Iron Condor

I thought such an eye-catching title would be appropriate for an article on risk management. Often times, beginning traders forget the fundamentals of proper trading in their quest for instant riches in the stock market. Those of us who have been trading for some time now are fully aware of the danger in that type of thinking.

I was a cocky beginning trader. Soon after attending a stock trading seminar, I had several big wins. In my own mind, I was the exception to any and all stock market trading principles. I could do no wrong. My short-lived reign as a trading Adonis came to an abrupt end. All my money began raining down into the pockets of real stock market professionals. Fortunately, I wised up before it was too late.

In short, I was a young punk who knew everything about nothing. I often times had to learn things the hard. Learning to trade in the stock market was no exception. So, here are my top three ways to prevent an STD.

#3 Way To Avoid An STD

Perform thorough market research! Taking proper research for granted is a one-way ticket to Brokeville. Trust me, I know. Due diligence is required in order to side step a poor stock decision. Remember, getting into a bad trade is simple…getting out is costly. Give market research the time and attention it deserves.

#2 Way To Avoid an STD

Remove hope from your emotional make up when trading! Wishful thinking is a dangerous mindset to be in when you are a stock trader. Hope and wishful thinking lead to irrational decisions based on emotions rather than factual information. Going down with the ship is far from an act of nobility. You will make mistakes. As a trader, you must be willing to make corrections quickly. In the stock market, making too many errors, too fast will certainly cause you to be prematurely ousted from the markets if you do not adhere to the method #1.

#1 Way To Avoid an STD

Make use of a protective stop loss! After placing your order, ALWAYS set a protective stop. Failure is not to far off in the distance for a trader who handles the duties of risk management in the absence of a stop loss. A stop loss is not perfect but the only insurance policy a trader has against stock trading career ending losses. Stop being a philanthropic trader who continues to give money away to the markets.

Using a protective stop loss continues to be the most effective method of risk management. Fortunately, it is also the easiest of the three to apply. Methods 1 and 2 are developed over time as you gain experience. Simply use my top three ways of preventing an STD and you have cut your chances of getting burned.

As a beginning stock market trader, I frequently visited an unpleasant place called Loss Vegas. It was teeming with would be investors and traders with grand aspirations of making a killing in the stock market. Differing life experiences, bank account balances, and strategies separated them but they were all bound by the possibilities of great riches there for the taking. Some were even aware of the chances of success being less than ideal and were not deterred. I could be counted among those who would not be denied.

The numbers don’t lie! 9 out 10 stock traders will fail, miserably! That is the same ratio for starting a business. At least in the case of running a business, there’s a 5-year failure window. I would say that a very small minority of beginning traders makes it past their first year. The reason for such an unbalanced success/fail ratio is simple. 9 out of 10 people entering the market would be better categorized as gamblers and not traders. Yes, I too, was one of those gamblers masquerading as a stock market trader.

Successful traders employ proven, winning trade strategies. Most beginning traders systematically make the same mistake over and over again. Venturing into the market without a sound trading plan is financial suicide. Here is a guide to structuring your own winning trading strategy.

Many principles of running a successful business can be applied to stock trading. Having a trading plan is essential to the success of your new venture. Consider this trading plan to be your road map that guides you to stock trading mastery. Skipping this step will ensure your permanent residency in Loss Vegas.

The trading plan must outline the why or purpose for trading the markets. If your purpose is to simply make money, you are in for a rude awakening. The number one objective of a stock trader is to trade well NOT make money. Focusing on trading well will result in you making money. Making profitable trades is a by-product of trading well. Calculating profits while practicing your trade is counter-productive to your efforts. You certainly wouldn’t want a lawyer tabulating his fees while researching your case, would you? The same focus needs to be applied while you trade. There will be plenty of time for counting your windfall once you have closed out your position.

After committing yourself to learning to trade well, the next step in the process is executing the plan. This includes but is not limited to:

1. Conducting Market Research-stock selection, risk/reward ratios

2. Pinpointing Entry Points

3. Money Management- where to place protective stops

4. Establishing Exit Points

5. Trade Review

I use this exact process when trading stocks and options. Deviating from your trading plan can hinder your progression as a trader in two areas. First, the effectiveness of a trading strategy cannot be accurately measured when a trader is inconsistent in the execution of a trading strategy. And secondly, altering your strategy in the midst of a trade is hazardous to your wealth. A prime example would be moving your protective stop in the opposite direction of your trade. This allows for a wider, much riskier stop loss cushion. Moving protective stops in the opposite direction of the trade is a sure sign of a rookie trader.

Following this simple formula will not eliminate visits to Loss Vegas but will ensure shorter, less frequent stays. Happy trading and here’s to your success!

The recent stock market crisis (2008) took the stock market down by more than 30% in less than a year. This has a lot of traders thinking that big money can be made simply by buying put options on stocks that will move down with the market, especially high beta ones. Nothing can be further from the truth. Most amateur options traders who did that either failed to make any money, make very little money or outright lose money even though the stock moved down a lot as predicted. Why is that so?
Volatile market conditions are especially bad for buying stock options due to 2 reasons. Firstly, the extreme volatility resulted in extremely high implied volatility which increases the extrinsic value of options dramatically, depressing its profitability. Secondly, extreme volatility leads to extreme speculation which encourages market makers to open up the bid ask spread to an unreasonably wide level in order to fill their own pockets.
Extrinsic value is the price one pays to the seller of stock options in order to justify the risk undertaken by the seller for giving such a right to the buyer. This price is arrived at in theory by options pricing models such as the Black-Scholes model. Extrinsic value directly affects the profitability of the options as the higher the extrinsic value of an option, the more the underlying stock needs to move in order to breakeven or profit. For example, if two options based on the same underlying stock, the same strike price and expiration month have different extrinsic values (of course this cannot be the case in reality), the option with the higher extrinsic value will make lesser money in profit than the option with the lower extrinsic value when the underlying stock moves by the same amount when held to expiration.
Extrinsic value is affected mainly by the level of implied volatility of the underlying stock. If the underlying stock is expected to make big moves, implied volatility goes up and the extrinsic values of its options go up as well. In times of extreme market volatility, extrinsic values go up dramatically across the board, depressing the profitability of options. In fact, one could end up losing more money than usual if the stock does not move according to expectations due to the higher extrinsic value paid. This is why a lot of amateur options traders who simply bought put options recently failed to make much money or any at all. This situation is made even worse by the wide bid ask spreads provided by the market makers.
Market makers are whom options traders really trade options with. When you buy an option, you are really buying directly from market makers who hold an inventory of those options and when you sell options, you are really selling back to these market makers who want to maintain an inventory of those options. Market makers buy and sell options in the exchange, ensuring the liquidity of all options contracts and profit primarily from the bid ask spread that they provide, buying at the bid and selling at the ask. They function exactly like used car dealers, buying at lower prices and selling at higher prices. Typically, the more actively traded the options are, the closer the bid ask spread tend to be due to competition between market makers, however, in times of extreme volatility where there are a lot more buying and selling on panic and more than enough business to go around for all market makers, they usually open up the bid ask spread in order to make even more profits. That is why we saw unusually wide bid ask spreads in this recent crisis. Wider bid ask spreads result in larger upfront losses which again depress the already depressed profitability of stock options due to the higher extrinsic values.
The higher extrinsic value and wider bid ask spread makes profiting from simple stock options buying extremely difficult and are the main reasons why amateur options traders fail to make money buying put options during the recent stock market crisis. Conversely, writing options are an extremely profitable way to trade options during a volatile market where extrinsic values are high. Naked writes and Credit Spreads are really the way to go in a volatile market condition and are what most beginner options traders do not know about. Selling options instead of buying them turns the table around and creates an extremely profitable position during times of high extrinsic value. Learn more about credit spreads at http://www.optiontradingpedia.com/free_debit_credit_spread.htm now.

 

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.   

 

 

 

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.

Have you or your friends ever attended an options seminar, learned how “simple” it is to make a high income from options trading but yet when you did it for real, you failed to make any money consistently?
Indeed, from my observation in this industry over the past decade, I have noticed that the chances of success for beginner options traders are extremely slim. In options trading, as in everything else in life, only a very small percentage of people make money consistently from options trading. This is true even amongst beginners who attended the same options courses. Yes, even with participants of the same options course, some will actually make some really good profit from options trading while most will not. What went wrong?
I explored the reasons for failure at options trading and narrowed it down to two main reasons; 1. Lack of a proven and systematic approach which novices to finance and economics can follow and trade with. 2, Lack of a robust trading mentality.
Let’s admit it, most beginner options traders are no professionals. In fact, most of them don’t even have a background in finance nor economics and don’t understand why things happen the way they do in the stock market or the economy. For such beginners, learning to pick stocks and analyze trades can be a disastrous attempt due to their lack of complete knowledge. This is where a lot of beginners fail. In fact, trading discretionarily by picking stocks based on a bunch of theories that may not work together in the first place or pure gut feel is a disaster even for professionals. In order for beginners to become consistent in options trading, a robust, complete and objective trading system and framework which has every angle covered needs to be introduced such that all they need to do is follow rules and make very limited subjective decisions nor analysis. Such a framework must include an objective method of identifying potential trading opportunities, objective method of identifying the correct options to trade with in order to optimize the risk/reward of the trade, an objective method of determining if an entry should be made as well as objective profit taking and stop loss policies. Without an objective and proven system and framework, no non-professional options trading beginners can hope to generate any consistent return.
Now, having that kind of “designed for beginners” trading system is merely the foundation of success in options trading. What really determines long term success is the trading mentality of the traders themselves. What’s the use of a trading system when the trader is incapable of following rules? Indeed, there are many options trading beginners who has made such losses in the past that they are generally ruled by fear and emotion to the extend that they are unable to follow rules at all. When the methodology they are following requires them to make an entry when a stock breaks out, a voice in their heads will stop them from buying saying that the stock might just drop back down. Then they will watch the stock continue upwards until it’s too late to make an entry.
There is a certain psychological profile needed of successful options traders and that includes the ability to listen to and follow the rules of their chosen trading system and methodology no matter how their emotions are firing up. They also need the ability to detach themselves from the money they are trading, just like a doctor’s detachment to the cries of their patients. A strong trading mentality comes not by nature. It is something that can be trained. Great options traders takes care of the way they run their life in generally and focuses on stress reduction and proper rest in the way their daily routine are run. Conversely, there are also traders who have been through so much pain in the stock market that they are generally unable to control their emotions and trade in a disciplined manner anymore. Yes, sadly, there are people who should just stay away from options trading.
Chances are good that an options trading system that is suitable for beginners (http://startradingsystem.mastersoequity.com) can be found. It is the trading mentality that most beginners don’t possess. In fact, in my observation, only about 1 in 10 people have what it takes to make it in options trading psychologically. The rest are fearful; fear of losing money, fear of their overall financial condition. It is exactly these fears that spoils trades and takes them deeper into their conditions.
Are there any solutions to the psychological issues of options trading?
The only way for most beginner options traders to become successful is to go through an extensive paper trading mentoring program over a significant period of time. Paper trading helps builds confidence if the trading system is good and over time convinces the trader that the system makes better decisions consistently than they can. Only when such faith is built can the options trader find the faith to follow their rules to the letter. Such period of training could take 6 months to a year. Sadly, most options trading courses are one weekend long these days. Real money triggers emotions which spoils trades if faith in the trading system has not been built up over a period of paper trading.
Options trading is like racing an F1 car. There is no short cut. Competence and proficiency needs to be built up over a significant length of training without which no secret formula can hope to work.

Let’s face it, derivative trading is risky. Period.
Derivatives such as futures and options are leverage instruments and by virtue of being leverage instruments, derivatives inherently carry more risk and exposure than pure and simple stock trading. Leverage instruments are risky because leverage allows you to do more with the same amount of money than you would normally be able to. Yes, leverage instruments such as futures and options have the potential to generate over 10 times more profit on the same move on the price of a stock than just buying the stock itself.
What most beginners to derivatives trading do not take into consideration is the fact that leverage is a double edged sword. Just as it could help you generate over 10 times more profits on the same move, it could also incur as much losses should the stock move against your favor. This is also why many beginners to futures or options trading lose their shirts so quickly and go broke.
So, why is futures and options trading still so popular then?
Very simply, most beginners with only a small fund and wants to build up a significant fund quickly could not depend on simple stock trading for a start. They need more leverage and they can afford to take more risk since the amount at stake is usually pretty small. With this in mind, the only question that remains is, which is safer for beginners? Futures or Options?
To determine which is riskier, we need to ascertain certain the qualities that constitutes “Risk”. For derivative instruments, the main qualities that constitute trading risk are: Leverage, Liability, Liquidity and Versatility (fulfillment obligation is usually not a concern in trading as traders rarely hold till expiration).
Liquidity in the stock futures and stock options market is definitely lower than the stocks themselves but is enough for the trading purpose of retail beginners and shall be excluded in this discussion.
Leverage
Leverage of futures and options is the multiplication effect on your money versus buying the underlying stock itself. We shall not go into detailed discussion on how leverage is being calculated for futures and options here. It suffices to know that the higher the leverage, the higher your potential profits and losses becomes. Leverage in futures is a lot higher than the leverage in stock options due to the much higher lot size and low margin requirement. This makes futures trading riskier than options trading in terms of potential losses due to leverage.
Find out how leverage is calculated in options trading at http://www.optiontradingpedia.com/options_leverage.htm .
Liability
Liability here means the maximum amount of loss you bear when things go wrong. Yes, we all make wrong investment decisions all the time and derivative trading is no exception. When you buy stock options, the maximum loss you can sustain is the amount of money you used in purchasing those stock options. When things go wrong, those stock options become worthless and you can lose no more than that. However, in futures trading, you are exposed to unlimited liability and will be made to top up your trading account with the daily loss amount in what is called a “Margin Call”. As long as your position continues to go south, you continue to top up your losses until you go broke or the stock gets to the bottom. Either way, you could have lost all your fortune in one go. That risk along with the fact that you have higher leverage in futures trading makes futures trading a lot riskier than options trading.
Versatility
Versatility here refers to the ability to profit in more than one direction. Logic says that if you can profit in more than one direction, risk is much lower than when you can only profit in one direction, right? Yes, stock options trading is highly versatile as there are options strategies that can be created to profit from 2 or more directions! Futures trading is basically single directional. You are either the short or the long. Never both, unless used in combination with the underlying stock, which increases capital requirement and defeats the purpose of leverage.
Get a full list of Options Strategies at http://www.optiontradingpedia.com/options_strategy_library.htm .
In conclusion, futures trading is riskier than options trading for the retail beginner to derivatives trading because of higher leverage, unlimited liability and lower versatility. This is also why options trading is slowly taking over as the derivative instrument of choice for the beginner derivatives trader. To learn all about options trading, please visit http://www.optiontradingpedia.com .

The Butterfly is an option position that is composed of 2 vertical spreads that have a common strike price. In other words, butterfly trading involves an opening position where options (either calls or puts) are bought (or sold) at 3 different strike prices. The way in which these options are created makes the butterfly a position that has both limited losses and limited profits.The Long Butterfly can be created using either all call options or all put options. Due to put-call parity, a long butterfly created using call options will behave like a long butterfly created using put options. In other words, it doesn’t really matter whether you use calls or puts to create your long butterfly. Our example here will focus on the version using call options.The long butterfly can be created by buying an In-the-Money (ITM) call option, selling 2 At-the-Money (ATM) call options and buying another Out-of-the-Money (OTM) call option. This is actually a combination of 2 opposing vertical spread options, hence why the butterfly is also known as the butterfly spread.Combining the profit profile of these 4 call options, you will find that if the stock price falls, you will face limited losses (which is the initial premium you paid for the entire butterfly trade). Similarly, if the stock price climbs too high, you will also face limited losses. However, if the stock price stays around the vicinity of the ATM option strike price, you will receive limited profit.This makes the long butterfly a good neutral option strategy for low volatility, since you are betting on the stock price not moving much in order to collect maximum profits. It is also a low-risk strategy, since your losses are limited if the stock crashes or climbs unexpectedly. Unfortunately, this is accompanied by limited profits as well. As has been mentioned above, the long butterfly can also be created using all put options instead of all call options.A Short Butterfly is the exact opposite of the long butterfly. Instead of buying an ITM call, selling 2 ATM calls and buying an OTM call, a short butterfly is constructed by selling an ITM call, buying 2 ATM calls and selling an OTM call. As before, the short butterfly can be created using all put options instead of all call options.The short butterfly’s profit profile is the opposite of the long butterfly’s. If the stock price falls, you will receive your maximum limited profits (which is the initial credit premium you received when opening the short butterfly position). Similarly, when the stock price climbs, you will also receive limited profit. However, if the stock price doesn’t change much, you will face a loss, though that loss is limited as well.As can be seen from the above description, the short butterfly is meant to be a strategy that is high in volatility but neutral in direction (ie. you expect the stock to move a lot, but do not know in which direction). As a side note, this might not be the best strategy for you if you are indeed expecting high volatility and are uncertain in stock price direction. Both the Straddle and the Strangle strategies also have the same lean towards high volatility and neutral direction, but with the extra benefit that they have the potential for unlimited profit. However, the benefit of the short butterfly is that it is a credit position where you pocket the initial premium when creating it.One warning about both long and short butterfly trading: these positions involve buying and selling options at 3 strike prices. For most option brokers, this means you will be paying 3 commissions to open the position, and another 3 commissions to close it. You will need to consider these extra commissions (which differ from broker to broker) when trying to determine if the butterfly will be profitable for your circumstances.For a more detail and illustrations on butterfly trading, please visit: http://www.option-trading-guide.com/butterfly-trading.html

Stock options trading can be dangerous business–very dangerous. Of course, folk get entangled with it because it can also be very , very rewarding. With options, you leverage underlying assets for a certain time period. You don’t have to buy the assets, just pay a premium up front in order to have control over them during the specified time. But , as with all investments, the more that you stand to potentially make, the more that you stand to possibly lose. So. You want to know what you’re doing for stock options to work for you. First, you have to have a strategic plan in mind up front. There are many stock options secrets that different financiers use. You need to study them and select those that you think are best suited to your risk toleration and your objectives. Never enter into a trade without knowing ahead why you are taking that approach and what you may do under certain circumstances, no matter how you’re feeling about them. In line with this, you have to select a good stock options broker. Find those online who are renowned for good reputations and good experience, and then compare their fee structures and what you get for your money. A good broker will be a good guide, but won’t try to tell you what to do. Another aspect of preparing your strategy is knowing the market. This means that you can understand the fundamental assets of the stock options you select. Follow online stock charts and economics reports concerning those assets so that you can make informed decisions and anticipate wisely, not shooting from your hip. And yet more preparation for the arena of stock options trading will entail good money management. You will keep your investment money budgeted and separated from the money that you require to live on and cannot risk. If you run out of that money, stop investing till you have reconstructed your bank account thru careful savings and even handed spending. However–don’t get out of a choice contract too shortly. You will take losses, especially when you’re getting your first experiences. You may expect to always take some losses, but the way to success is reasonably simply to make more than you lose over a period. Never give up too easily. At the same time, with stock options, you don’t want to hold it too long. Know when it’s time to sell a choice so that you can lessen your losses. But when it does come to your earning profits, don’t blow it by taking a heavy loss shortly after. That’s the worst experience in the world. Instead, understand how to use trailing stops. You must also be well informed in the easiest way to figure out a break-even point. Study both of these basic and obligatory stock options trading techniques before you dig into this world. But in the end, success in stocks options all boils down to ceaseless research. Again, know the market, know the stocks, know the corporations, know the basics, and know what methods to use when. And how can you be most guaranteed of keeping up with all this? Thru reading a high quality options newsletter. An options newsletter written by experienced, successful options trading professionals can be like gold itself to you. So, let your research start with finding such a service.

You don’t need to be a trader or an investor to know that the higher the risk, the greater the reward. This concept is true in all aspects of life and business. The more risk you are willing to undertake in life, the more life returns to you. Indeed, risk and reward are directly proportional and often in trading and investment, the more risk your account is exposed to, the greater the return on investment when things work out as planned.
Knowing that risk and reward are proportional makes finding the correct balance of risk and reward extremely important to all kinds of traders; stock traders, futures traders, options traders etc. There is no one solution that works for everyone and the correct balance is decided upon the risk appetite and risk tolerance of the individual trader.
For stock traders, balancing risk and reward primarily involves adjusting the amount of growth stocks and defensive stocks in one’s portfolio. Generally, the more growth or speculative stocks in one’s portfolio, the greater the risk due to greater uncertainty and therefore the higher the gain when things works out as expected. The more defensive stocks in one’s portfolio, the more predictable returns become and therefore the lower the return as these stocks does not generally move a lot. This degree of risk / reward balancing is at best crude compared to the surgically fine degree of balancing you can have in options trading.
Stock options are the most versatile trading instrument in the world right now due to the wide array of options strategies that are employable. Yes, not only can risk and reward be balanced through employing different mix of strategies in your portfolio, there are also different risk and reward profiles achievable by each individual options strategy. There are options strategies that range from making over 1000% profit while risking all your money to options strategies that make a mere 0.01% return while risking nothing as well as every centimeters in between.
As long as you understand what your personal risk appetite and risk tolerance is, you will be able to find an options strategy that suits your needs 100%. Here’s a general outline of the kind of risk reward balance that can be achieved through options trading:
Highest Risk, Highest Reward – OTM Call / Put buying
This is the options strategy that produces the legendary 1000% profit that amazed so many beginners. What those ads did not tell you is that the risk is losing ALL the money that you put into the strategy. This options strategy involves buying out of the money(http://www.optiontradingpedia.com/out_of_the_money_options.htm)call options when you think a stock is going to go up or buying out of the money put options when you think a stock is going to go down. Professionals use this options strategy with only a very small portion of their money in order to place a bet on an uncertain event such as leveraged buyout. Some lucky amateurs use this options strategy with all their money and then become millionaires overnight. The downside of this strategy is the fact that if the stock did not move far enough in the direction you expected it to, you can lose all the money you put into the strategy. That is also why so many beginners break their accounts overnight in options trading.
Various Degrees of Risk and Reward – Options Spreads
There are literally hundreds of possible options spread strategies out there with various degrees of risk and reward for every market condition. There are more aggressive bullish, bearish, neutral and volatile spreads and there are more conservative ones. All of them shares the same logic of higher risk compensated with a higher profit potential.
Lowest Risk, Lowest Reward – Options Arbitrage
Yes, there are literally risk free trading opportunities in options trading which also returns very small, sometimes negligible returns. These are the legendary options arbitrage strategies. Options arbitrage strategies such as conversion/reversal aims to make a fixed return totally risk free through simultaneously buying the underlying and shorting the overpriced synthetic equal or vice versa. The problem with such strategies is that the returns are so low that most of the time, it’s even lower than the commissions you will pay for the trades made. Even if you manage to return a positive return, the return can be as low as 0.01% in percentage terms. That is why arbitrageurs aim to make an absolute return using enormous amounts of money.
With this in mind, the most conservative traders may choose to specialize totally in arbitrage strategies (http://www.optiontradingpedia.com/options_arbitrage.htm) while the most aggressive traders may choose to specialize in leveraged speculation using OTM options. Everyone else would be able to find something to suit your risk appetite in the hundreds of spread possibilities. This degree of flexibility and range of risk/reward possibilities makes stock options the most versatile trading instrument in the world today and why options trading (http://www.optiontradingpedia.com) is so popular these days.