3 Key Strategies To Use When Trading Stock Options

By Dale K Poyser

 One of the most critical, and I mean critical things to be aware of when trading options is choosing the right underlying stock for that particular option strategy. In a previous article I covered selling naked puts and covered calls. Now I'm going to talk about three strategies to use to help choose the right underlying stock.

Selling puts and calls is a waiting game. This strategy works best with stocks that do not move a lot. In other words, stocks that are somewhat non-volatile.

1 Stock must have an Options Chain

 There must be options available for that stock. Not all stocks have options, so options strategies cannot be applied to all stocks. The first step in selecting an underlying stock is to choose a stock that has an options chain. This can be verified easily enough by looking at the quote detail on any stock and selecting "chain" or "options chain." By selecting this for a particular stock, you can see a list of put options and call options by month and in some cases years (LEAPs) for expiration dates. You will also be able to view the different strike prices available for a particular stock. You can get this information on any stock site such as MSN, NASDAQ or similar sites. Once you have a list of stocks with options move on to the next step.

2 Technical Analysis

Most stock prices follow a certain pattern over time. People that are proficient in technical analysis can study these chart patterns and try to predict or anticipate the price movement of a stock. Past performance does not guarantee future success and stop losses are in place to address this. That being said, this tool is extremely powerful in predicting the future price patterns of a stock when applied properly and with discipline. Use technical analysis to identify stocks that are moving in tight ranges (not choppy) and ideally flat or slightly trending upward. Looking for rising trendlines and channels will be particularly useful. This should significantly narrow down your list from step 1. Lastly, apply technical analysis to the major indices such as the DOW Jones, NASDAQ, and S&P. Stocks tend to follow the direction of the market. Your chances of success will be much higher if you apply your strategy in line with the market direction. Technical analysis alone will greatly increase your chances of picking the right underlying stock for your options strategy.

3. Fundamental analysis.

This type of analysis involves looking at the financials of a particular stock. This involves things such as sales, income, debt to earnings, price to earnings, market cap, etc. Once you have narrowed down your list from methods one and two, further narrow down your list by choosing stocks with a strong balance sheet. Look for strong earnings, low debt, low price to earnings (P/E) and positive news about the company such as new products, etc. There is not much more to say on this strategy other than that you need to choose the right healthy underlying stocks for your options strategy.
In summary, options trading involves choosing the right underlying stock. This process can be made simple by first finding stocks that have an options chain, then applying technical analysis to find the right price pattern. Lastly, use fundamental analysis to narrow down this list to your master stocklist. Look for proper entry points and choose your option strike price based on these points.

Article Source: http://www.streetarticles.com/retirement-planning/3-key-strategies-to-use-when-trading-stock-options

2 Quick And Easy Options Trading Strategies For Beginners

By Dale K Poyser

 Ever wanted to get into options investing but did not know how? Well, I’m going to give you a quick overview of options and then two options investing strategies that are quick and easy to implement.

Overview on options

The first thing to understand is that Options trading can be very speculative or very conservative, how much is entirely up to you. In other words, you can do everything from protecting a position from a decline to outright speculating on the movement of a stock, commodity, or index, this is the conservative approach. The high risk associated with options applies to the speculative approach. You can buy and sell options like you buy and sell stocks. Statistics show that 80% of Options “sellers” make money and 80% of options “buyers” lose money. So, which side do you think you should be on? That’s right, the sellers!

An option is a binding contract (between a buyer and a seller) that gives the buyer the right, but not the obligation, to buy or sell a fixed amount of shares of an underlying asset at a specific price on or before the expiration date. For stock options the expiration date is usually the third Friday of every month, although there are some stocks that have options that expire weekly, Microsoft and Google are examples of stocks with weekly expiring options.

A call option gives the holder the "option" to buy the underlying stock at a specific price (strike price) before expiration. Calls are like being in a long position on a stock. Call buyers profit if the stock will increase significantly above the strike price before the option expiration date, otherwise the option expires worthless.

A put option gives the holder the "option" to sell the underlying stock at a specific price (strike price) before expiration. Puts are like being in a short position on a stock. Put buyers profit if the price of the stock falls significantly below the strike price before the option expires, otherwise the option expires worthless.

2 Quick and Easy Options Trading Strategies you can Implement today!!

The two options strategies I recommend for beginners are

1. Selling naked puts on stocks you would not mind owning, or
2. Selling covered calls on stocks you already own.

By selling naked puts you are basically being paid a premium upfront to buy a stock at a price YOU determine. If at expiration the stock never hits the price (strike price) of the option, you keep the premium free of any further obligation. At this point you are free to sell the put option for the next month out. You can do this strategy over and over again until you are forced to take ownership of the stock. At which point (you now own the stock) you can sell covered calls until someone buys the stock from you.

These easy options investing strategies are a great and very simple residual strategy that can easily make you 10% or more on your money every month. A key to these strategies are choosing the right underlying stocks and strike price of the options. This works best with non-volatile stocks.


Article Source: http://www.streetarticles.com/retirement-planning/2-quick-and-easy-options-trading-strategies-for-beginners

Options Trading: Understanding Option Prices

Options are priced based on three elements of the underlying stock.

1. Time
2. Price
3. Volatility 

Watch this video to fully understand each of these three elements that make up option prices. 

Stock Option Explained

Correction: At 4:20, the graph in the top left-hand corner is slightly off; for total return, the curve should not intercept at (30,0), but rather should be shifted slightly to the left so that the bend in the line occurs at (30,-2). Sorry for the blunder.