price.

A put seller receives a premium or down payment in this case. A single put option represents a specific amount of the underlying asset in question. Frequently, it’s one put option to 100 shares of the underlying asset.

In other words, the “down payment” is 1/100th of the total purchase price.

Trading Call vs. Put Options

  • A call option is best when you believe the price of a stock will rise.
  • A put option is best when you believe the price of a stock will fall.

Benefits and Advantages of Trading Options

Some of my students have had excellent results with options trading. They’ve studied the market, recognized the potential pitfalls, and traded options with their own risk tolerance in mind.

Why do some successful traders love options trading? Here are some advantages.

Flexibility

Options can give you a ton of flexibility.

Yes, you have to plunk down that premium, but it affords you the flexibility to make the decision of whether to actually exercise the option later.

You don’t have to exercise the option if you choose not to. There’s no punishment. When the expiration date comes, the option becomes null and void.

Yes, this means that you lose the investment that you made for the option premium, but you won’t suffer any additional losses.

Also, since options are a type of derivative, you can use them to trade all sorts of financial securities like commodities and foreign currencies to name a few … It’s not just for stocks.

Limited Risk for Buyers

I’m all about cutting losses and limiting risk. Options can let you limit risk, which is a good thing.

Yes, you do have to put down that premium, and if you don’t exercise the option within a set period of time, you may forfeit that payment. So, in that way, there’s considerable risk depending on the number of shares you intend to buy or sell.

However, that risk can be minimal compared to the potential losses you might suffer if you made the trade without an options contract.

Speculation

Yep … If you think options sound a bit like prospecting, you’re right. There’s a certain level of speculation involved in options trading.

For instance, if you purchase a call option, you probably have a strong belief that its value will go up in time and that you’ll be able to buy in at a low price. Employing a call option versus simply buying the asset or stock allows you additional time.

But remember the car sale scenario. The buyer puts down a deposit against the agreed-upon price. That’s all well and good. But the seller holds the cards here. If the buyer doesn’t come back, the seller keeps the cash.

It works the same with options trading.

Hedging

While options buyers often speculate to a certain degree, one of the biggest appeals of options is that you can hedge your bets, so to speak. Hedging is a method of reducing risk.

I hate risk. Have I said that already? Let me say it again: I hate risk. And you should, too.

Like in the car sale analogy, an options premium creates a stopgap. It basically says, This is the most I’ll lose on this deal if it goes south.”

Basically, you’re guaranteeing that this would be the maximum amount that you’d lose if things don’t go your way. It’s almost like an insurance policy. Yes, you have to pay for insurance, but if something goes wrong, you’re covered.

Some will say that if you’re not sure of a stock investment, you haven’t done enough research and it’s too risky to even pursue.

But some traders think that hedging can be an intelligent approach … you never know what factors will play into a stock’s or asset’s value. Hedging strategies can be extremely valuable, especially when the stakes get high.

Options give you the ability to restrict the potential losses on a given investment, while optimistically trying to make the most of the potential gains. It can be really cost effective when you think of it in that way. You’re paying for peace of mind.

How to Read an Options Table

The first time you try to read an options table, you’ll likely feel overwhelmed. I know I did.

With its staggering series of columns, it can be confusing.

However, once you break it down, it’s really not as complex as it seems. Here’s a cheat sheet of some of the common columns you’ll see in a table and what they mean.

OpSym

This is short for Option Symbol. This column offers the basics: The stock symbol, the contract date of maturity, and the strike price. It also defines whether it is a call or a put option (specified with a C or a P).

Referred to in points, the bid price is the most up-to-date price offered to buy the option in question. So, if you were to enter a market order to sell the call or put, this would be the price commanded.

Also referred to in points, the ask price is the most up-to-date price offered to sell the option in question. So, if you were to enter a market order to buy the call or put, this would be the price commanded.

Extrinsic Ask

This shows the premium of time built into the option price. Since all options lose their time premium when the option expires, this value showcases the amount of time premium currently playing into the option’s price.

Implied Volatility Bid/Ask

Also referred to as the IV Bid/Ask, this column shows the potential level of future volatility. This is based on factors including the option’s current price and the amount of time until the option expires. This value can be determined by a model such as the Black-Scholes Model.

According to “The Economic Times,” the “Black-Scholes is a pricing model used to determine the fair price or theoretical value for a call or a put option based on six variables such as volatility, type of option, underlying stock price, time, strike price, and risk-free rate.”

Ultimately, with a higher IV Bid/Ask, there’s more time premium included in the option’s price.

Historical vs. Implied Volatility

Not sure about the difference between historical and implied volatility? Let’s take a little time out to talk about it.

  • Historical volatility is based on historical data –– like actual past price action.
  • Implied volatility looks at the past but is forward-thinking. It uses the past to predict what might happen with volatility in the future.

Volume

This column tells you how many contracts of a given option were traded during the last market session. Often, options with larger movement and volume will have a tight bid/ask spread, since the competition to buy and sell these options is higher.

Open Interest

This column tells you how many contracts of a given option have been opened, but have not yet been cashed in or sold.

Strike

This column tells you the strike price of the option in question. This is the price that the buyer has set to buy or sell the underlying security if he or she chooses to take the option.

Assessing Risks in Options Trading

In addition to the above columns in an options table, you’ll often see a series of columns with headings named after greek letters. One of the unique things about options is that they carry various values that can help you determine the level of risk.

I’m talking, of course, about the infamous “Greeks.”

If you’ve been researching options or looking at options tables, you’ve probably heard about the Greeks — and are likely confused by them. The Greeks include delta, gamma, theta, vega, and rho.

These measure a variety of factors that can affect price regarding a given options contract and are calculated using a theoretical model.

Sound complicated? Stick with me.

In this section, we’ll discuss what the Greek letters mean in options trading and how they can better help you understand an option’s risk and reward potential.

Delta

Delta is a Greek value that represents the “stock equivalent position” for an option. The delta for a call option can range from 0 to 100 (and for a put option, from 0 to -100 … yes, that’s negative 100).

In essence, the of-the-moment risk and reward with holding a call option with a delta of 100 is similar to holding the equivalent amount of stock shares.

Gamma

Gamma is a Greek value that tells you how many deltas the option will gain or lose if the underlying stock rises by one full point.

Theta

Theta is the Greek value that indicates how much value an option will lose with the passage of one day’s time based on what’s referred to as “time decay.” This factors in the expiration date of the option.

Vega is a Greek value that indicates the amount by which the price of the option would be affected, either positively or negatively, based on a one-point increase in implied volatility.

Rho is a Greek value which acts to measure an option’s sensitivity to a potential change in interest rate. So, for every rho, the percentage point in interest rates will increase the option value.

How to Make Money Trading Options

When it comes down to making money trading options, you rely on the same logic as trading stocks.

You want to commit to buying or selling prices that will put you in an advantageous position to collect profits. But “call” and “put” don’t tell the entire story…

Successful Options Trading Strategies Explained

There are a ton of different strategies for options trading. Here are some common ones.

Long Call – Options Trading

This is the most basic type of strategy for the call option. Basically, it begins with your belief that the underlying asset will rise in value over time.

You buy a call option with a strike price that you believe the asset will exceed in value over time.

The hard part? You’ve got to determine an expiration date. This is something of a gamble because you hope the value will rise before that date.

You risk losing potential profits by setting an expiration date too soon after the contract begins.

Compared to simply buying shares in full, you gain leverage here because there’s a chance that the value will go up quite dramatically, and then you can buy in for that sweet predetermined price.

However, if the value doesn’t go up by the time that the expiration date is up and you decide not to go through with the order, you won’t get that down payment back.

Long Put – Options Trading

This is the most basic type of strategy for the put option. It begins with you either believing or hedging on the fact that the underlying asset will lose value over time. You buy a put option with a strike price that you believe the asset will sink below over time.

Like with a long call, you have to agree to an expiration date. Once again, this is a gamble because you have to try to determine by what date the asset will go down in value.

Some traders believe that, in comparison to short selling a stock, a long put is easier. For one thing, you don’t have to find shares to borrow, which can prove tricky, especially if you’re into pennystocking.

However, unlike simply selling short, your losses are finite. Selling short carries unlimited profit — but also unlimited losses. So comparatively, the losses can be controlled here.

What I want to point out, though, is that options trading is a zero-sum game. In other words, it’s you against the buyer or seller.

Trading regular stocks opens up the field, kind of like in a horse race. Everyone is betting against one another, which means you have stronger data and a greater opportunity to profit.

Call Backspread

This is where things get a little bit more complicated. A call backspread, also referred to as a “reverse call ratio spread,” is a more bullish strategy.

Here, you sell a certain number of call options, then buy more call options of the same underlying asset with a higher strike price.

This is a little bit more aggressive of an approach for purchasing options. It’s most appropriate when you really think that the asset will experience huge growth in the near future.

The call backspread profits when the price goes up sharply and the profits are virtually limitless for the buyer.

Put Backspread

The put backspread is the yin to the call backspread yang. It’s also referred to as the “reverse put ratio spread.”

Basically, you sell a certain number of put options, then buy more put options of the same underlying asset, but with a lower strike price.

There are virtually limitless profits available with this strategy, but it also demands greater risk tolerance. The put backspread profits when the price goes down sharply, and the profits are virtually limitless for the buyer.

Protective Put

For buyers who are worried about their assets, the protective put, also referred to as a “put hedge,” is a method of hedging.

When you’re worried about a market downturn or crash, or a change in the value of an asset, you may invest in a protective put to protect from limitless losses.

Here, it’s like you have a previous purchase that you’re protecting with a proverbial insurance policy. This is what differentiates it from a long put — the fact that you’re already in the trade.

In this way, it’s almost like refinancing a house you already own versus buying a new one. But when it comes down to it, the risk is still similar to a long put.

Bear Split-Strike Combo

This is one of the most complicated strategies … and definitely the one that sounds most like a circus sideshow. Here’s how it works.

You have one long put with a lower strike price and one short call with a higher strike price. Yup, you have options in both directions with the same underlying asset and expiration date, but with different prices.

You could call this the ultimate in hedging because you’re putting a wager on whether the asset will go up or down. So if it goes up, you can profit from the call. And if it goes down, you can profit from the put.

Common Options Trading Mistakes

Choosing the wrong strategy. Like with trading, not all strategies are a perfect fit for all traders. It may take trial and error, but it’s important to stick with a strategy that matches your style.

Wrong expiration date. Picking the right expiration date for options contracts is hard … so ask yourself these things first:

  • What’s the market liquidity like?
  • How long do I think it will take for the price to move higher/lower?
  • Do I want to hold this contract through seasonal fluctuations like earnings season?

Going all in. It can be tempting to take a huge position since you only have to pay the premium … but resist the urge. Remember: you can still lose money. Never trade more than you can afford to lose!

Why Do You Need Expert Assistance?

You could learn things the hard way, or you could speed up your learning curve by seeking out assistance.

I won’t be your mentor for options trading. But if this is a strategy you’re interested in, do yourself a favor: find a program or mentor where you can learn all you can before risking your cash!

Trading Challenge

Like I said before, trading options isn’t my thing. But what I can teach you is how to trade penny stocks. That’s what I focus on with my Trading Challenge.

My goal as a teacher is to help my students forge long-term, sustainable careers as traders.

I focus on all sorts of strategies for trading low-priced stocks. I want you to be adaptable, diverse, and most of all intelligent in your trading.

Articles, daily alerts, webinars, and an extensive video collection are just a few of the many perks you’ll get as a student.

I’m here to help you become a smarter trader who knows how to cut losses and refine successful techniques to keep getting better. You game?

The Final Word on Options Trading

Options trading is appealing to many traders … and with good reason.

It can come with a lot of benefits, including flexibility, limited risk, and the ability to gain profits based on foresight gained through study and research.

However, options trading isn’t without its fair share of risk. It’s so important to become educated on any style of trading you want to pursue. Never just throw your money at the market!

What do you think? Do you trade options? What strategies do you like best?

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Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

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      Hey Everyone,

      As many of you already know I grew up in a middle class family and didn’t have many luxuries. But through trading I was able to change my circumstances –not just for me — but for my parents as well. I now want to help you and thousands of other people from all around the world achieve similar results!

      Which is why I’ve launched my Trading Challenge. I’m extremely determined to create a millionaire trader out of one my students and hopefully it will be you.

      So when you get a chance make sure you check it out.

      PS: Don’t forget to check out my free Penny Stock Guide, it will teach you everything you need to know about trading. :)

      Complicated stuff. Wearin a head sized Band Aid right now. Try and guess where.

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