7 Steps to Success Trading Options Online - Traders' Library

Recommendations

Info

The ask price for that option is $3.30, or $330 total, and theprospects for success look a bit more positive. GM would have tofall $1.10 a share before you’d suffer a total loss, and you’d needa move of only $2.20 a share — to $58.30 — to break even. But,you’d still need a move to $61.60 to double your money. Certainlynot impossible—but not exactly guaranteed either. So, what doyou do?In this situation, the optimum alternative is a vertical bull spread.If you buy the GM July 55 call at $3.30 ($330) and simultaneouslysell the July 60 call at $1.10 ($110), your net cost is $2.20 ($220) —which is also your maximum risk. Plus, you get a highly positivescenario. GM’s stock needs to rise just $1.10, to $57.20, for you tobreak even, and a move of only $3.30, to $59.40, will double yourmoney. Tack on just 60 cents more and you get the maximum profitfor the position of $2.80, or $280 — which represents a sevenweekreturn of 109 percent, even after commissions of around $40.(Most brokers count a spread order as one order, with only onecommission.) Quite a satisfactory potential outcome — especiallysince we already know you feel fairly sure GM’s headed for the$60-plus level.Given that, you call up the “Spread” panel on your broker’s orderentryscreen, plug in the specifics of the trade you want to open —as shown in the sample screen in Figure 2-4 on page 46 — andpress the “Send” button. (You can either specify the exchangewhere you want the order sent or let the program automaticallyroute it to the exchange with the best price.) And, as with a singleoptionorder, because you’re trading under 20 contracts at the marketprice, the orders will be filled automatically in a matter of seconds,with the confirmations coming back to the “Filled Orders”section of your screen. (Note: As trading technology improves andthe ECNs grow more sophisticated, it may soon be possible for thetwo sides of a spread to be filled on differing exchanges, with thecomputer automatically routing the buy order to the site with thelowest ask and the sell order to the one with the highest bid, thusholding the total cost to its absolute minimum. For now, however,both spread fills will come from the same exchange unless youchoose to manually leg in or out.)7 Steps to Success Trading Options Online 45
Figure 2-4. SPREAD-ORDER SCREEN FOR GENERAL MOTORS CORP. (GM)Spread-Order screen showing a “Bull Call” Spread to open using “Buy Open” ofGM July 55 call at $3.30 and “Sell Open” of GM July 60 call at $1.10, doing 1 contractat a limit price of $2.20 for the Day and a “Net Amount” of “220.00” (Debit).Once the expiration date rolls around — or earlier if you achieve anice profit and want to grab it — you have several alternatives forexiting. If GM’s stock has fallen below $55 a share, you simply letboth calls expire, taking the maximum loss. If GM is above $55,but below $60, you sell the long 55 call and let the short 60 callexpire, taking either a partial profit or partial loss, depending onthe exact stock price. And, if GM moves above $60 as expected —either before or at expiration — you sell the July 55 call and buyback the July 60, earning the spread’s maximum profit (less anybid/ask differential).You can do this on the “Spread” order screen by simply reversingyour previous instructions — i.e., changing the July 55 order from46 Trade Secrets
Page 5 and 6: Titles in theTrade Secrets SeriesTr
Page 7 and 8: Copyright © 2001 Larry D. SpearsPu
Page 9: Trading Resource Guide . . . . . .
Page 14 and 15: ing option valuations and working o
Page 16 and 17: firm had a $50 “minimum ticket”
Page 18: ferredTrade, is a veteran options p
Page 21 and 22: nology, equipment or software excep
Page 23 and 24: This electronic trading system, whi
Page 25 and 26: of lower computer prices, advanced
Page 27 and 28: tracts or less, although this limit
Page 29 and 30: another from the firm’s own order
Page 32 and 33: Chapter 2KEY STEP NO. 2:Utilize the
Page 34 and 35: position one of the more exotic “
Page 36 and 37: Potential Profit: Unlimited, once t
Page 38 and 39: sake of comparison. What you really
Page 40 and 41: share, as you expect, the July 20 c
Page 42 and 43: Strategy 4 — Selling a Put ShortT
Page 44 and 45: thereby generating a profit equal t
Page 48 and 49: “Buy Open” to “Sell Close”
Page 50 and 51: Cost to Open: Commission only, but
Page 52 and 53: Historically, covered call writing
Page 54 and 55: Figure 2-5. SELLING COVERED DELL CO
Page 56 and 57: Chapter 3KEY STEP NO. 3:Choose the
Page 58 and 59: Key Elements of an Option Premium (
Page 60 and 61: on most optionable stocks, so the i
Page 62 and 63: as Kroger’s beta is a minuscule 0
Page 64 and 65: •A closing contingent-on-stock or
Page 66 and 67: day traders also place conditional
Page 68 and 69: You’d like to take a shot at a da
Page 70: ting a successful execution of the
Page 73 and 74: Indeed, while most profit targets s
Page 75 and 76: shortly after you open, putting you
Page 77 and 78: time value, the most you could thus
Page 79 and 80: • An opening stop order can be us
Page 81 and 82: or stop price for most of the tradi
Page 83 and 84: Figure 4-2. A STOP “SELL CLOSE”
Page 85 and 86: • Stop-Limit Orders convert to a
Page 87 and 88: While there will be some minor diff
Page 89 and 90: screen. (Refer back to Figure 2-1 i
Page 91 and 92: simple because they are “cash set
Page 93 and 94: ound of daily trades (the so-called
Page 95 and 96: and is willing to sell options shor
Page 97 and 98:
smaller (a reflection of the higher
Page 99 and 100:
• Taking profits too soon — and
Page 101 and 102:
the reasons to follow these guideli
Page 103 and 104:
We’re stressing this awareness of
Page 105 and 106:
ton on your mouse to transfer it to
Page 107 and 108:
Figure 6-4. THE SUMMARY OF “ACCOU
Page 109 and 110:
FIGURE 6-6. THE “TRADES — HISTO
Page 112 and 113:
Chapter 7KEY STEP NO. 7:Use the Rig
Page 114 and 115:
• Is the software user friendly
Page 116 and 117:
4. Timely executions and confirmati
Page 118 and 119:
admittedly got a bit more complicat
Page 120:
owser to quickly check the news and
Page 123 and 124:
— and, as such, must be totally r
Page 125 and 126:
3. DO have the courage to take a lo
Page 128 and 129:
SUGGESTED READING LISTMcMillan On O
Page 130 and 131:
The Complete Option Playerby Ken Tr
Page 132 and 133:
VIDEO TRAINING COURSESFOR OPTIONSLa
Page 134 and 135:
OPTIONS SOFTWAREOptionVue 5Install
Page 136 and 137:
Free 2-Week Trial Offer forU.S. Res
Page 138 and 139:
OptionVue Systems . . . . . . . . .
Page 140 and 141:
Open aPreferredTradeaccount andrece
Page 144 and 145:
About the Author▲ ▲ ▲ ▲ ▲
show all

7 Steps to Success Trading Options Online - Traders' Library

Create successful ePaper yourself

Delete template?

Save as template?