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For those of you who followed my blog you may notice at several points I mentioned using options as leverage. I stress this simply because options can provide substantial income opportunity if used correctly.
Once you enter the world of options you may never want to trade stocks again. And the moment you understand this guide to stock options you will develop your own strategy for obtaining infinite returns.
Of course you may have guessed although there’s opportunity with using options there’s also dangers involve.
Like all vehicles of money if you lack proper knowledge then money is sure to be lost.
To reduce this I’ve prepared this guide explaining the do’s and don’ts of option trading.
Below are key terms you should know if trading options becomes your vehicle of choice.
The Good
The good news is, trading options can allow you to generate a weeks paycheck in a day.
This could occur in a matter of seconds, maybe minutes, or even an hour depending on your level as a trader.
Another benefit is no matter what the stock market does there’s an option strategy for every behavior.
There are strategies to make money whether the market goes up, down, or side ways markets, it all depends on your understanding as a trader.
The Bad
With options, it’s easy to lose money if you lack proper knowledge.
You could lose money quickly if you are not careful because options are high speed vehicles.
I’ve seen amateurs purchase puts and later purchase calls simply because a stock was trending a particular direction and lost money. Ideally if you are trading options it’s important to understand there behaviors relation to a stock. There are far more things that determines an options value, below are a few you should be aware of.
Costly Mistakes
1. Time
In the world of options, time is a liability if you are an owner of the option. This is because options depreciate in value each day you hold the option. You must buy enough time to be right on a directional move of a stock. This is because options expire as time passes they don’t last forever.
Because time is a liability as an owner you want to stay away from a week or a month options. It’s best that you purchase a 2 or 3 month option to give you time to be right.
2. Price
If you are cheap, then trading options may not be for you. A common mistake most beginners make is thinking it’s smart to buy cheap options.
Although options are relatively cheap when compared to a stock, it doesn’t mean cheaper options are a good buy. You certainly want to be careful in this area because in most cases if an option is cheap chances are they’re worthless.
In The Money, At The Money, And Out The Money
In the options market, there’s cheap options and there’s expensive ones. This is important because, this is where most people lose money.
The diagram below displays a snapshot of the option chain. Pay close attention as we move along because this is where most mistakes are made.
The options sample we are viewing below is AT&T. You may notice, their strike prices are relatively different as they range from 32 to 35.
The next thing to observe is the expiration dates (Exp) of the option. This is important because it’s the date your option contract expires. If you don’t sell before that date you will lose your enter investment in the option. So be sure to remember your expiration date before you buy an option.
Next is the strike price which is another important factor.
The strike price is a target price an options must reach or surpass for it to be exercised or profitable.
If a stock price doesn’t reach an option strike price it can’t be exercise. This simply means, you as the option holder can’t exercise your option until the stock price reaches your strike. This is another reason as an option trader buying enough time comes into play.
The following is a breakdown of why strike prices are relatively different from one another. This is an oversimplified example, but also very important.
Looking at the chain below if you bought the 32 call strike for AT&T, you are considered to be In the Money.
An in-the-money option has positive intrinsic value as well as time value. A call option is in-the-money when the strike price is below the spot price. Just as a put option is in-the-money when the strike price is above the spot price. The spot price is simply the price the stock is currently trading at in the regular market. So don’t let the term confuse you.
Now let say you didn’t buy the 32 call strike but bought the 33 at $0.93. At this point you are “At the Money.”
An option is at-the-money option is when the strike price is the same as the spot price of the underlying security on which the option is written. An at-the-money option has no intrinsic value, only time value. An example of an at the money option is if the stock was at 32 and the option strike price was also at 32. Which gives it’s meaning to it’s name At the Money.
Last we have an out the money option. An out-of-the-money is an option that has no intrinsic value. A call option is out-of-the-money when the strike price is above the spot price of the underlying security. While a put option is out-of-the-money when the strike price is below the spot price. So using the example from AT&T a 34 call option strike would put you out the money.
The Right Place At The Right Time
Volatility
One of the key factors which boost an options value is something called volatility. Like water is to a plant, volatility is to an option. Volatility can impressively increase an option value if you are at the right place at the right time.
For example, when American Airlines filed for bankruptcy their stock plummet. This was good because their options were selling at a discount of $0.03, I bought 100 calls. Since one option controls 100 shares that’s 0.03x100x100 = $300.
Five minutes later, I was profiting $250. Then, as I called my friend to tell him the news, my profits suddenly jumped to $12,235. At the moment I stood puzzled so I didn’t sell. Moments later my profit plummeted to $650 and an opportunity to make 12,235 was lost.
The following day I explained to my coach what happen, all he had to say was “Volatility; you were at the right place at the right time, you should of sold.” He then indicated for me to not be hard on my self. He said, “Things like this happens all the time there will be more opportunities to come. When it happens again you must be prepared” at that moment I felt better. And my response was, next time I will be better prepared.
Practice Makes Perfect
Like anything that requires perfection, practice those make perfect. Although no one is perfect thinkorswim makes it relatively easy to get close. Thanks to their paper trading platform, you can practice all this wondering stuff which is written in this article.
All you have to do is sign up, get verified and approve and an account will be open for you. The great news is opening an account to paper trade is simple and free. You can also paper trade months without depositing a penny and it’s all in real time.
Invest In Your Education
Finally we have the most important section of all education. Sadly, I know people who spends day in and day out reading free content, but would never invest in a course.
They always have the newest cell phones, and the latest footwear. But when it comes to financial education they will never invest a dime. When I ask them why don’t they take a course they simply say I have no money.
The funny thing is, later when you see them they’re shopping. I scratch my head sometimes when you see what people think is important.
For those of you who don’t have this mentally, I have great news. I’ve been doing some research on my spare time and found an explosive training course called Option Boost that not only make learning option interesting but explains it in simple terms.
This tutorial is not only informative, but hits everything on the nail on how options really works. It starts with the basics and builds you up, and the best thing is, it teaches using thinkorswim. The tutorials are 10 hour long, simple to understand, and is taught by an intelligent trader name Derek Devore. The reason Derek earned a spot in this post, is because I seen he was passionate about helping people.
His videos are separated into 10 segments, each about 1 hours long. You can watch it on your iPod, iPad, and computer multiple times if you like. The information is easy to grasp, and he offers a MONEY BACK GUARANTEE. The training course is only $199 and trust me it’s worth every penny.
I know some of you may be saying $199 is a lot of money but stop and think for one minute. Companies host seminars and later charge thousands to teach what Derek offering for just $199. I’m not saying their prices are wrong, all I’m saying is Derek price is a bargain.
I’ve purchase the course already and have not regret a penny. Below is a video introduction to what derek has to offer.
To get instant access click here. As always please don’t forget to subscribe.
Manny
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