Getting Ready To Trade

Good evening everyone!  It's a rainy night here in north Florida.  I meant to get this up yesterday but the J-O-B was occupying all my attention.  Anyway, I think I left off last time talking about the rules I use to trade credit spreads.  If I recall correctly I think the first two rules were to trade only Bear Call Spreads and to avoid volatility producing events like earnings reports, lawsuits, etc.

My next trading rule is to not be greedy!  Some websites promise 10% per month or 5% per week.  If those guys can do that consistently than more power to them. Make that money bro!  However, I've found that with big rewards come big risk.  It's my goal to limit risk as much as I can.  So each month I'm not looking to hit a home run I just want a base hit.  For me that translates to making no less than a 2% return (to include commissions) each month.  2% doesn't sound like a lot but that's over 20% a year!  I think that's a good goal to reach for.

My next rule has to do with math, statistics and probability.  I could spend an hour explaining how all the math works but that would be totally boring.  All you really need to know is that there are probability calculators available that can actually use a stocks historical price movement and some other factors to determine what the odds are that a stock will rise (or fall) to a predetermined price that you select.  With credit spreads the lower the probability of success the higher the potential reward.  In my travels on the Internet I've seen that some people are comfortable with probabilities of success at or around 70%.  I admit that's certainly better than Vegas, but when I have 50K on the line I want the odds really stacked in my favor.  So when I trade I like to have probabilities in the mid to high 80 range.  I've found that I can easily make my 2% per month with trades having at least an 80% chance of  winning.

The last rule I have has been the hardest for me to follow.  Always stick to the first four rules!  When you start having success you start believing you're the man and are smarter than the market.  You start telling yourself you can make 5% per month instead of sticking with safer trades in the 2-3% range.  You begin to see that there's more money to be made on the "put" side instead of the same old boring "call" trades.  Let me warn you! Don't go off the reservation out of greed!  The market WILL beat you up!  Here's a great clip about greed.  I can't say I agree though......

Anyway, it's Spring Break time.  We're headed to the mountains tomorrow.  Next time we'll talk about the best broker to open up a trading account with.  Good night!

The Rules of The Game!

What's up everybody!  I'm just sitting here doing my taxes and getting more depressed by the minute.  Nothing like a new blog post to cheer me up!  When I look back at my first five posts I "think" I've provided enough information to get most folks up and running with options.  As always, if anyone has questions please leave a comment.  Today, I want to go over what my trading rules are.  After much trial and error I've found that as long as I stick to these rules things should go pretty well.  I've had these rules in place for six months and my account is up over 30%!  Can you say the same about yours?  OK, here we go!

Rule#1: Only Trade Credit Spreads on The Call Side (Bear Call Spreads)

As I've mentioned before you can trade credit spreads with either calls or puts.  If you use calls, you're betting a stock won't rise to a certain level.  With puts, you're betting a stocks price won't drop to a certain level.  So why only trade the call side?  For my peace of mind I like to eliminate as much uncertainty as possible.  The last thing I want to do is wake up in the morning as find out that because of a terrorist attack or some other pending financial crisis that the entire market has dropped 500 points!  I could've had a put spread with a 90% chance of winning that is now a total loser because of one bad event.   To avoid that risk I only trade on the call side.  So when the next "To Big To Fail" crisis comes, I'm like "whatever"!

Rule# 2: Avoid Volatility Producing Events (Pick boring stocks)

As I'm sure you know there are thousands of stocks with trade-able (Is that a word?) options.  Some good.  Some not so good.  I've learned that the credit you can earn from options is always higher when there is a level of uncertainty in the short term stock price.  What can cause these uncertainties?  Well, things like court cases, FDA approval votes, earnings reports, changes in company leadership, etc...  All these events cause uncertainty.  And the more uncertainty, the more risks.  The more risk, the more sleepless nights and lost productivity at our day jobs.  What's great is that there are tons of good trades each month that avoid all that stuff.  I always (always) stick to those boring trades.  Boring trades equal money in the bank!

Those are my first two rules guys!  Next time I'll go over a few more.  This weekend I'll be trolling the net for opportunities next month.  IOC is looking interesting!  Connect with me during the week for live trade updates on Twitter @optionadventure.  Have a good week!

The Ultimate Options Strategy!

Hey everybody!  Man, it’s been a long week. Like most folks I have a day job.   Blogging and trading options is just something I do on the side for fun and profit.  I’m blessed to have been employed with the same company for sixteen years and hopefully I’ll be able to retire one day with a boat load of cash generated from years of compounded earnings from options trading.  With that in mind let’s get back to it!

So far we’ve talked about what options are, the different types of options (calls and puts), and how to read an options chart.  Let me say this before we continue.  There are thousands of books and websites you can check out that will expose you to more information about options than you can possibly imagine.  It’s quite overwhelming! But I’m of the belief that you really don’t need to know it all to get started and be successful.  

One of my duties at my day job is being a regional defensive tactics instructor.  With the experience I’ve gained I could teach you all types of exotic take downs, pressure points, and submission holds but when it’s all said and done if you, as they say, “Hit them back first!” you have a great chance of winning most physical confrontations.  I approach options trading with the same attitude.  I may not win every fight (or trade) but I will knock my share of bad guys out!   Now don’t get me wrong, I encourage you to read and learn as much as you can about option trading but my plan is to get you up and running as quickly as possible.

In this post I want to talk about the type of option trade I use exclusively.  The strategy has several different names but I just call it a basic “spread”.  Specifically, it’s called a “bear call spread”.  More about the bear call thing later.  Let’s break it down!

A spread is created when a trader “sells” an option at a strike price (aka short strike) that’s a good distance away from the current price of a stock.  Then at the same time you “buy” an option at a strike price (aka long strike) that’s even further away from the stocks current price.  The goal of entering this type of spread is to choose a short strike that the stock price will never touch. So let’s say stock ABC’s current market price is $60.  To create a spread we could sell an option at the $70 strike and simultaneously buy an option at the $75 strike.  When we sell the $70 strike let’s say we get paid 1.00 ($100), but the cost to buy the $75 strike is 0.60 ($60).  For every spread contract we obtain, your broker would deposit $40 into your account  ($100-$60).   As long as ABC’s stock price doesn’t touch or go past $70 we win and get to keep all our income.  In this example the total amount of risk would be $500.  The easiest way to calculate your risk is take the distance between the two strike prices (5 in our example) and multiply it by 100.  Most traders normally use either five or ten point spreads.  The reason why we buy the long strike is because it limits the amount of loss we would incur if the worse case scenario happens.  In our case the worst case scenario (max loss) would be when stock ABC touches or goes higher than $75 (long strike).

Well, that’s the strategy!  It’s nothing fancy but it works.  The key to making consistent monthly income with spreads is to have a firm set of rules to follow.  The rules determine which spreads to enter into and what to do in the rare occasion things go south.  Next time we’ll start talking about some of the  rules of the game.  See you guys next week!

Deciphering an Options Chart

What's going on everybody!  It's the end of another long week.  I barely survived it.  How about you?  Anyway, I'm glad you made it back.  I thought today I would decipher all the parts of an options chart (aka options chain).  If you're going to trade options this is the primary tool you'll be using to figure out which calls and puts you'll be buying and selling.  Most of the terms I'll be throwing around today were explained in my first three posts.

What you see above is an options chart you'll find on Yahoo! Finance.  This is the site I normally use to  see what's going on in the financial world and check my monthly positions.  So lets talk about all the moving parts here.  I'll start at the top and work my way down.  Lululemon is the name of the company  we're looking at.  No brainer right!  Below the company name and ticker is the price of the stock.  Next to the price is how much it's either risen or dropped during the current trading session.

Under the title Options you see "View by Expiration".  As I mentioned earlier all options have a specific day they expire.  Generally, options expire monthly.  The chart we're looking at is for options that expire during the March 2013 cycle.  Specifically, the third friday of March.  For some reason the people that made the options rules made monthly options always expire on the third friday of each month.

Next you can see that this chart is specifically for Call options.  If I had the entire chart you would see both the Call and Put options for LULU.

Beneath that are the actual option listings.  You can see the column for the Strike prices.  Remember these are the stock prices that the buyers and sellers are placing their trades against.  Next to the strike prices are the unique option symbols created for those particular options.  The next four columns all have to do with the price of the options.  "Last" is the most recent price the option sold for.  The "Chg" column tells you how much the price has increased or decreased since it last sold.  The "Bid" and "Ask" prices are pretty important.  The Bid price is the current market price you would get if you sold the listed option.   The Ask price is the current market price you would have to pay to purchase the  option.  The market makers that process option orders make their money on the spread between the option Bid and Ask prices.  For example, looking at the 35 Strike, I can buy one option for  33.90, which in real life would actually be $3390.00.  In options charting you always have to multiply all the prices by 100!  I know it's a little confusing but don't quit on me yet!

The last two columns are easy peasy!  The "Vol" or volume shows how many options contracts have been traded during the current market session.  And lastly the "Open Int' column shows the total amount of contracts traded for that particular option.

That's it!  If you can understand this chart and everything else we talked about so far you're about 75% ready to get started.  Next time I'll introduce the almighty credit spread.  It's the technique I use to make safe, steady income with options each month!