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options trading

options trading (2)

Saturday, 04 May 2013 06:38

day trading using options

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the term day trading is used when the act of buying and selling a stock within same day is in action. it is considered more profitable by leveraging large amount of money in order to earn profit from little price movements. there are two main problems on the way to day trading which are discussed in this article.

first is the option premium’s time value component has the propensity to reduce the price movement. second, the option market liquidity is less which makes bid-ask spread wider than for stocks. these two options are in your way, if you have plans to day trade and you must learn how to overcome these problems.

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for day trading, the main goal to achieve is using the options with minimum time value and little delta. the point for you is to day trade the near month in-the-money options of stocks with high liquidity. in-the-money options have the minimum time value and largest delta and that is why we day trade in the near-month. in addition to that, near expiry period, the option premium is dependent on intrinsic value. this will impact underlying price changes thus making you aware of every point-to-point movement of the underlying stock. always remember that near month options have got more liquidity as compared to longer term options.

the main advantage of day trading is that it allows you to invest with little amount of money. it is considered as more profitable than buying your own stock. in this case, if somehow the underlying stock price goes down, your loss will be as low as your premium amount.

another option to consider is to plan the daytrade for any specific stock for small upside moves for next few months. in this case, you may buy defensive put options which will avoid any loss in case of stock crash.

daytrading is no doubt a difficult skill and mastering it requires many strategies. as a successful day trader your first goal is to achieve an ideal stock. an ideal stock contains these two qualities: liquidity and volatility. liquidity is like an entry and exit point for a stock at good rate. volatility is the calculation of daily price range and a day trader operates within this range.

if you are done choosing your ideal stock, your next goal is to spot out possible entry points. some tools like intraday candlestick charts and real-time news service are used to identify these entry points. you will also require finding a price target which will mainly depend on your style of trading.

the entry points in day trading are somewhat same as in normal trading but the exit points are different. every year hundreds of traders choose daytrading as their business and dream to earn double and triple profit but reality is different. many of day traders lose their money. well, this is not the case with everyone. if you have chosen the right strategy for your trading, you may earn profit as well. but you need to be extra focused with your every move in order to be a successful day trader.

Saturday, 04 May 2013 06:37

what are credit spreads?

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credit spreads - low risk option trading

why not to give yourself 80 percent trading edge by making use of option “time decay” to your benefit with credit spreads. stock market will not finish in near future because it is one of the major markets in the whole world. one can understand from here that mastering some basic profit earning strategies in stock market can easily make us able to set a constant and dependable income source.  do you know the skill that can earn you lots of profits? well that is option trading.

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there are more than one trading strategies in the market and few of them are bulleted below:
•    strangles
•    straddles
•    bullish call debit spreads
•    bearish put debit spreads
•    ratio backspreads
•    calendar spreads
•    credit spreads

this article emphasizes on the main advantage of option credit spreads.  this option is very flexible and thus allows you to trade options without any danger, for long time.

what is option credit spreads? they are termed like this because they add credit in your account on their creation. this is opposite to debit which normally occurs when it comes time to pay for a stock or its derivative. what if the options in the credit spread expire? well you can still keep the credited funds if the share price has not crossed a certain level.

you must be thinking why it creates credit and not debit. the reason is you are selling an option at a strike price which is not far away from the on-going share price. to not create difficulties for yourself, you minimize your risk by buying the same number of option contracts at a strike price further away, both having the same expiry date. we can summarize it as, selling option is better than buying option, if it is closer to the money and that is when you receive credit.

you should know taking advantage of the time decay factor and it is possible if you open the spread with very little time to expiry. do you know that time decay falls exponentially and more steeply as the expiry date comes closer? because of this you should create spread just before a month to expiry. you can do this even before 2 weeks to expiry as it will assist you in keeping your credit much quicker. in this case, your time period will be very short and you will be required to get surer about the short term direction the share will move.

why are option credit spreads so beneficial?

following are the five points that tell the way in which market can move in any given time period. you will observe only one of the five ways in given time span:

1.    a little move upwards
2.    a small move downwards
3.    a side ways move - i.e. in a given time span, the market price "goes practically in no specific direction" or before that timeframe expires, returns to its original point.
4.    a big move upwards
5.    a huge move downwards

you are lucky if you have opened one of these spreads as the market then can move in any four ways and the profit will be yours. you can still save yourself if the market goes the unlucky fifth way, but how? you can simply delay your profits by rolling out or rolling out and down your positions to a later expiry date and/or lower strike prices. you can carry this on until the market comes to somewhat stable and profitable positions.

what else one would wish for? no matter in which way market moves, you will be safe and earning profits.

you should also know money and risk management to make yourself more safe and lucky.

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Contributing Editors

  • adrian muller has conducted seminars for the chicago board of trade, including a key series in 1999 which cautioned about a top in the equity markets (see his article “top experts and statistics on the dow”). adrian muller has appeared on cable tv financial programs with analysis on the futures markets and equity market directional forecasts. he has been quoted in barron's, the wall street journal, and futures magazine.

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