Options are unique in the investment and trading worlds. These are the most flexible instruments you will ever find. You can design a strategy that is anywhere in between high-risk and ultra-conservative. You can set up a combination that costs little or nothing or even produces income. You can use options to reduce portfolio risk. Finally, options enable you to leverage capital and reduce overall market risks.
Spreads come in a vast variety of combinations, shapes and sizes. One of the best ways to distinguish spreads is by their geometric look. The three types—horizontal, vertical, and diagonal—can be graphically used to explain how the spread is put together.
The idea of limiting risk is always appealing. But if limiting risk also means accepting very small profits, several questions come up:
1. Is it worth the margin requirements?
2. Can my capital be better employed elsewhere?
3. Will the strategy take too much effort to manage and track?
These questions should be addressed for strategies like the butterfly spread.
Options trading activity has grown at an amazing rate for the past 35 years. This accelerated once options became available on most listed stocks plus indices, ETFs and futures. This expanded trading market opens many possibilities. Options can be used as the vehicle for day trading or swing trading. Strategies can be very high-risk or very conservative.
Paper trading -- using a virtual account and trading with non-real money in a real time market setting -- may be a great way to learn the terminology, trading rules and restrictions, and most of all, to find out whether a theory produces profits or unexpected surprises.
Are “tips” worth pursuing? If you hear about a great opportunity from a friend, family member or stockbroker, you have to wonder about two major issues. First, is it a good tip? Second, why are they telling you? In a majority of cases, acting on stock tips is either illegal or ill-advised.
When a current trading range is replaced with a new one -- meaning price levels move above resistance or below support, and remain there, new resistance and support levels are set. But one interesting outcome that traders will notice is the exchange of the old lines for new lines. Old resistance may become new support or old support become new resistance once the new trading range has been set.
Traders seek confirmation to improve the timing of entry and exit. Knowing that any signal can fail and mislead, all forms of potential confirmation are welcome. If you rely on candlestick formations, momentum oscillators, or chart patterns, you know all about confirmation signs. One you might have overlooked, however, is proximity of current price to the borders of the trading range.
Candlestick charts give you a good basic indication of current momentum and coming reversal trends. Some very strong candlestick indicators help you to improve entry and exit timing, and build more profits while reducing losses.
By timing entry and exit of stock positions with ex-dividend date, you gain exceptionally high annualized returns and can churn capital in and out of positions to great advantage. Using three stocks with different ex-dates, you can earn 300% of the average annual dividend yield by moving in and out of positions--while eliminating all market risk.
Most traders have heard about confirmation as an important part of entry and exit signals. In a nutshell, before acting on a signal, you need independent confirmation from a second signal. Many traders understand the concept, but many make their trade without confirmation, believing that they don’t dare miss the opportunity available right now. Confirmation might take time. Even so, it is time well spent.
For most options traders, the entry into this world is through the long strategy. It is considered the most basic and easy to understand. The sequence--buy, hold, sell--is familiar and logical. However, this is also one of the highest-risk options strategies. Approval by brokers to trade more advanced but lower-risk strategies is not given easily; so paradoxically, new traders are required to accept higher risks.