This section will go over what options are, the best ways for trading options including video tutorialsan interesting theory on compounding option trading gains, and option trading resources. Trading options gives you tremendous opportunity for huge gains. Also, the worst that can happen is your option goes to zero. Options decay in price over time. That's why so many pros want to sell them to ignorant investors looking for a quick buck. You better have one heck of an edge in option trading if you want to overcome this roadblock. Contracts and Strike price: Options are options contracts that allow a person to buy a stock at a certain price called the Strike Price at a certain date expiration date. You pay money up front for the option because you think the spy is going to either go up or down. When the stock goes up, a CALL option will go up. When the stock goes down, the CALL option goes down. You now have the right but not the obligation to buy shares of stock XYZ for whatever Strike Price you bought the options. A strike price for a call is the price at which you could buy the actual stock. So if you bought an option on SPY with a strike offor every dollar overyou would usually add a dollar to your option price, plus whatever premium is figured into the option pricing. This premium goes into the pocket of the person that sold trade the spy. This is their reward for the risk they take in selling you the option. The longer an option is from it's expiration date, the more premium you pay. The strike isand SPY is currently trading at If SPY just stays at until expiration, the option will expire worthless. By the way, the example was a real option that coincides with the Smart Money buy signal from June, to May, SPYLU SPY December call. The main problem that occurs with options is the fact that they expire. If you buy an option with an expiration date of October, the option will expire on the third Friday of October. If you bought that option back in August, the option will become less and less valuable as you approach the expiration date. It's just like buying milk at the grocery store-- as the date gets closer and closer to expiration, not too many people want to buy it, and if they do, they want to get a better price. Here's an interesting fact about time-decay: If you bought a stock on margin, you would have to pay interest on whatever amount you're borrowing. Both option trading and buying on margin have a cost of carry. In fact, options rates are a key component to pricing an option. American style options such as OEX or SPY can be traded anytime. European style options can not be closed until their expiration date. I prefer options trade American style where since I can buy and sell them out when I want. The price of an option is based on six different pieces of data. The price of the stock. A call will be more expensive to buy as the stock rises. One of the less know reasons for price fluctuation in an option is volatility. If the stock has wild price swings, the option will be more expensive to buy. The strike price of an option will also be included in an option's price. If a call's strike price is increased, the price of the option will decrease. Expiration is a key factor because people will pay less for something that will expire soon. However, if the option was purchased with several months before expiration, you can bet that people will pay more. Therefore, the price of the option will be more expensive. Interest rates and dividends play a key role in option pricing. The higher interest rates rates go, the higher your premium can be. Finally, one aspect that none of the standard models can equate for is supply and demand. Just like a stock, an option can be effected by how many people are buying or selling at any one time. Sometimes a bunch of people will buy options at the same time, or they raise their asking price. This tends to raise the price even if the stock is going nowhere. There are several reasons why where pricing trade not always follow the standard equations for pricing them. The biggest problem I see for the Black-Scholes model: It assumes that markets are efficient Puts are the opposite of calls. If you buy a put, you are betting the stock will go down. When a put's strike price is increased, the option will increase. This is because you have the right to make the writer of the put buy the stock at a more expensive price think of it like you're puttin' it to 'em. My approach to option trading is not to exercise them-- it is to trade them. The signals are generated from the Smart Money indicator The time-decay aspect of trading options makes me buy long-term options that aren't going to expire for 12 months or more. These are called LEAP options. I want to buy LEAP options that expire in December of the following year. That gives me plenty of time to get in and get out. We average about three trades a year with the Smart Money Index Trading System. To buy and sell options, you will need an options expiration and strike price code, and the underlying stock's ticker symbol. That's easy enough to get from the CBOE web site. If I buy too high, the option won't compound as quickly. Once you have the option symbol, you need to calculate how much you're going to risk on the trade. When you have that dollar amount, you can figure out how many option contracts you will buy: When placing the order with your broker, you will usually use a symbol like SPYLU or you can simply enter the stock symbol, strike, and expiration info this is how by broker -interactivebrokers. I suggest using limit orders for buying and selling options. Options are quoted with a bid and ask price. Note that if you enter a limit at the bid or ask, the option is usually executed almost immediately via the electronic market. One of the most common mistakes for losing money on options is holding on to them for too long. Never hold on to an option in the hope that it will go back up. I have seen this happen time and time again on stocks such as GOOG. People will buy calls with the assumption that any pullback will be trade lived and the stock will go right back up. Even performers like GOOG can have sideways and downtrends, so just buying options based solely on fundamentals is a sure way to lose. I have to repeat this again: The Wall Street fat cats are counting on you to blow out your trading account in a couple years, so don't make such a common and costly mistake! This index is made up of different stocks so it can show the overall trend of the market. The volume of options on the SPY is the highest out there, so the price between the bid and ask is usually pretty small. See the Smart Money Index Trader for a description of just how big of an edge we can have. A record with winners 4. The above options tutorial basically concluded that index options give us the biggest edge. By only trading at times when the probability for success is high, you can make a serious profit in just a few trades. Where of just trading the options with the same dollar amount, why not roll over the profits after each and every trade. As your account grows, so do your options. Starting off with a relatively small amount of money will give spy psychological benefits because you will let the winners ride, and cut your losses only when the market is telling you to. The above only assumes a record with the average loss at Basically, this high risk strategy returned over times the initial investment. Is it worth the risk? Become Richer Than Bill Gates? There's two reasons why you can't become richer than Bill Gates with this approach. The other nice thing is that you could try to repeat the above scenario the following year. The second reason you can't go into the billions with this approach is because there's not enough options traded to go on forever. If you buy up lots of call or puts, you will eventually move the market. The market can support millions of dollars in SPY options, so the ceiling on maximum profits is still incredibly high there is a 75, contract limit on SPY. Referring once again to the psychology of trading. The more conservative approach would be to reinvest the option profits into index funds or individual stocks. Dan's Million Dollar Target Video blog Free index where signals that can work very well for option traders: How Options are Traded. Options as a Strategic Investment. The results listed herein are based trade hypothetical trades. Plainly speaking, these trades were not actually executed. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually spy executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. You may have done better or worse than the results portrayed. Articles Trading Systems Reinvest Your Profits Instead of just trading the options with the same dollar amount, why not roll over the profits after each and every trade.
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