Options Trading Strategies
There are several trading strategies that options traders learn to use as they trade options. In today’s article we discuss bullish options strategies such as buying calls, selling puts, the bull call spread and the bull put spread.
Buying calls is considered a long call strategy that is used in a bullish market where the rise in the price of the underlying stock is probable. When buying a long call option you reduce the risk of the trade and increase your leverage. The most that you can lose when applying this strategy correctly is the cost of the premium. This strategy provides a great way for options traders to increase their participation in specific stocks without tying up a lot of funds. You can control more shares for less capital when electing to purchase a long call option.
Selling puts is one of the options strategies that is very close to a covered call. When you write a covered call you are predicting that the stock will either go up or stay the same. You must own the stock with a covered call so the risk becomes losing your money to a falling stock. To make money with a covered call, the stock must go up or sideways. Selling puts is similar to covered calls however it has a somewhat different perspective.
A bull call spread takes place when a small increase in the price of an asset is expected and most of the time it is a vertical spread. To achieve this, a stock options trader would purchase the call option at a specific strike price and would also sell the same number of calls of the same asset and expiration date but at a higher strike price. The maximum profit when using this trading strategy is the difference between the strike price of the long and short options, less the net cost of the options.
The last of the options strategies that we will discuss today is the bull put spread. The purpose of this strategy is to profit from a stock that is either rising or stalled. This is done in order to find income generating options trades that are bullish and that have a limited downside risk. Stock traders will use this strategy to gain a profit when a stock looks to either move upward or remain steady.
Simple options strategies provide a tremendous source of income when the right trading strategy is applied to the correct price move. These simple trading techniques will be demonstrated thoroughly during the Candlestick Forum Option Trading program on October 17 and 18th. If you would like to learn how to dramatically increase your income while at the same time reducing your risk, take advantage of the trading knowledge that has been applied to over 20 years of candlestick application. Click here for more information.
Market Direction: Why is accurate trend analysis important? The obvious answer should be that it allows an investor to be properly positioned in their portfolio. Candlestick analysis provides an accurate analytical tool. Each signal/pattern has a relevant interpretation. Utilizing the candlestick signals and other confirming indicators creates a visual format that allows for an extremely accurate trend assessment. Although analyzing a trend correctly is obviously good for being in the right positions at the right time, there is a much more profitable aspect that is built into knowing what the market trend is doing.
Knowing the probabilities of what the market trend is revealing based upon each individual daily signal and the conditions of the stochastics is a valuable tool for the daytrader. Knowing the general trend of the market is a valuable tool for the swing trader. Knowing the general trend of the market, whether up or down or choppy sideways is an important tool for assessing what could occur in individual stock prices that are forming patterns. Simply stated, if it can be assessed the market is in a slow general uptrend, individual stock prices can set up patterns that produce an extremely high probability of a price break out.
This information becomes extremely important for the daytrader, the swing trader, and the option trader. If the uptrend continues to persist in the direction it has been moving, price patterns have an opportunity to develop and then perform as expected, usually breaking out for big price gains. This creates the opportunity to establish option trades that have very little risk but big upside potential. This is the ultimate goal of any trading program.
The high probability expected results of a price pattern allows for a simple option trading strategy called a 'staggered' spread. Analyze the Google chart . It was forming a Scoop Pattern with the $500 area being the resistance level. The expected results of a Scoop Pattern creates the opportunity to establish a low risk/high profit option trade. What is expected on positive trading confirming a scoop pattern? A strong bullish move!
Buying the October 510 calls at $8 might be an expensive AND high risk trade for most investors. But if a positive open is expected after the scoop pattern, creating the beginning of a strong uptrend, a staggered spread may make more sense. That would involve buying the OCT 510 on the open at 8 dollars, anticipating the price moving more positive during the day. If the price does trade higher going into the close, the other side of the spread would be to sell the October 520. That price may now be seven dollars at the end of the day. This would leave a net cost of one dollar exposed to the trade.
If Google closes above $520 by expiration date, the one dollar exposure turns into $10. Is this the best strategy? Fortunately, candlestick analysis provides the direction and the magnitude of a potential price move. Putting the correct option strategy on a trade becomes a much easier process when having a high degree of expectations coming from a price pattern. Option trading strategies do not have to be difficult. The most important aspect of making money with options is putting the right option trade on the right price move. Most investors get too consumed with trying to put their favorite option strategy on any price move.
Option training with candlestick's - October 17 and 18th
The Candlestick Forum will be providing a two day training program demonstrating how to take the simple option strategies and apply them to the correct trade situations. This training is for the beginning and intermediate option trader. You will learn how to effectively analyze which trades warrant option consideration. You will learn how to distinguish which trades require calls or puts to be placed outright versus establishing a lower risk spread trade. The same simple common sense built into candlestick analysis is also built into this option trading strategy program. Do not miss this opportunity to learn some very simple techniques that will greatly enhance your earning capabilities. Click here for more details
Chat session tonight at 8 p.m. ET. How do you find the best chart patterns for establishing high profit option trades. Click here for instructions.
The Candlestick Forum Team