Posts Tagged ‘options’

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The Heavy Problem with Iron Condors

Tuesday, February 7th, 2012

The traditional Iron Condor strategy contains some major weakness. If you don’t know about them they may cost you some significant losses. The structure of the trade has an architecture that makes adjustments costly. If you’re familiar with Think or Swim or similar tools then imagine the expiration Profit and Loss graph in the discussion of adjustments that follows.

Each adjustment you make “lowers the bar” until you reach a point where you can’t make any money at all on the trade.

How Condors Behave

Today’s market tends to seesaw back and forth. Traditional strategies like the Iron Condor were not designed for these recurring market swings. These traditional trades perform best when you just put them on and let them go, preferably without adjusting them at all. They require, however, that the market doesn’t move in either direction in order for you to reliably turn a profit.

When you analyze it, these traditional strategies require adjustments that actually lock in losses once the market begins to move. The fact is, that most trades you do throughout the year require adjustments. These traditional types of trades, therefore, consistently present problems. When you adjust this type of trade, you repeatedly lock in losses as the month progresses.

A Typical Story Illustrates the Pattern

I hear lots of stories very similar to the one I heard just the other day from a trader who explained to me how he worked and worked his trades all month long, doing dozens of adjustments across hundreds of trades. He made repeated necessary adjustments as the market moved back and forth, back and forth. When he added up his P&L at the end of the month he realized he had made a total of $25.

You wind up reducing the maximum amount you can make on these trades every time you make an adjustment. The more adjustments you make the less you stand to gain. Many traders continue making adjustments without realizing the full implications. Because of the way these trades were initially designed, while you may seem to be making essential adjustments, you’re still “lowering the bar” on how much you potentially stand to make on the trade.

If you’re in a traditional Iron Condor and a few days go by, the Russell could suddenly drop down 20 points. If this happens, then in an instant you’re behind on the trade and your Delta is becoming unbalanced. Plus, volatility increases as the Russell continues to drop down.

So a common adjustment would be to start peeling off some of the Put side of the trade and now it becomes an unbalanced Condor. As the Russell continues to move down, volatility increases. The original price will often be lower than the current cost which is higher.

If it costs a dollar more than when you sold it then you’re buying it back at a higher price. This is what I mean when I say you’re locking in losses. The more you do this, naturally, the lower your maximum potential profit becomes. You might start a trade at $2640, for example, and after one adjustment the most you can possibly make might be $2000.

One easy, little adjustment and your maximum profit drops $640 - pow! - just like that. Continued adjustments continue to drive the profit line at expiration further down…

These trades are very dated. They could have worked well in the past but in today’s market that moves rather drastically, they’re too risky. We’ve seen the flash crash, commonly unpredictable fluctuations, and there are things going on behind the scenes that we don’t even know about. So the type of trade that’s designed to make a profit only when the market does not move, is not a trade that you want to be in now.

Come to our free webinars and learn something new, not something that’s as out of date as the condor, the credit spread, the butterfly, and the calendar spread. These are all very dated strategies. In the San Jose Options course you learn a completely new way to think about options and how to trade in today’s market. You actually learn how to “raise the bar” on all of your trades instead of locking in losses like the ordinary option trader does.

SJ Options Training Course will show you how to lock in profits with our proprietary option strategies while staying in the trades longer to make even more.

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The Allure Of Investing In Options

Saturday, February 4th, 2012

Considering the overhead costs that Marco Polo must have incurred on his camel rides to trade in silk it is not altogether surprising that he decided to stay in China for forty years after he arrived there. His overhead costs would have been high. By contrast, modern options trading allows for considerable profit and the overhead costs are relatively slight.

Options are contracts that can be bought and sold, hopefully at a profit, but possible at a loss. The contract confers the right to buy or sell and underlying asset. The underlying asset may be a well traded share such as a commercial bank or mining company. One can also trade in commodity options, buying or sell commodities such as oil or copper.

The fact that such contracts are derived from trade in the underlying asset is why they are called by the generic term of derivatives. Market makers create the market in these contracts and earn a premium on each sale in them. This is the risk free profit that they earn as they transfer the risk from themselves to traders in the market.

The risk is taken on by traders who hope to enlarge their profit by leverage. The contract that they buy enables them to trade in larger amounts of the underlying asset than would be the case if they invested a large amount of money to buy only a few shares in the underlying asset directly.

For example, it could cost a thousand dollars to buy an underlying share but only one hundred dollars to buy a derivative contract that will provide for six or seven times the profit that could be had from buying the underlying share. Sadly, the lever can be applied in the reverse way should the trade turn sour and loss could also be six or seven times greater.

Aside from leveraging, trading in derivatives allows grater flexibility. A trader may potentially benefit from a declining price trend by buying a ‘put’ option which allows the right to sell the underlying asset. If the put is bought at a thousand dollars and sold at a much lower price then the different is the profit to the seller. So an astute trader may profit from declining price trends as much as he does from rising prices.

In some quarters put options are condemned as artificial ways in which stock markets can decline precipitately due to the number of traders jumping onto the ’sell’ bandwagon. Others believe that put options act as safety valves that prevent disasters such as the Great Depression. This is because a put option will be sold at some point and the sale will mean that another trader has taken an opposite view, so helping to maintain a balance.

The opposite of puts are call options. Holders of these contracts are expecting prices to rise so that they may benefit from the increased value of the underlying asset. Call options also help to keep markets stable because holders will take profits at some point, discouraging wild gyrations in profits and unhealthy spikes of the kind that saw tulip bulbs being sold for the price of a house in the tulip market bubble.

Trading may take many different forms. Some people prefer to rent a store, buy stocks of groceries, hire staff and take a small profit from each small sale. Others might think it more exciting to buy a computer, work from home to one’s own hours and enjoy this modern income generating strategy.

Born To Sell’s website offers additional information about covered call options. A good covered call calculator will save you a ton of time when doing covered call options investing.

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Big Risks with Popular Options Strategies - Part 1

Friday, February 3rd, 2012

Overview: Duane gives an overview of a couple of the most popular option trading strategies: Naked Puts and Credit Spreads. He points out the risks involved with these strategies and why they may not work so well in volatile markets.

Most option traders have some early successes and that’s what keeps them trading. Most option traders also experience some very significant failures that make them question their approach and their understanding of options trading.

You’ve probably tried some of the more common trades like a short put where the put is sold, the premium is collected, and the investor hopes that the underlying price will stay somewhere near the initial price or go up slightly. This way the option expires worthlessly, the premium is capped, and the next trade is started.

But real life seldom matches precisely with our plans and the underlying price sometimes goes down significantly. You can try to ride the credit already collected by making some simple adjustments but if the price continues to be uncooperative you wind up locking in your losses.

As a variation on this theme, you can trade a put spread, in an effort to minimize your potential for loss. But a deep look reveals the same basic structural limitations. Once you again you’re selling a position, buying a position, collecting a premium and hoping the price stays above your credit spread.

The problem remains that the underlying price doesn’t always do what you want it to do. As the price drops, you can make some adjustments but you’re already eroding the small premium you collected. You also maintain a significant risk so that if the underlying price continues to drop you’re just going to lock in more and more losses.

Losses just like this are terribly common with these kinds of trading tactics.

Learn more about Low-Risk Options Trading by taking Options Classes with San Jose Options, the leaders in investing options safely.

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Profitable Options Trading

Sunday, January 29th, 2012

Those who are willing to put in the time and effort will find that options trading is a way to earn income in the market. Two methods are available. You might buy puts or calls and receive profits when the stock reaches the strike price and an option is exercised. You might also be the trader who writes the puts or calls and collects the premium from the transaction. A complete understanding of how the market works is necessary before setting out to participate.

When deciding how best to implement these income methods, there are several factors to consider. You will need to understand the terminology associated with the market. You will need to decide how much capital you are prepared to risk. Finally, you will need to determine the level of your personal involvement in a trade.

The terminology that is unique to the market could fill an entire book. To get started, you will need to know about a call, a put, and whether you are buying or writing an option. A call, as it is applied to the stock market, is an agreement whereby the buyer has the right, not the obligation to purchase stock at a specific price within a specific period. A put is where the buyer has the right to sell at a specific price prior to the end of the expiration period.

The option writer earns a premium from the sale of an option. Although most puts and calls expire without being exercised, there is risk if the buyer exercises his rights. The writer has the obligation to fulfill the terms of any option until it expires.

Options are traded on the major exchanges, just as stocks are traded. The price associated with an Put or Call is affected by the price of the stock. It is also affected by the number of days prior to the expiration of the option.

When you decide on options trading, you will find less risk than if you were to trade stocks. This can benefit those who don’t have much investment capital to trade with. Becoming successful in this specialized market requires knowledge, risk management and patience.

To find out more about covered calls, go to https://www.borntosell.com. Super low interest rates can make for good profits in bonds, but when bond bubbles pop you will get hurt quickly.

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All You Need to Know about Investments That Will Help You Grow Your Wealth

Saturday, January 28th, 2012

Whenever you are going to get into the world of investing, you may need to take into account a few factors and carefully think about them. One of them is the sum of money you’re ready to invest. Whenever you place your funds on stocks, options, mutual funds, or bonds , you have to have a specific amount for you to acquire a unit or build an account.

In regards to financial investments, two types of units are commonly traded in the market - short-term investments as well as long-term investments.

The main difference between both is that short-term investments are designed to present large returns inside a fairly shorter period time, while long-term investments are intended to reach maturity for a few years or so and features a slow but progressive rise in return.

Should your aim as an investor is to enhance your wealth or retain your capital’s purchasing power over time, then it is vital that your investments should grow its valuation that somehow keeps up with inflation rate. Owning a good mix of stocks and real-estate investments could well be an effective long-term strategy compared to having only fixed interest investments.

You must have an investment portfolio that is spread across various sorts of investment products so you can successfully reduce your risk. It is a classic the actual application of the old phrase “Never put all your eggs in just a single basket.” Investment products are becoming more and more complex with huge and institutional investors trying to outperform each other.

As an individual investor, you simply have to invest on something you are comfortable with and not on products you do not fully grasp. You should be clear with your investment criteria since it is important in weighing your options. If you are uncertain, the ideal plan of action is to get helpful advice.

Find out more about dealing with your investments to stay in touch with your money.

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Trading Options in the Comfort Zone

Friday, January 27th, 2012

In today’s article we’ll be exploring another dimension to risk while trading options. Most people only consider the mathematical probability of a trade, but as an option trader myself I always consider the “Comfort Zone.” You may ask what is this so called Comfort Zone?

The Comfort Zone is a place where I can relax knowing that my option position is perfectly safe. Not only is my position not at risk, but I can also make money in the Comfort Zone. In this video we are looking at traditional Iron Condor. We notice that when we consider the Comfort Zone, the probability of the trade is only about 36%. This is a very low probability. If we consider the probability on the trade ignoring the Comfort Zone then it’s actually about 83%. This means that the majority of the probability on this trade is actually in the “Danger Zone”. To me, this is a very risky and stressful trade to be in.

Observing the Calendars Spreads and ATM Butterflies, it is evident that their Comfort Zone is just like that of the Iron Condor’s. Hence, it could be difficult to handle these trades in an erratic market. The reason why these trades are not a good option at the moment is because of the trends in the stock market. The market usually has an up-down movement as opposed to a sideways one. In the video, when you study the price chart, you will notice that the market moved sideways only three or four times during the last year.

In contrast, the price chart indicates that the stock market went up and down 12 times over the last year. This shows us that we can forecast an up or down move easier and more consistently than a sideways move. Having this information we can conclude that over the recent period of 12 months we will could have found more bullish and bearish trades than we would have neutral trades. And the interesting thing is that with by constructing bearish and bullish trades, we can increase our Comfort Zone probability to about 85%. So not only do we have more trade opportunities within a one year period, but we also have a higher Comfort Zone which increases the quality of our life as well as our returns.

To conclude, the Comfort Zone can be defined as the ‘”Realistic Probability” of a given trade option because we really should consider ‘Risk’ when we analyze our trades.

Trade Option Strategies in the Comfort Zone. Learn how to Trade Options with San Jose Options. Don’t be an ordinary option trader!

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Do Iron Condors Scale Up Well?

Thursday, January 26th, 2012

Let’s briefly analyze the monster we call the Iron Condor and see if this is a strategy that’s scalable. In other words, will it work with a lot of capital? After all, if you can’t use it with a lot of capital then where can this type of trade ultimately take you?

So ask yourself this question. Would you put a million dollars on an Iron Condor? Would you feel reasonably safe and comfortable doing it? If you answered yes, then you must read the rest of this article because I want to open your eyes to a couple of things that you’ll happy to find out. Those who know a lot about options trading would not put a million dollars on a 30-day condor. The same can be said, by the way, for a 30-day credit spread.

Major league investors who trade $1,000,000 to $25,000,000 would not put their money on a traditional trade like this. They couldn’t do it safely using this type of strategy. They simply wouldn’t do it and here’s why.

Let’s take a typical condor and look at the probability for a given month. Starting out, we often have the illusion of a trade with an extremely high probability of profit, let’s say it’s almost 80%. So you could easily think, why not make this trade with a lot of money? Why not put a million dollars on a trade like this to have an 80% probability of gain?

With only a 20% probability of loss how could you lose?

Yet how about if there’s another flash crash and the market suddenly has a sharp drop of, say, 10%? And what if you have a 25 point rise in volatility in just a day or two? Now how safe and secure do you feel about risking your investing nest egg on this type of trade? If your investment at this point is even $17,000, you could already be down more than $7000. Now where do you stand? Let say you’ve lost $7200.

Well, this is exactly why this type of trade is not scalable. 7200 divided by 17 gives us a 42% draw down. This means that at any point you’re in this trade you can lose 42%. And that’s if the sudden drop happens on the first day.

If you’re a week and a half into this trade and then you have a 10% crash, you could easily be down $12,000. If you experience this type of drop on the last couple of days of the trade you could lose 100%. This is why I say this style of trading is not scalable. This is also why lots of option traders repeatedly experience catastrophic losses - over and over again.

The bottom line is that you are risking 40% at any given moment, for as long as you’re in the trade. It would be extremely hard to grow an account very large with this strategy. The more you have, the more you can lose, so eventually… the odds are that you’ll lose it all back. You’ll wind up getting nowhere after potentially years of hard work.

Are you going to put a million dollars on an Iron Condor and risk $420,000 (42%) in one day? That’s half of your million dollars. For some people it takes a lifetime, or two lifetimes, to build up a million dollars. Are you really going to risk it in one day?

If you want to learn more about our unique, proprietary options strategies simply come to our free webinars. Learn something new that’s meant for today, not something as out of date as the condor, credit spread, butterfly and calendar spread. These are all very dated strategies. We’ll show you why. We’ll make you a better option trader.

Live discussions explain and clarify the patent-pending option trading strategies we developed and teach exclusively at San Jose Options Mentoring.

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Iron Condor, the Negative Vega Option Trade

Thursday, January 26th, 2012

The “Iron Condor” is a negative Vega option spread. As the IV of the underlying traded moves down, the “Iron Condor” benefits. This happens most often when the underlying price is rising. With the market looking optimistic at present through a negative Vega spread, this could be the perfect chance to use the “Iron Condor” strategy. Make sure though that the IV still has a room to drop. If the IV hits support, better look out as it might just move up on you thereby hurting the Condor.

The last few months I have been making money on the stock market with very little adjustments and/or work at all. This is one of the best things with the “Iron Condor” strategy when, sometimes, the stock market is very quiet. You can make money almost every day when the market is calm by using the “Iron Condor” option trade. It is the type of option spread that with skillful managing will make money when the underlying, or asset to be bought or sold, stays within a tight price range.

Do you want to earn an income without much work? How about taking time to unwind, getting the pleasure of life’s best, while making money almost each and every day? With the Iron Condor these things could be possible! It’s a superb way of living when the market is opening up such an opportunity for you. But do not be too complacent for this is not possible all the time, but it is really up to you to grab sometimes.

I have seen a safer approach to the “Iron Condor” being taught by San Jose Options. And I like it much better since it’s such a more conservative trading style of the “Iron Condor” than those aggressive approaches from other courses which are actually putting me in a higher risk of losing my money. These other aggressive trading methods require me to make several adjustments too often and this is causing a problem when the market is frequently moving up and down. I have realized that such aggressive trading of the “Iron Condor” option trade only pushes me to take more adjustments, added stress, more headaches and overall losses.

Through this new conservative approach to “Iron Condor” option trading, I have been getting a clean 10% for the past few months. Yet on top of it all, I haven’t had to make many adjustments at all in my trades. I have been able to let my trades and my money work for me. Gone are those times when I have been making several adjustments every week through more aggressive ways in trading this option spread. With this new trading technique, there is not one single moment when the market ever hit my point of adjustment. And believe me; I am absolutely enjoying the stock market and my trading at this very moment.

Trade Low-Risk Option Strategies, not your livelihood. Learn how to trade the Iron Condor with San Jose Options. Don’t be an ordinary option trader!

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Find out the Techniques for Creating a Fortune in Investments

Wednesday, January 18th, 2012

When you’re going to get into the world of investment, you might have to consider some aspects and thoroughly think about them. One of these is the amount of cash you’re ready to invest. When you put your funds on stocks, options, mutual funds, or bonds , you will need to produce a specific amount so as to purchase a unit or build an account.

In the case of financial investments, two kinds of units are commonly traded on the market - short-term investments as well as long-term investments.

The main difference between the two options is that short-term investments are meant to present considerable returns inside a fairly shorter period time, whereas long-term investments are intended to become mature for a few years or so and features a slow but progressive rise in return.

If your primary objective as an investor is to raise your wealth or keep the purchasing power of your capital over the years, then it is critical that your investments should grow in value that somehow keeps up with the rate of inflation. Owning a good mix of stocks and real-estate investments might well be a great long-term strategy in comparison to having just fixed interest investments.

Your investment portfolio must be well spread across different kinds of investment instruments for you to effectively lessen your risk. It is a classic the actual application of the old phrase “Don’t put all your eggs in one basket.” Investment products are becoming a lot more sophisticated as large and institutional investors increasingly try to outdo each other.

When you are an individual investor, you simply have to invest on something you feel comfortable with and never to products that you do not understand. You should be clear with your investment criteria because it’s necessary in evaluating your alternatives. When you are unsure, the ideal plan of action is to find good advice.

Read some of the beneficial tips about investments and start building your wealth towards prosperity.

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All You Need to Know concerning Investing That Will Help You Grow Your Wealth

Wednesday, January 18th, 2012

Whenever you are looking to get into the world of making investment, you might have to consider a few factors and carefully think about them. Among them is the amount of money that you are willing to invest. Whenever you place your funds in mutual funds, stocks, bonds, or options, you should have a specific amount so that you can buy a unit or build an account.

When it comes to financial investments, two kinds of products are normally traded on the market - short-term investments and long-term investments.

The primary difference between both is that short-term investments are meant to provide considerable returns in a relatively shorter period of time, while long-term investments are meant to last for a few years or so and characterized by a slow but progressive improvement in return.

If your primary objective as an investor is to boost your wealth or retain your capital’s purchasing power over time, then it’s crucial that your investments must improve in value that at least keeps up with inflation rate. Owning a diversified portfolio of property investments or equity shares might well be an effective long-term strategy in comparison with having only fixed-term investments.

Your investment portfolio must be well spread spanning various kinds of investment instruments to enable you to efficiently lessen your risk. It is a classic application of the phrase “Never put all your eggs in just a single basket.” The many investment products available these days are becoming more and more sophisticated as large and institutional investors trying to beat each other.

If you are an individual investor, you only need to invest on something you are comfortable with and never on products that you do not have an understanding of. You need to be clear with your investment criteria since it is important in evaluating your choices. When you’re doubtful, the ideal approach is to obtain helpful advice.

Find out more about taking care of your investments to stay in touch with your money.

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