Introduction to Options Investing
Options investing requires the use of multiple investment strategies and a wealth of knowledge about the markets. In todayís article we will discuss the different types of market makers who practice options trading as well as a few different trading strategies used by the market makers.
A day trader is a type of traders who buys and sells financial instruments and the closes out of the market within one trading day. They trade financial instruments such as stocks, currencies, options, futures, etc. Day traders that trade options, aim to capitalize on intra-day market movement through the use of small positions. They donít hold positions for long periods of time and they typically donít hedge options with underlying stock.
Spread traders who practice options investing focus on the spread and they end up with large positions that tend to naturally be hedged. (See hedging). They use a variety of strategies through the buying and selling of options in order to offset the risk. They use strategies such as call spreads, put spreads, and condors. (Bull spreads will be explained below).
Premium Sellers take advantage of the time decay by focusing on selling the high priced options and then buying them later at the lower price. This options investing strategy is used in the absence of surprising and large price swings. It is very risky at times when option volatility rises quickly.
Theoretical traders are by far the most analytical traders. They constantly evaluate and reevaluate their positions so that they can determine the effects of changes in time, price and volatility. They tend to sell options that are overpriced and buy options that are under priced.
Options investing requires the use of multiple strategies such as the use of bull spreads, covered calls, protective puts, and many more. We will discuss these three strategies as they relate to trading options. Selling covered calls is one strategy that allows you to accumulate income over time through the collections of premiums on your options. To sell a covered call means that there are investors who are willing to pay for the right to take a stock if it reaches a higher price. Additionally, you can use bull spreads, which is an option strategy in which maximum profit is reached if the underlying security rises in price. More specifically, a bull call spread is when the investor is able to buy a stock at a lower price and then turn around and sell it at a higher price. The last strategy we will discuss is the use of the protective put. The investor who uses this strategy purchases a put option while he owns shares of the underlying stock from a previous purchase. He typically has unrealized profits as well that he has accrued from an increase in the value of those shares.
Options investing is a very interesting form of trading and investing and one that requires extensive knowledge about the markets as well as various strategies. Investors must practice paper trading options first before trading with real money. They should invest heavily in their options trading education as well before doing so.
Market Direction: There are expected trend moves during specific times of the year. December usually has a Christmas rally. The operative word here is 'usually'. Although the markets have been in a slow uptrend for the past few weeks, it has not demonstrated enough strength to be considered a Santa Claus rally. What are the markets currently revealing? It is obvious that there is no great strength being shown by either the Bulls or the Bears.
There have been some excellent percentage moves recently in some specific sectors. The shipping stocks produced huge profits over the past few weeks. The reason sell signals at major resistance levels provided the perfect opportunity to take some big profits. The same has been true in the mining stocks. The analytical benefits provided by candlestick analysis allows investors to participate in high profit moves even when the general market is relatively sluggish. There was nothing magical about the signals indicated the mining stocks and shipping stocks were going to have a high probability of a big price move. The candlestick signals, in the oversold area, followed by a gap-up in price in many of those stocks, was a strong indication those sectors were being bought with enthusiasm.
DSX a shipping Co.
The Dow and the NASDAQ have been showing waning strength. The mining stocks and shipping stocks have been revealing sell signals. As mentioned previously, some excellent profits were made over the past few weeks in these sectors. Where should the money move to now? Currently there are no compelling buy signals showing up in other sectors. What becomes the best strategy for the next two weeks? Obviously, this year's holiday trading appears to be in a sideways mode. It is likely that many money managers are licking their wounds. There are numerous stocks that have lost huge percentages over the past few months. The sideways mode of this market may continue to the end of the year.
But that is where candlestick signals provides a huge benefit. Just as the signals detected which sectors are going to act the strongest coming out of the November bottom, the same will usually occur after the first of the year. What will most money managers be doing for the next two weeks, into the end of the year? They will be analyzing which industries are likely to perform the best going into 2009. The result of that research will be seen in the initial trading after January 1. Two years ago big profits were made when it was evident that the institutions were buying biotech stocks. January of that year produced gains of 25% and greater in those stocks. They were easily identified by the candlestick signals followed by gap-up in price.
It would not be far-fetched to expect one or two sectors showing those same conditions this January. There will be a new administration in the White House. Over the next two weeks, research analysts around the world will be evaluating which sectors are likely to perform the best under a new administration. You and I do not have the research abilities or capabilities to analyze the potential results of a new administration's policies. However, a candlestick investor has the visual means for identifying what other research departments have concluded. That information will be conveyed with candlestick scans.
What is a good strategy? If the current market conditions are indicating a lack of market direction and even the lack of any sectors showing unusual strength, then as profits from the recent price moves are taken, the funds should be left in cash. This makes for buying power being ready when/if specific sectors can be identified as strong potentials starting the next year. What are those sectors going to be? That we do not know! But when the signals reveal where the money is moving to after the first of the year, have your buying power ready to take advantage of that information.
The Candlestick Forum Team
Semi-Private Training Sessions
Live and in person with Stephen Bigalow
Now Scheduling for
January 3rd & 4th, 2009
Contact us ASAP to register via email or call 1-866-251-4015.
Group size is limited to FIVE participants
Sessions fill quickly - Pre-register early