Iron Condor

Technical analysis was truly an arcane art before the internet boom. Chartists perform technical analysis in their secret rooms with data that was carefully collected from professional sources. Those were the times when stock prices and data did not have a medium through which to be readily available to the public and be ran through publicly available software to produce the charts that are available today.
Today, with internet in almost every household, technical analysis became an art anyone could practice. Complex charts, technical indicators and analysis that was once the sole domain of a few highly paid wallstreet analysts are now available to anyone who wants it, often for free.
Technical analysis also became linked to short term aggressive trading instruments such as stock options and futures because of its excellent short term predictive nature.
With technical analysis this popular, I feel obligated to teach you once and for all everything you need to know about how to conduct proper technical analysis before you start looking at your first chart. A lot of amateurs fail at technical analysis simply because they didn’t have the necessary basic knowledge to understand how to interpret technical indications properly in the first place. With the knowledge in this article, you will definite experience more success at technical analysis.
Summary of Technical Analysis Basics
2 Principles of Technical Analysis: Significance, Prudence
2 Key Tools: Charts, Indicators
2 Key Components: Price, Volume
5 Key Concepts: Resistance, Support, Trend, Patterns, Setups
2 Principles of Technical Analysis: Significance, Prudence
The two principles of technical analysis are the most important foundation in understanding technical analysis and interpreting technical analysis properly. Too many amateurs misinterpret technical indications simply because they did not understand these two simple principles. This is also the only part in this tutorial that addresses the mental aspect of technical analysis and should be clearly understood before moving on. The two principles of technical analysis are Significance and Prudence.
Technical Analysis Principle #1: Significance
Significance refers to the degree that a technical indication is true. Take breakout and reversal signals for example. Does a 0.5% close above a resistance level indicate a breakout? Does a 1% reversal in a bearish stock that has fallen more than 40% indicate a reversal? No. The degree of significance for both cases is just too weak. Most technical analysis beginners who do not understand the principle of significance would take a small fake out as a breakout and then act on the wrong stocks. The judgment of significance is, however, a matter of experience. How much of a breakout represents a significant breakout? How much of a reversal represents a significant reversal and how big a candle represents a strong morning star signal? The judgment of significance is something you need to acquire and refine as you put more years behind your ears.
Technical Analysis Principle #2: Prudence
Prudence refers to the ability to say “No” when in doubt. Technical analysis is more of an art than a science. This is because even though technical indications are scientifically generated, the interpretation of technical indications is highly subjective. You are going to experience many marginal or doubtful moments in technical analysis. Technical signals that “almost made it” as well as technical signals that are “neither here nor there”. Those are the times to exercise the technical analysis principle of Prudence and to make the most conservative interpretation. When a signal is marginal, you should always exercise prudence by giving benefit of the doubt to disqualifying the signal. When a significant breakout signal is produced after a huge drawdown, you should exercise prudence by waiting for further confirmation or enter the position gradually over a few days.
2 Key Tools: Charts, Indicators
Technical Analysis Key Tool #1: Charts
Chart reading is the most fundamental tool in technical analysis and is also why technical analysis is frequently referred to as “Chartology”. Before the popularization of the internet, during the age where analysts still read tapes, technical analysts have to obtain stock quotes from “secret sources” and then plot them down on huge chart papers in their secret rooms. What then is a chart? A chart is simply a plot of the stock prices made into a curve. A chart’s basic function is to show the TREND of a stock’s price action. Without a chart, a stock closing at a price of $50 has no meaning at all. With a chart, you can clearly see the price action trend down from $100 to $50, giving investors the first indication of where the future price action of that stock might be. In the beginning, charts are plotted merely as a single line joining the prices together. Recently, with more and more powerful computers and software, more innovative and informative plotting methods like candlesticks, bar charts and point and figure charts are developed and made easily available through the internet. No matter what type of chart you look at, the only aim is to provide an indication of where the future movement of the stock might be. Another important aspect of charts is “Chart Patterns”. Different types of charting method can produce easily recognizable patterns and formations that can be associated with certain future expectations. Popular chart patterns include “morning stars” in candlestick charting, “double top breakout” in point and figure charting and “double bottom” formation.
Technical Analysis Key Tool #2: Indicators
Technical Indicators are the other key tool in technical analysis. Technical indicators are graphical representations of various mathematical formulas based on the stock price and transaction volume. The are literally thousands of technical indicators out there and more are being developed daily as new finance theories are translated into mathematical formulas every day. Technical indicators’ main function is to tell when a stock is considered oversold or overbought and when a stock is considered weak or strong relative to its past action. There are literally endless amount of formulas that can be used to provide those indications, hence the endless number of technical indicators. Because there are so many different technical indicators out there, beginners should start with a few well known and widely used ones as those tends to be used by institutional investors as well. It can be argued that the effectiveness of a technical indicator lies in its popularity. The more investors acting on the same indicator, the stronger the predictive nature of the indicator becomes. A self fulfilling prophecy? Maybe.
2 Key Components: Price, Volume
Surprisingly, so many different charting methods and technical indicators used in technical analysis all stems from the same 2 key components, Price and Volume. The price and volume of a stock are the only two publicly available information pertaining to that stock. Out of its price and volume, stock charts and technical indicators are created. Candlestick and bar charts are constructed out of the opening price, closing price as well as high and low prices. Relative Strength Index is created out of the price as well as volume of a stock compared against its historical data.
5 Key Concepts: Resistance, Support, Trend, Patterns, Setups
The 5 key concepts of technical analysis are the 5 most important analytical methods in technical analysis. Understanding all 5 are critical to the mastery of technical analysis. All 5 key concepts work together to help technical analysts predict future stock movement and know when to buy or sell a stock. Of particular importance is the ability to tell when to buy or sell a stock. This is the kind of information that fundamental analysis will not provide.
Technical Analysis Key Concept #1: Resistance Level
A resistance level is a price level at which most investors sells a particular stock at, resulting in the stock falling every time that price level is hit. It acts almost like a brick ceiling from which the stock falls down every time it hits its head on it. Resistance levels are identified from reading price charts, particularly point and figure charts. It is a level which you might want to at least take some profit off the table. Even though resistance levels make excellent selling points, a breakout of a resistance level does spur a stock strongly to upside, creating an excellent buying opportunity. When anticipating resistance level breakouts, it is important to apply the 2 key principles of technical analysis outlined above.
Technical Analysis Key Concept #2: Support Level
A support level is a price level at which most investors BUYS a particular stock at, resulting in the stock rising every time that price level is hit. Support levels are the reverse of resistance levels and acts almost like a trampoline on which the stock rebounds every time it lands on it. Support levels are also identified from reading price charts and is a level where you might consider buying a stock at, especially when a stock hits a correction. Even though support levels make excellent buying points, a breakdown of a support level does spur a stock down a lot more. This is why the 2 key principles of technical analysis are important when timing an entry using support levels.
Technical Analysis Key Concept #3: Trend
The main objective of looking at the trend of a stock through price charts is the anticipation that the trend is going to continue going in the same direction generally. It is like buying fashion that conforms to the current trend. If no other information is available, an investor looking at a price chart would always have a better feel of where a stock is going than an investor looking merely at a closing price, right? Of course, no trends go on and on forever. This is where technical indicators come in to provide an indication of how strong or weak a trend is.
Technical Analysis Key Concept #4: Patterns
Chart Patterns are shapes formed by price charts. Some popular chart patterns are “Double Bottoms” and “Head and Shoulder Formation”. They are so named based on the shape formed by a price chart. These easily recognizable patterns provide an interpretation on what investors are expecting the stock price to head towards. Double Bottoms typically indicate a reversal and head and shoulder formations typically indicate a switch to a bear trend. There are a ton of chart patterns out there and all needs to be interpreted in conjunction with the right technical indicators while applying the 2 key principles of technical analysis.
Technical Analysis Key Concept #5: Setups
Setups are specific patterns formed by using different charting methods. A morning star setup using candlesticks charting may not show up as a buying signal in a point and figure chart. This is why different charting methods need to be used to cross check buying or selling setups produced by one charting method. A setup is a lot more specific than a chart pattern. A chart patterns tells you where a stock might be heading and a setup tells you when you can buy or sell a stock. Setups need to be interpreted together with the other key concepts while applying the technical analysis principles. A buying setup occurring at support levels or a selling setup occurring at resistance levels makes the setups more convincing.
Fundamentals of Technical Analysis – Conclusion
All the fundamentals of technical analysis needs to be used together like all parts of a car, nothing can be left out if you want to be successful with technical analysis. So far, you might notice that technical analysis has the ability to precisely time entries and exits on high probability stocks. This is also what makes technical analysis so important to options trading. Trading Stock options requires the stock in question to move as expected quickly in order to reduce the effects of time decay and to maximize profits. I hope this article has been useful to you as you start your journey in trading and to your future success.

When a person is thinking about investing, and is considering learning a bit about the option market there are a few general things he should consider. The following are a few tips to help you get started.
Learn the Language
Option trading is like almost every other activity of human endeavor in that it has its own unique language. This is no different than bowling, baseball, hunting, or brain surgery. There is a tendency in people to develop their own terminology, and sometimes even slang, that they like to use to speak with others who share their interests. It serves the purpose of separating those in the know from the beginners. When you are new to anything, this can be daunting and confusing. Usually, a little research will sort things out. Often the terminology is merely a complex way of expressing a simple idea. Option trading is filled with such terms: calls, puts, margins, strike prices. It helps to be able to speak the lingo.
Study the Market
There has never been a better time to enter into investing. Information and knowledge are the tools of the trade, and we are living in the information age. There are a lot of facts out there, and you are connected to them on the internet. Take your time, and educate yourself about the market that you are interested in giving a try. Concentrate on facts and figures, and view advice with a bit of skepticism. It is helpful to remember the old adage: Those you can do, and those who can not teach. If someone knows a fail safe way to make money in Option Trading, you can bet he will be out making money, not trying to sell the idea to you.
Dip your Toes
While it is thought by some that the best way to learn to swim is to jump into the deep end of the pool, a lot of people who end up trying that method drown. There is a high amount of risk in any market investment, and the beginner can often be like a lamb going to play with a pack of wolves. On the other hand, you can not be learning option trading without doing a bit of option trading. One idea is to find a “virtual” option trading game, where you can practice and learn with phony option purchases and play money. This can be very helpful, but like combat training, things get a lot different fast when real bullets start flying around. When you are ready to actually take a stab at a real investment, start slow so that you don’t lose all of your investment capital while you are still learning.
Learn to be You
There should always come a time when the student is ready to surpass the teacher. The student does this by absorbing all the teacher has to teach, and then adding their own insight, and talent, and skill. You are going to have to see option trading as an art and not a science. You can learn technique, and you can learn methods. You can learn the language, and the tricks of the trade. You can study the success of others, and their failures. In the end, however, it is going to be you making the decisions. Approach the learning process as a quest to find your way of investing, not to learn to duplicate the ways of other investors. Ultimately, it will be your money, and your profit or loss.
The above is just some basic advice to get you started on the process of learning. Do not despair if option trading seems hard to learn. Remember this quote, “Of course it is hard. If it were easy anyone could do it. It is the hard that makes it great”.

 

Let’s be clear on this. There is no other option trading strategy that can outshine or even equal the profit generating potential of the sport of writing naked options. The term ‘sport’ is used here because those who practice this money making trading technique not only turn out fabulous profits but also have fun in the process. It is a fun, profitable but dangerous option trading sport that is mostly played by seasoned and skilled option players. That is, until the sport’s peril’s were tamed with the use of trading techniques that, while offering substantial safeguards to the player, still continued to offer high profitability ratios, albeit at slightly reduced rates. Having made it ‘investor safe’ has only slightly altered the profit potential of writing nakeds and certainly, without doubt, continues to be the premiere money making trading strategy in the options market.

 

The birth of the options market in recent decades spawned the creation of dozens of trading strategies and systems that is today being used not only by individual options traders but also by financial institutions. Stock options as an investment instrument is now widely employed as a safe and sound money strategy. The ability of options to give the investor a wide range of choices in stock market investment is what has made the options market grow by leaps and bounds over the last two or three decades. There are dozens of option trading systems being employed by individual investors as well as financial institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value, another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is now popularly known as covered call writing.

 

Trading strategies, techniques and systems available to the option trader are so numerous today that it would take a whole book to describe each and that would be just a brief description not a detailed explanation. It would be far beyond the scope of what we could cover in this short article. Most of the strategies are based on the principle of buying calls and puts or, variations of this strategy such as the use of spreads. The reason for the popularity of buying calls and puts and its variations is quite simple; limited or defined loss against the potential for unlimited and fabulous profits. This is what has driven thousands into the options trading game. But like everything else in life there is always a trade off. While the potential for fabulous profits against limited investment exists the reality of achieving such success is restricted. It’s almost like buying a lottery ticket with the potential for winning fabulous riches. Or putting it differently, it’s also akin to going to a casino and placing bets on gaming tables with the hope that at the end of the evening you will come out with more money than you came in. As we all know there are very few winners in casinos and that is why the gaming business offers tremendous profits for the operators.

 

But one can be an option trader and be in a similar position as the casino operator.  How? By being an option writer or seller instead of a buyer. For every option that is bought in the market, there must be a seller or writer of the option. These writers are the casinos in the options business. As the option seller you take the bets from the option buyers and since 75 to 80 percent of all options in the market expire worthless, you the seller pocket the premiums paid by the buyers when the options they bought expire worthless. For the benefit of those who are not familiar with gambling casinos, the winning odds of casinos over the betting player is only around 5 percent and yet they rake in profits from this business. Now imagine this, research and studies have shown that the option writer (seller) has better than 10 to 20 percent odds over the option buyer.

 

Option traders who successfully use the strategy of selling options consider themselves as having found the Holy Grail of Investments. And of all the variations in option selling strategies (just as many as there are in option buying), writing naked options is considered to be the Cadillac division. No other option selling system offers the profit potential of the naked writer.

 

So why aren’t there more option writers in the market? For two reasons:

 

 

 

 

 

It must be noted however, that option writing is fast gaining popularity among serious investors looking to grow their wealth at a steady, consistent and secure manner regardless of market or economic conditions. For those willing to venture into this lucrative field for long term capital appreciation don’t let the first reason above frighten you into inaction. There are many ways one can protect himself and conquer the element of ‘unlimited loss’ in writing nakeds. The author of this article is one of many successful naked option sellers. He has put out an e-book detailing a trading system that uses a three pronged strategy that trounces the so-called risk of loss to be almost neglible. Information about his system can be found at his web site.   

 

 

 

(Don’t place another Forex trade until you READ ALL THIS)

The bar for Forex training is about to be raised again…

…because one of the top Forex mentors has just released the March, 2009 update to one of his most popular multimedia training “kits” that challenges 90% of what most Forex traders hold to be true.

It might “ruffle your feathers”, but if you have ANY interest in discovering how select groups of traders have been quietly riding the coat tails of the big banks to maximize their “pip potential” in the Forex markets…

-I think you’re in for a big SURPRISE.

~~~~~~~~~~~~~~~~~~~ YOUR ‘FOREX 4-PACK’ ~~~~~~~~~~~~~~~~~~~

If a 30+ year seasoned trader grilled you on your top Forex challenges and then delivered a custom-made, step-by-step, multimedia “blueprint” that addressed each and every one…

-do you think you’d be interested?

Well, that’s pretty much what you’re about to get your hands on.

Just last week, over 100,000 Forex traders were invited to take part in a landmark survey about their top challenges trading the Forex markets.

And the result?

* A four-part multimedia POWERHOUSE that ignores what’s popular, and instead tells you the TRUTH about what’s working NOW in the Forex markets…

It’s called the ‘Forex 4-Pack’, and honestly, you shouldn’t even consider placing another trade until you see what it reveals…

~~~~~~~~~~~~~~~~~ 20 MINUTES A DAY? ~~~~~~~~~~~~~~~~~

Find out how the author spends just 20 minutes a day with TOTAL confidence in the Forex markets, identifying more pip potential in that time than most traders dare to dream about…

You’ll also learn:

** How to “shake out” the good Forex brokers from the unscrupulous ones. Many brokers won’t be prepared when you ask them these 5 questions (part 1, page 16, & part 4).

** The “core essentials” of Forex trading that will let you “leapfrog” over other traders, giving you a “fast track” that would otherwise take months, or years to achieve (part 2).

** The 4 “golden rules” your Forex trading method MUST follow if you want to have an edge over all other traders (part 1, page 58).

** The “insiders formula” on how to determine the best mix of technical indicators to use when trading Forex pairs (part 1, page 27).

** Step-by-step tactics for applying the “Optimal Profit Exit Strategy”.  This is a deadly accurate way of enjoying profit-taking as quickly as possible (part 1, page 37).

** The 4 market conditions that you should avoid at all costs and that practically eradicate risk (part 3).

** How to drastically reduce your “time in the trenches” trading Forex by spending only 20 minutes a day. These 2 discoveries make it all possible (part 1, page 70).

** …plus, there’s a TON more you’ll get to sink your teeth into when you get the ‘4-Pack’…

~~~~~~~~~~~~~~~~~~~~~~~~ SORRY, IT’S NOT FOR SALE ~~~~~~~~~~~~~~~~~~~~~~~~

When I snuck a look at the ‘Forex 4-Pack’, I was certain I’d be asked to cough up 150 bucks or more for it. After all, it’s not one of those flimsy 10-page “ebooks” many so-called “gurus” try to pass of as “value” these days…

-Instead, it’s a collection of lengthy reports, “screen capture” video tutorials, and more… there’s even a “Broker Scorecard” that your broker might have a hard time with. Bottom line – it’s all designed to PROTECT YOU and to HELP YOU FIND MORE PIPS, with more FREQUENCY.

That’s why I was surprised to find out that…

-it’s not for sale (at least not right now).

You see, the author released an early version of just one of the pieces to this ‘4 Pack’ last year and he was overwhelmed by the response he received from the trading community.

So that’s why he decided to give it away. In his own words, “I want to de-mystify the Forex markets once and for all. So I sat down to produce this material as if I was under oath, being grilled by an attorney.  That’s how direct and forthcoming it is.”

~~~~~~~~~~~~~~~~~~~~ HOW TO GET YOUR COPY ~~~~~~~~~~~~~~~~~~~~

To get your copy, just visit this web page right now:

http://www.allforextraining.com/y/?i=1057655&l=f48

I hope you enjoy it as much as I have.

The first thing that you have to do when you are looking to begin trading in stock options is to read everything that you can find on the topic. Stock options are not stocks, and trading in stocks does not qualify you to trade in options by default. If you want to be successful, see what others have to say about the subject and learn as much as you can from as many diverse sources as you can.
This means doing internet research, talking to people who trade in stock options, reading books on the topic, and possibly even buying software that is designed for stock options traders to see what they are using and what they need to know. Next you will want to build up your experience by ‘trading on paper’ for a while.
Go through the motions of making trades without actually doing so and see if you are making money or if you are losing out. If you have been losing out on your imaginary deals, you will not do much better in the real market. Get a feel for how things move before you jump in with both feet. Once you feel like you have a good background in information, you can set up an options account.
Contact a broker or discount broker who specializes in stock options, and set up an account with him or her. You will do your trading through your broker, at least at first, so make sure that you are comfortable with the broker, what he or she has to offer, what that broker does not offer, and what their requirements for opening an account are.
Invest a small amount of money to begin with, and focus on safe trades and following recommendations to keep the risks low. Once you have really started to get into things, you can ease your investments and your risks up a little higher in the quest for greater profits, but starting small will help keep you from digging yourself into a hole too early in the game.
Stock option trading can be a fun and profitable adventure, but you should go into it fully prepared and with the knowledge that you could lose money just as easily as you can make it, especially at first. Keep that in mind and study hard, though, and you will soon be trading options like a pro on the market.

Brendan Moynihan and Jim Paul organized a book on managing money while increasing profits, which is What I Learned from Losing Millions of Dollars. Based on a true story, this book focuses on money management and prevents you from losing newly earned profits. Technical theories are the most evident aspects in this book teaching many methods of increasing profits. Even though many ways are preventing forex traders to lose profits, they still do.

Well, currency trading has some tactics to teach you how not to lose money:

Moynihan and Paul’s first tutorials comprise of the funny and richest pleasures of forex trading. The authors also express some problems on currency trading and how, as forex traders, they have solved these complications. Definitely, these authors brought the most out of forex markets.

After losing profits, these authors have learned and formed various views on how to manage money that is insightful and provoking. In this book, you learn how to manage emotional and monetary aspects of forex without having any difficulties on decision-making. In addition, in currency trading, you have to implement great defense.

Here are some of the major points stressed by Moynihan and Paul:

? Three major failures forex traders commonly make and measures of preventing them.

? The reason on building wealth first rather than spending it

? The pattern that is psychological in nature, where losses take form

Aside from managing profits, this book also focuses on the ratio of risk versus reward and the reason on other books’ wrong interpretation on this topic.

After reading this article, you should know where you are heading.

Have you ever lost money trading stock options?
Chances are good that you tried to apply the 3 trading horizons of stock trading to options trading and then got yourself hurt real bad.
There are 3 time horizons or what we call trading horizons in stock trading and they are; Long Term, Mid Term and Short Term. Long term horizon in stock trading means the buying and holding of stocks for 3 to 5 years, or sometimes longer. This is ideal for value investing in the long term prospects of a company. Mid term investing in stock trading is the buying and holding of stocks for 6 months to a year or two. Most stock investors use a mid term view to invest in new growth stocks which are expected to perform well in the immediate year. Short term investing in stock trading is the buying and holding of stocks for 3 to 6 months. These are stocks of companies that are expected to make a breakthrough in their industries. However, do these notions of investing apply in options trading? Not at all!
The truth is this: Stock Options are derivative instruments that have very short contractual lives! In fact, the longest expiration for exchange traded stock options rarely exceed 1 year! On top of that, the extrinsic value, or what we call time value, built into every stock options contract decays as expiration draws nearer, diminishing the value of your options even if the underlying stock remain stagnant. Due to these characteristics, stock options are trading instruments, not investing instruments, and have much shorter trading horizons than if you trade stocks. This is also why options trading is associated so closely with technical analysis these days because technical analysis is extremely useful in identifying short term trends or reversal of trends.
So, how is the long term, mid term and short term trading horizon defined for options trading?
In Options Trading, long term horizon is the buying of options with expiration of up to 1 year in order to speculate a long term rally or ditch in the underlying stock. Typically, long term charts on monthly time periods are used to identify such trends. Mid term horizon is the buying and holding of monthly options all the way to their expiration, each trade lasting no more than a month. Charts on weekly time periods are particularly useful for identifying mid term trading opportunities. Short term horizon lasts from 3 to 15 days in order to speculate a quick short term surge or ditch in the underlying stock and typically uses short term daily time period charts to identify trading opportunities.
From the above definitions, it is clear that stock options, as a short term trading or hedging instrument, is useless for anyone who is investing in the long term horizon defined for stock trading. Therefore, before you decide to completely replace your stock investing with options trading, first decide if trading stock options allow you to trade the way you always have with stocks. If it doesn’t, it is time for you to either stick with stock investing or learn a trading system which is perfectly suited for options trading.

There are two main types of vertical spreads. There is the vertical call spread and the vertical put spread. Each spread allows you to do two things. First, you can buy it, making you long the vertical spread. Second, you can sell it making you short the vertical spread. Both can be employed to take advantage of directional stock plays. When we use the term ‘directional stock play,’ we refer to using vertical spreads to capitalize on anticipated stock movements either up or down.
A bull spread is used when the investor feels that a stock is most likely to go up. As we recall, ‘bullish’ means to have a positive outlook on a stock’s future movement. There are two ways to set up a bull spread. The first is with the use of calls. In this case, a bullish investor would buy a vertical call spread (bull call spread). This is accomplished by buying a call with a lower strike price and selling a call with a higher strike price.
The second way to construct a bull spread is with the use of puts. A bullish investor could sell a vertical put spread (bull put spread) hoping to profit from an increase in the stock’s value. The investor would sell a put with a higher strike price and buy a put with a lower strike price. Let’s take a look at how the P&L chart of a Bull Spread looks below.
To recap, if you feel a stock will be increasing in value, you may put on a bull spread by either buying a vertical call spread (bull call spread) or selling a vertical put spread (bull put spread)
A bear spread, however, is used when, you the investor, feels a stock is likely to trade down. Remember, ‘bearish’ means that one’s outlook on the future movement of the stock is negative. To take advantage of this expected downward movement, the investor would put on a bear spread. This can be done in either of two ways.
First, the investor can do it using puts. The purchase of a vertical put spread (bear put spread) can be accomplished by purchasing a put with a higher priced strike and selling a put with a lower priced strike.
The second way an investor can construct a bear spread is by using calls, specifically, by selling a vertical call spread (bear call spread). You do this by selling a call with a lower strike price and purchasing a call with a higher strike price.
So if you think that a stock is likely to decrease in value, you sell a vertical call spread (bear call spread) or purchase a vertical put spread (bear put spread). Let’s take a look at the P&L diagram for a Bear Spread below.
Finally, there are two fundamentals that are universal to all vertical spreads. These fundamentals are critical to understanding the foundation of the vertical spread strategy: (1) you can determine a vertical spread’s maximum value by taking note of the difference between the two strikes and (2) vertical spreads have intrinsic value.

The Stock Market offers a lot of opportunity to make a steady income, one of the juicy strategies available allows you your fortune make; option trading. Stock Market is quite large with a lot of money and security exchanging hands everyday. With a good workable strategy you can be earning a steady income from the market. As mentioned one of the profitable techniques available is the skill to trade options.
Credit spreads is just one of the other many popular strategies available and it is quite profitable. Credit spreads when created put a “credit” into your trading account instead of a “debit” when you pay for a stock or derivative. That is why they are called credit spreads, they allow you keep the credited funds if the options in the spread expire and the share price has not reached a certain level.
You might wonder why it creates a credit and not the traditional debit. The reason is quite simple, you are selling an option at a price quite close to the current price, But at the same time you are limiting your risk on investment by buying the same number of option contracts at a strike price further apart, with both having the same expiry date. This activity has simply put your sell option closer to “the money” or the obtainable share price and which is higher than your “bought option” and that earns you a credit.
A trick of the trade is to sell credit spreads with a short expiry time, which allows you take advantage of the “time decay” factor in options. Options normally have a time decay which falls as the expiry date approaches. A credit spread with 4-6 weeks expiry is thus desirable. You can even have just less than 2 weeks expiry; you just have to be careful you know the way the share would move since the time frame is shorter.
Basically in a given time frame, in any market, share price can only move in five patterns:
1. A small upward move
2. A small downward move
3. A side ways move – i.e. market price goes practically nowhere or returns to its original point.
4. A large upward move
5. A large downward move
Out of the above five possibilities, four of them would favor you if you have created a credit spread. Even when the undesirable fifth option occurs, losses can still be minimized by rolling out or extending your expiry date and waiting for the market to return to a more favorable profitable position. You can also buy back on your sold option and make enough profit to break even or realize a small profit.
As you can see credit spreads are quite profitable they offer you an opportunity for fortune making while practicing option trading. It also offers wonderful flexibility! Imagine 4 out of 5 possible market movements are all in your favor, which is an 80% success rate.

Many people think of the stock market when they think of options. However, the foreign exchange market also offers the opportunity to trade these unique derivatives. Options give retail traders many opportunities to limit risk and increase profit. Here we discuss what options are, how they are used and which strategies you can use to profit. Types of Forex Options There are two primary types of options available to retail FOREX traders. The most common is the traditional call/put option, which works much like the respective stock option. The other alternative is “single payment option trading” – or SPOT – which gives traders more flexibility. (Learn to choose the right Forex account in Forex Basics: Setting Up An Account.) Traditional Options Traditional options allow the buyer the right (but not the obligation) to purchase something from the option seller at a set price and time. For example, a trader might purchase an option to buy two lots of EUR/USD at 1.3000 in one month; such a contract is known as a “EUR call/USD put.” (Keep in mind that, in the options market, when you buy a call, you buy a put simultaneously – just as in the cash market.) If the price of EUR/USD is below 1.3000, the option expires worthless, and the buyer loses only the premium. On the other hand, if EUR/USD skyrockets to 1.4000, then the buyer can exercise the option and gain two lots for only 1.3000, which can then be sold for profit. Since FOREX options are traded over-the-counter (OTC), traders can choose the price and date on which the option is to be valid and then receive a quote stating the premium they must pay to obtain the option. There are two types of traditional options offered by brokers: American-style – This type of option can be exercised at any point up until expiration. European-style – This type of option can be exercised only at the time of expiration. One advantage of traditional options is that they have lower premiums than SPOT options. Also, because (American) traditional options can be bought and sold before expiration, they allow for more flexibility. On the other hand, traditional options are more difficult to set and execute than SPOT options. (For a detailed introduction to options, see Options Basics Tutorial.) Single Payment Options Trading (SPOT) Here is how SPOT options work: the trader inputs a scenario (for example, “EUR/USD will break 1.3000 in 12 days”), obtains a premium (option cost) quote, and then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is successful, giving you a payout. Many traders enjoy the additional choices (listed below) that SPOT options give traders. Also, SPOT options are easy to trade: it’s a matter of entering the scenario and letting it play out. If you are correct, you receive cash into your account. If you are not correct, your loss is your premium. Another advantage is that SPOT options offer a choice of many different scenarios, allowing the trader to choose exactly what he or she thinks is going to happen. A disadvantage of SPOT options, however, is higher premiums. On average, SPOT option premiums cost more than standard options. Why Trade Options? There are several reasons why options in general appeal to many traders: Your downside risk is limited to the option premium (the amount you paid to purchase the option). You have unlimited profit potential. You pay less money up front than for a SPOT (cash) FOREX position. You get to set the price and expiration date. (These are not predefined like those of options on futures.) Options can be used to hedge against open spot (cash) positions in order to limit risk. Without risking a lot of capital, you can use options to trade on predictions of market movements before fundamental events take place (such as economic reports or meetings). SPOT options allow you many choices: Standard options. One-touch SPOT – You receive a payout if the price touches a certain level. No-touch SPOT – You receive a payout if the price doesn’t touch a certain level. Digital SPOT – You receive a payout if the price is above or below a certain level. Double one-touch SPOT – You receive a payout if the price touches one of two set levels. Double no-touch SPOT – You receive a payout if the price doesn’t touch any of the two set levels. So, why isn’t everyone using options? Well, there also are a few downsides to using them: The premium varies, according to the strike price and date of the option, so the risk/reward ratio varies. SPOT options cannot be traded: once you buy one, you can’t change your mind and then sell it. It can be hard to predict the exact time period and price at which movements in the market may occur. You may be going against the odds. (See the article Do Option Sellers Have A Trading Edge?) Options Prices Options have several factors that collectively determine their value: Intrinsic value – This is how much the option would be worth if it were to be exercised right now. The position of the current price in relation to the strike price can be described in one of three ways: “In the money” – This means the strike price is higher than the current market price. “Out of the money” – This means the strike price is lower than the current market price. “At the money” – This means the strike price is at the current market price. The time value – This represents the uncertainty of the price over time. Generally, the longer the time, the higher premium you pay because the time value is greater. Interest rate differential – A change in interest rates affects the relationship between the strike of the option and the current market rate. This effect is often factored into the premium as a function of the time value. Volatility – Higher volatility increases the likelihood of the market price hitting the strike price within a limited time period. Volatility is factored into the time value. Typically, more volatile currencies have higher options premiums. How it Works Say it’s January 2, 2010, and you think that the EUR/USD (euro vs. dollar) pair, which is currently at 1.3000, is headed downward due to positive U.S. numbers; however, there are some major reports coming out soon that could cause significant volatility. You suspect this volatility will occur within the next two months, but you don’t want to risk a cash position, so you decide to use options. (Learn the tools that will help you get started in Forex Courses Teach Beginners How To Trade.) You then go to your broker and put in a request to buy a EUR put/USD call, commonly referred to as a “EUR put option,” set at a strike price of 1.2900 and an expiry of March 2, 2010. The broker informs you that this option will cost 10 pips, so you gladly decide to buy. This order would look something like this: Buy: EUR put/USD call Strike price: 1.2900 Expiration: 2 March 2010 Premium: 10 USD pips Cash (spot) reference: 1.3000 Say the new reports come out and the EUR/USD pair falls to 1.2850 – you decide to exercise your option, and the result gives you 40 USD pips profit (1.2900 – 1.2850 – 0.0010). Option Strategies Options can be used in a variety of ways, but they are usually used for one of two purposes: (1) to capture profit or (2) to hedge against existing positions. Profit Motivated Strategies Options are a good way to profit while keeping the risk down–after all, you can lose no more than the premium! Many FOREX traders like to use options around the times of important reports or events, when the spreads and risk increase in the cash FOREX markets. Other profit-driven FOREX traders simply use options instead of cash because options are cheaper. An options position can make a lot more money than a cash position in the same amount. Hedging Strategies Options are a great way to hedge against your existing positions to decrease risk. Some traders even use options instead of or together with stop-loss points. The primary advantage of using options together with stops is that you have an unlimited profit potential if the price continues to move against your position. Conclusion Although they can be difficult to use, options represent yet another valuable tool that traders can use to profit or lower risk. Options in FOREX are especially prevalent during important economic reports or events that cause significant volatility (when cash markets have high spreads and uncertainty).

Many people think of the stock market when they think of options. However, the foreign exchange market also offers the opportunity to trade these unique derivatives. Options give retail traders many opportunities to limit risk and increase profit. Here we discuss what options are, how they are used and which strategies you can use to profit.

Types of Forex Options

There are two primary types of options available to retail FOREX traders. The most common is the traditional call/put option, which works much like the respective stock option. The other alternative is “single payment option trading” – or SPOT – which gives traders more flexibility.

Traditional Options

Traditional options allow the buyer the right (but not the obligation) to purchase something from the option seller at a set price and time. For example, a trader might purchase an option to buy two lots of EUR/USD at 1.3000 in one month; such a contract is known as a “EUR call/USD put.” (Keep in mind that, in the options market, when you buy a call, you buy a put simultaneously – just as in the cash market.) If the price of EUR/USD is below 1.3000, the option expires worthless, and the buyer loses only the premium. On the other hand, if EUR/USD skyrockets to 1.4000, then the buyer can exercise the option and gain two lots for only 1.3000, which can then be sold for profit.

Since FOREX options are traded over-the-counter (OTC), traders can choose the price and date on which the option is to be valid and then receive a quote stating the premium they must pay to obtain the option. .

Single Payment Options Trading (SPOT)

Here is how SPOT options work: the trader inputs a scenario (for example, “EUR/USD will break 1.3000 in 12 days”), obtains a premium (option cost) quote, and then receives a payout if the scenario takes place. Essentially, SPOT automatically converts your option to cash when your option trade is successful, giving you a payout.

Many traders enjoy the additional choices (listed below) that SPOT options give traders. Also, SPOT options are easy to trade: it’s a matter of entering the scenario and letting it play out. If you are correct, you receive cash into your account. If you are not correct, your loss is your premium. Another advantage is that SPOT options offer a choice of many different scenarios, allowing the trader to choose exactly what he or she thinks is going to happen.

Why Trade Options?

There are several reasons why options in general appeal to many traders:

Your downside risk is limited to the option premium (the amount you paid to purchase the option).

You have unlimited profit potential.

Options Prices

Volatility – Higher volatility increases the likelihood of the market price hitting the strike price within a limited time period. Volatility is factored into the time value. Typically, more volatile currencies have higher options premiums.

Profit Motivated Strategies

Options are a good way to profit while keeping the risk down–after all, you can lose no more than the premium! Many FOREX traders like to use options around the times of important reports or events, when the spreads and risk increase in the cash FOREX markets. Other profit-driven FOREX traders simply use options instead of cash because options are cheaper. An options position can make a lot more money than a cash position in the same amount. Hedging Strategies

Options are a great way to hedge against your existing positions to decrease risk. Some traders even use options instead of or together with stop-loss points. The primary advantage of using options together with stops is that you have an unlimited profit potential if the price continues to move against your position.

Options represent yet another valuable tool that traders can use to profit or lower risk. Options in FOREX are especially prevalent during important economic reports or events that cause significant volatility (when cash markets have high spreads and uncertainty). See my bio with more info links below.