All stock options trading and technical analysis information on this website is for educational purposes only. This webinar will cover everything from how to find good quality stocks to buy and the best ways to buy call or put options.
Whether you are new to trading or been trading for years, we will show you how to buy stocks of good quality companies and make healthy profits swing trading the options. Mike says, “I washed out my trading account twice and got frustrated with trading stocks and didn’t know what I was doing wrong. In this webinar, we will show you how to avoid the many pitfalls that await the new trader. In order to be successful at trading, you need to have a strong understanding of what moves stocks and how to capitalize on their moves.
As a quick review, a Call option contract gives us the right to buy 100 shares of the underlying security and is a nice tool to place a speculative long trade with tightly defined risk while tying up a small amount of trading capital.
This applies for both Puts and Calls.The percentage returns are different because in the first example you only had to risk or commit $900 to make $5,400, but in the second example you had to risk or commit $7,600 to make the same $5,400. Jay and Mike have over 40 years of combined trading experience and have made many mistakes along the way. A Put is similar in structure to a Call, but is the right to sell 100 shares of the underlying security at a set strike price. The further the stock falls below your strike price ($130), the more valuable the option becomes. Since a Put increases in value as the underlying drops in value it can be used as a vehicle to protect portfolio positions in case of a downturn as well as for a speculative short directional trade in a security.CMG Case StudyLet’s take a look at using Puts to hedge and protect gains for your account.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. An ideal solution is to sell ? of the shares to recover most of the original principal and use a portion of the profits to purchase a CMG Put option to lock in gains on the remainder. A protective put creates a loss protecting floor at the strike price minus the cost of the put. Let’s examine the results comparing an in the money 400 strike put with an at the money 380 strike put.
From the previous article we remember that in the money options have a higher delta which means they are more sensitive to changes in the stock price.
Because no matter how far the CMG stock trades under the strike price, you would still have a right to exercise the option and sell your shares at the strike. If you felt that CMG had found price support here at the $300 level and was done with its correction, you could sell your put to close the initial option position and buy a lower strike put farther out in the calendar (i.e.
The net profits going forward from continued CMG appreciation would be greater since you had taken a bunch of option premium off the table and switched from a very deep in the money to an at the money put. Just be careful not to roll until you definitely have seen signs of price support and better odds of a sustained reversal higher.Profit from Stock Drop Using Speculative PutThe opportunity to buy a put option without owning CMG shares could have been used for a speculative directional trade in order to profit from an anticipated drop in CMG. Compare that to an attempt to short sell CMG stock where there could be unlimited losses and a great deal of trading capital tied up.
If you use puts to make defined risk directional short trades, stay small, be sure to calculate your breakeven point (Strike Price – Put Premium) and be very aware of the time value or Theta decay that reduces the price of the put and erodes your potential profit.In upcoming articles, we’ll explore more option portfolio protection strategies – writing covered calls, creating option collars, and introducing option spread trades. All will be fairly straight forward given that you already understand the Call and Put basic fundamentals that we’ve presented in this article and the previous one.
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