Learn How To Trade Options And Make Money

Trading options is both similar to and different from trading stocks. Trading stocks offers many strategic possibilities from buying and holding a stock for the long term to a day trader’s use of technical analysis to make quick buying and selling decisions.In this regard,options and stock trading, are similar.

When an options trader is first starting out, he or she  needs to understand the basic difference between an option and a stock. An option is a “right to purchase” a particular stock over a period of weeks or months,and it expires on a specific date.The price of the stock itself can fluctuate, as we all know,over the expiration interval so there’s the usual volatility factor in market prices.

Options, however,since they expire on a specific date, have to be exercised before that date. Or you can choose not to exercise them at all. Plus, you can purchase an option for a fraction of the actual price of the stock.So options traders can leverage their investments.They can acquire the option to buy a $100 stock for only a fraction of that price.Hence, they can acquire options for more stocks than if they were actually purchasing the stocks outright.This leverage makes options very attractive as an investment.

There are different types of options,too. “American” options can be exercised any time before their expiration date, while “European” options can only be exercised on the expiration date itself.And to make matters even more complicated,these different types of options are not determined by “where” you purchase them.The “American” options tend to apply to stocks and bonds, while the “European” type applies more often to indexes. And options expire on the Saturday after the third Friday of the month. But U.S. markets are closed on weekends, so “American” options expire on the third Friday of the month and “European” options the following day.

An option is a contract that gives you the right to sell (a put option)a stock or buy (a call option) a stock on or before its expiration date.You have several choices when you purchase an option. You can either hold it until its expiration date and exercise it just before it expires, or you can exercise it any time before that date.Or you decide not to exercise it and try to sell the option before the expiration date and recoup a portion of your investment. If the option expires and you don’t exercise it, you lose your investment.Let’s look at these situations more closely:

Let’s say you buy an option for Acme Chemicals Corp.for $2 a share with a strike price of $20. Now most options contracts require a minimum purchase of 100 shares, so you’d have to pay $200 (for 100 shares) for the contract.Acme’s stock price rises to $25 two weeks later and rather than waiting for the expiration date, you decide to take your profit and run. You exercise the option, acquire the stock for $20 and turn around and sell the stock right away for $25.You deduct the  $2-per-share cost of the option and you’re left with a $3 per share profit,or $300 less brokerage fees. Pretty conservative, but you made money. And that’s good!

But consider the opposite scenario. What happens if the Acme’s share price doesn’t rise. What if it goes below $20? You could sell your options for less than the $2 you paid for them–say $1 per option–and you’d be out half of your $200, or $100. Bear in mind that owning an option does not require you to purchase the stock. So you can sell the option and recoup a portion of your investment. This is a lot better than if you had actually purchased 100 shares of Acme’s stock. You can jump in and exercise the option when you know you will make a profit, or you could wait it out until the expiration date and make your decision then. I personally think the more conservative approach is more likely to result in consistently positive returns, albeit perhaps lower than a more aggressive strategy. But that’s just me. Higher risk, higher returns. Greater profits. And potentially greater losses. Just like most other investments.

This is just a basic example of how options trading works. It is more complicated than this and you should really educate yourself before you commit much of your capital to it. The best options  trading tutorial I know is the one taught by David Vallieres,  which you can review here and the video above from the free demo video series he provides. What make this course so good is not only will you learn all the nuts and bolts about trading options, but David also shares with you his strategies that resulted in his success trading options.

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Stocks and options are very similar,but still different. Both are bought and sold in the stock market. Traders who are trading options, however, have to buy and sell within a specific price range and time interval. There is an expiration deadline for the options. There is none for trading stocks.

Another difference is that options are awarded to specific individuals–real people. They are used as incentives for employees or members of the Board of Directors to perform in a profitable way that will cause the value of the company to increase, and the company’s stock will also reflect this increase in value. Stocks themselves, however, are traded in any open market. Anyone can purchase them. There has been some bad publicity of late for some online options trades. Some greedy and dishonest executives who generally are senior in rank have been caught backdating their options and earn money illegally by selling them with a specious inflated value. A few bad eggs have tarnished the reputation of a viable and essential tool to motivate employees and executives of companies to work more efficiently and productively to increase profitability–an essential ingredient in the capitalistic model.

One of the advantages of trading options is that it protects investors from fluctuations in market conditions over a specific time interval. In an online option trade, the investor can purchase the option at a lower price and then can sell it at a later date when the price increases.

Options trading  has the major advantage of providing protection from volatile market conditions  over specific time intervals. Options can be purchased at a lower price and sold for a profit at a later date when the price goes up. Trading options provides a general safety net and it’s easier to calculate their terms than those used when trading general stocks. And it’s also easier learning option trading mainly because option trading moves in a specified time period and you don’t hang on every price fluctuation in the stock during that expiration period. You can hang around for the value to go up and sell, thereby allowing increased gain in profits. There are many  options tutorials available online from where you can learn this.

Another big difference between stock and options trading is that you don’t have to use as much of your own capital to purchase an option as you would if you just bought the stock outright. In this sense your capital investment is leveraged in a similar way to Forex trading. It’s a really attractive aspect to investing in options. The bottom line is that both stocks and options fluctuate in value. But options have an expiration date that you need to be on top of.

You must remember these expiration dates so that you exercise them before they expire or you will lose money. You need to be organized!  You don’t need to keep options for a long time because in the days before they expire, market prices may vary too much causing you to lose money. Consequently, it makes sense to sell when you discover the prices are high instead of waiting for a better price to come along. A conservative approach to options trading will help ensure your success.

Option trading still is a risk, no matter how many returns it may give. But it is not nearly as risky as stock trading. You must develop knowledge for when is the right time to sell and when is the right time to hold onto it to gain maximum profit with the least amount of risk. Trading can be very easy with the right amount of  stock option trading. This video is the second of the free demo videos for David Vallieres’ trading options tutorial that not only beginners but also seasoned traders can take to find out how he has become a wealthy investor through his options trading strategies.

Trading Pro System Tutorial–Video 2

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Video 1 From The Trading Pro System

Many online options traders take losses when they first start out because they have used a flawed strategy in the amount of money they invest in each trade.

It’ss important to know how much to invest in options before starting to trade them. Many traders take big losses when they start to trade options simply because they use a money management strategy that results in their incurring higher risks than are needed with the unfortunate result of losing their investing budget too quickly, resulting in quick losses.

No matter what technical analysis you might use or what trading system options traders need to establish a trading strategy. This puts constraints on how much money one should invest in each trade, or re-invest once a trade has been completed. Here are three strategies we have usedsuccessfully for doing this.

1. Invest a Fixed Percentage of Your Total Portfolio Value

One of the most common trading strategies is to to limit the amount of your trade to a defined percentage of your total porfolio’s value. For example, when a trader invests only 20% of his  portfolio in each trade, and assuming a $20,000 portfolio value, he or she would set a limit of $4000 in the first trade. If the trade results in a 50% profit, the portfolio then would grow to $26,000 and in the next trade $5,200 (20% of $26,000) will be invested.This strategy is considered conservative and is most common among professionsal options traders.

2. Invest a Fixed Amount

Another strategy is to set  a fixed amount per trade. Similar to the first example a trader would initially allocate $4,000 in each trade. Even after the portfolio grows to $26,000 only $4,000 would be invested in the second trade. This trading strategy is less profitable than the first investment strategy discussed above, but it a  trader can keep his losses under control better. Sometimes this trading strategy can be used in combination with strategy #1 by options traders. For instance, in order to increase profits, some traders may prefer to use strategy #1 after each winning trade, and in order to recover faster from a lost trade the #2 strategy might be used after each lost trade until the portfolio is restored.

3. Reinvest Both the Principal and The Net Profits

The last trading strategy involves the reinvestment of both the principal and the profits after each trade. If a trader invests $4,000 on a first trade and then takes a 50% profit, then $6,000 would be invested in the second trade (the principal of $4,000 plus the $2,000 profit). By using this strategy, a trader would benefit from compounding and many investment institutions use this strategy, however, trading options this way is aggressive and more risky and could result in wiping out an entire portfolio quickly. None of the professional options traders use this strategy in options trading.

(Hint: Follow the Professionals)

Conclusion

Options trading can be a risky type of trading and using the strategy #3 could should be discouraged. In the end, you’d lose everyrhing. On the other hand the options trading strategies #1 and #2 are used most of the time. Strategy #1 is used in auto trading by many online brokers and very often this is the only choice a trader has in the options auto trading account.

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If you are thinking about launching an online options trading business, here are some tips for you:

Learn The Jargon Of Options Trading

Option trading has its own unique language terms, just like many other professions. It’s sort of like being in the military, where there are so many acronyms, and outsider has trouble following a conversation (you learn quickly!). This jargon serves to separate experienced traders from newcomers. But if you are a newbie, you must learn this “language.”  When you are new to anything, this can be sometimes be difficult to learn. But you will if your serious about becoming an options trader. You will soon lwearn the meaning of terms like: “calls, puts, margins, strike prices.” Two “Must Read”books   Cohen and on the basics of options trading which I recommend are “The Bible of Options Strategies” by Guy Cohen and “Options Trading 101″ by Bill Johnson can be found here:Options Trading Books

Research The Market

There has never been a better time to begin to invest. Information and knowledge are tools of the trade, and we are in the information age. There are many facts and figures and we are connected by the internet. Educating yourself thoroughly in the market that you want to try. Advice is rampant,  so be careful. Figures don’t lie. So view advice with skepticism. There are those who do, and those who teach. If somebody knows about the holy grail of options trading, make sure that person’s advice is based on his experience actually doing it.

Be Cautious At First

Don’t just jump in blindly.There is much risk in any investing. Newbies can often be like sheep going to the slaughter. Remember that markets are engineered from within. Of course you need experince trading option to become skilled. Probably the best way to gain this valuable knowledge is to find an  options training course or tutorial taught by someone with successful trading experience. Start with a demo account so you can learn how to trade without committing any actual money. When you are ready to take the plunge with real money be cautious and use good money management skills. This way you won’t lose all of your money while learning. Remember there will always be another trade if you have preserved you capital.

Develop a Trading Style

Over time  you may develop your own trading style and strategies, and some day you may actually outshine your teacher! Anything is possible, but  if your teacher is experienced and successful you will be, too. You do this by learning all you can and then add your own insights and ideas. This is when option trading becomes an art as much as anything. You can learn techniques and can find methods. You will absorb the lingo, and the tricks of the trade. You can study success and failures of others. But in the end its just you and the market, and you are in control of your own fate. Approach the learning curve as a way to learn as much as you can about the basics of the trading business and how an expert who is training you got to be a success trading options.Then try what has worked for your teacher and as you get to be successful yourself, you can find your own way of trading, your own trading style, so to speak. You might find a surefire way to consistently earn money and keep repeating it to ensure a steady income.  But you can also try out some of your own trading ideas, keeping the downside risk small, as you will be in a ” testing and experimenting” mode. Then you can focus on what works and abandon what doesn’t work.  In the end it will be your money and your profit or losses.

I think the above is a good way to approach the options trading business. But the key will be getting an experienced mentor who has already been successful at it and can share with you his knowledge and strategies. With that in hand, you’ll soon be off to he races and will never look back!

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Published by Learn To Trade Options

By: D. Jeff Jackson

Article Directory: http://www.articledashboard.com

About the Author Jeff Jackson is the creator of Profitable Option Trader. If you liked these tips on getting started why not get some more tips that can produce a consistent monthly income after learning them. Click here to grab these hot videos now;www.profitableoptiontrader.com

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