The spread describes trades with two or more options having different strike prices. There are eight types of spreads and, among these, several additional variations.
Are you an investor or a trader? This is a question some of us don’t ask ourselves, but the answers define how and when you get in or out of positions. The dilemma for many would-be investors is that end up trading when they intend to invest for the long term. Using options to manage your portfolio solves some of these problems.
The put option is easily overlooked as a strategic advantage. Because markets move in both directions, the optimistic American trader can easily forget that markets go down at times, and not always up. This is where the put is easily overlooked or taken for granted.
Jargon. It is the chronic problem with options trading. The minute you try to explain how it all works to someone new, it turns them off. It demands a methodical, gradual, careful teaching method and willing newcomers. Otherwise, the special terminology will always be a stumbling block.
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.