Hi everybody … I have been missing for a Month … Wao !!! Recently i’m having a break and also quite busy with my work. Well busy till cant blog … haha it is just my excuses … Actually i have a lot of article i want to share with you guys, just that i’m quite lazy =P.

This topic has been bothering me for quite some time as many people still mix them together due to the popularity of options.

Is there a Different between Pure Option Trader and Trader just using option?

Many people does not see the different. The Truth is they are totally different as they traded differently.

Option Trader

Option Trader are people who know how to use options expertly. They know all the stuff about options like implied volatility, option greeks, bell curve and the construction of options. They seldom construct a single long call or put. The way they trade usually involve the calculation of Greeks and thus they constructs spreads or multiple combination of spreads. Spreads are like vertical, horizontal and diagonal spreads.

Usually they will need to wait for the construction of option to expire to make money.

Trader using options

These are the people who actually can use stock to trade. They are day trader, swing trader, momentum trader or long term trader. These are the people who buy option in only 1 direction. These also mean that they will no hedge their position. The main purpose for them to use option is for leverage.

You see, a lot of the people only know about stock. Thus they think that options trading is just using option to trade like how they trade for the stock. This is wrong as option trading actually is a hedging game or a calculative game which involve the construction of multiple calls and puts. Therefore many people are losing money thinking that options is a cheap way to substitute stock.

Come On … No free lunch in the world … Thus how can an option being a leverage tools without having its disadvantageous.

What you think might not be what you think …
Learn from the Professional …
Ask them what kind of traders are they?
Learn the art of the game correctly before you jump into the ocean.

All the best in your trading … Do not be fool by the so call Gurus …

Options can be use for many purposes. One of the useful purpose is leverage. This mean instead of buying the stock for 40 bucks, you will be able to get it for 20 bucks but the trade off is the TIME.

The steps of Options Leverage

- Pick a stock (sector rotation, upgrades/downgrades, favorites, fundamental …)
- Decide on the trend (up or down / Call or Put )
- Decide the Target Profit
- Decide on the Time to hit the target profit
- Decide on the Strike (ITM or OTM)
- Decide on the Greeks
- Theo value (undervalue or overvalue)
- Make Money $$

Whenever you enter a market, you need to have the target profit and also its stop lost. Once you have decided then you can go to find a suitable options. Never ever choose the option first then the stock. Always choose the stock to trade first then you choose the option suitable for the stock.

All the best in choosing the right options.

Usually …

A call buyer wants the stock to go up.
A put buyer wants the stock to go down.

A call seller wants the stock to go down.
A put seller wants the stock to go up.

But …

A call buyer wants the stock to go down.
A put buyer wants the stock to go up.

A call seller wants the stock to go up.
A put seller wants the stock to go down.

The above statements are not wrong because this is only a part of the picture that you see. A call buyer wants the stock to go down because the buyer buy a call to protect his short selling stock. Option is just like an insurance policy. People buy insurance to protect the house, health and other stuff. Option is the same thing. Option is also use to protect the stock.

Just to take note that the call buyer not necessary want the stock to go up. It really boil down to personal strategy.

Myth 1:
Selling options is the only way to make money since 90% of options expire worthless.

FACT:
Contrary to what many think, the vast majority of options do not expire worthless. The facts are as follows: approximately 10% of options are exercised, from 55% to 60% of option positions are closed prior to expiration, and about 30% to 35% of options expire worthless. Note that 90% of options go unexercised, which is very different than expiring worthless. It should also be noted that this says nothing about profitability. Option positions closed prior to expiration may be profitable or unprofitable. Options that expire worthless may not be unprofitable if they were part of a strategy that involved other securities such as covered call writing.
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Myth 2:
You should only buy low-priced(cheap) options to limit your risk.

FACT:
It is a fact that purchasing options is a limited-risk strategy: The most the buyer of an option can lose is the amount paid for the premium plus commissions. Another way to look at this is that the buyer of an option has less capital at risk than the equivalent position in the underlying asset. What is more important to focus on than the inherent leverage in options is the probability of gain or loss. Low-priced options tend to be short-term and out-of-the-money. These are the options with the very highest probability of expiring worthless. The options toolbox software, available without cost at www.cboe.com/toolbox, allows investors to evaluate these outcomes and probabilities prior to trading.
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Myth 3:
When I buy an option I am taking the risk that whoever sold me the option may not be around when I want to sell or exercise this option.

FACT:
The financial condition of the buyer or sellers of option contracts is not a matter of concern for investors. The counterparty to every option transaction is the Options Clearing Corporation or OCC, which guarantees the performance of the terms of listed option contracts. Should a party default on an option trade the OCC would ultimately make good on those contracts. The OCC has been given an AAA credit rating–the highest rating given by Standard & Poor’s Corporation.
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Myth 4:
Nobody exercises an option before expiration, and so the risk of being assigned early is virtually nonexistent.

FACT:
Although only approximately 10% of options are actually exercised, and the majority of those are exercised very close to the expiration date, a number of options are exercised prior to expiration. In fact, in-the-money equity call options will at times be exercised before expiration just prior to the stock going ex-dividend. The holder of an equity call option may exercise early to capture the dividend that would be foregone if the option were only exercised at expiration. For equity call options, the risk of early exercise is greater immediately prior to the underlying stock going ex-dividend. Equity put options are also occasionally exercised early. Early exercise of puts tends to occur when in-the-money puts are trading near parity (at their intrinsic value, no time premium left). Investors must remember that puts have a tendency to go to parity more readily than calls. So for put options, if the time premium has completely eroded, the risk of early assignment must definitely be taken into account.
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Myth 5:
By their nature options are short-term instruments and forecasting short-term price movements is nearly impossible.

FACT:
Numerous investors prefer to trade shorter-term options. But if someone has a different time frame in mind, the options market may still be able to meet his or her investment needs. In fact, for all optionable stocks, options with expiration dates of six to eight months are listed for trading. For a more limited group of stocks (the ones with the more active and liquid options), longer-dated options, known as LEAPS, are also listed for trading. LEAPS give investors the possibility of establishing option positions of anywhere from nine to a maximum of 32 months. So if your outlook is based on longer-term forecasts, LEAPS may provide you with the leverage and limited risk similar to short-term options.
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Myth 6:
The best way to play a volatile stock is to buy call options, put options, or even both.

FACT:
Buying options is not necessarily the best way to profit from a volatile stock. Investors must keep in mind that options will be priced according to the volatility of the underlying stock. Generally, a relatively stable, low-volatility stock will have relatively inexpensive options; a more volatile stock will have much more expensive options due to the greater uncertainty about future stock prices. The stocks historic volatility will be taken into account in the options’ pricing. Investors buying options to take advantage of a volatile stock must remember that the options market has taken this fact into account also. The resulting option prices will usually include a premium for that historic volatility. If the underlying stock does not behave in the future with as much price volatility as expected, this “volatility premium” in the options prices will erode, sometimes dramatically.
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Myth 7:
Options are a zero-sum game: in order to make money, the trader on the floor who bought or sold an option has to lose for me to make money.

FACT:
Very often when investors purchase options, they do so from a professional option trader (a market maker) who thereby becomes the seller of the option, and vice versa when an investors sell options. It stands to reason that if the buyer of the option (i.e. the investor) is to make money, the seller of this same option (i.e. the market maker) must lose a corresponding amount. It appears as though public investors are in competition with the pros, and would therefore make no sense to argue with experienced, savvy market makers. In fact, the public and market makers are not in competition with one another. The investor who purchases an option usually does so because he or she has an opinion about direction: Call buyers are bullish, put buyers are bearish. Investors purposefully establish positions with a directional bias. When market makers sell or purchase options, it is usually because a public customer wants to buy or sell an option; market makers may have no opinion about the probable direction of a stock. What do they do? In the best of all possible worlds, a market maker who sold an option at 2 would try to buy it back at 1-7/8, make a small profit and have no market exposure. In most real-world cases, a market maker who sells an option may not be able to buy it back quickly at a profit. What happens then, wait and hope the stock goes in the right direction? For most market makers a wait and hope strategy would be a recipe for disaster. Instead, they will hedge their positions, either by buying or selling a different option, or many times by buying or selling the underlying stock or security. It turns out that investors and market makers are not competing against one another: investors are trading a directional opinion, while market makers are hedging their positions and trying to lock in small profits due to small price fluctuations in a series of options and the underlying security.

Article by CBOE

Have you wonder what are options?

Do you know that Options is a tool create to trade stocks especially for those expensive stocks.

Definition: An option contract is an agreement between two parties to buy/sell an asset (stock or futures contract as an example) at a fixed price and fixed date in the future.

It is called an option because the buyer is not obliged to carry out the transaction. If, over the life of the contract, the asset value decreases, the buyer can simply elect not to exercise his/her right to buy/sell the asset.

There are two types of option contracts - Call options and Put options.
A Call option gives the buyer the right to buy the underlying asset, while a Put option gives the buyer the right to sell the underlying asset.

American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date. Most exchange-traded stock options are American.

A simple example: lawrence buys a Call option contract from Sarah. The contract states that lawrence will buy 100 Microsoft shares from Sarah on the 5th May for $25. The current share price for Microsoft is $30.

Note: this is an example of a Call option as it gives lawrence the right to buy the underlying asset.

If the share price of Microsoft is trading above $25 on the 5th May, then lawrence will exercise the option and Sarah will have to sell him Microsoft shares for $25. With Microsoft trading anywhere above $25 lawrence can make an instant profit by taking the shares from Sarah at the agreed price of $25 and then selling the shares on the open market for whatever the current share price is and making a profit.

The $25 value, which is stated in the agreement, is referred to as the Exercise (or Strike) Price. This is the price at which the asset will be exchanged.

The date (in this case 5th May) is known as the Expiry (or Maturity) Date. This date is the deadline for the option contract. At this date, the option buyer is to decide if a transaction of the underlying asset is to occur.

Outcomes: Let’s imagine that at the expiration date, Microsoft is trading at $30, then lawrence will buy the shares from Sarah at the agreed $25 and then he can sell them back on the open market for $30 and make an instant $5.

Alternatively, if Microsoft is trading at $20, then buying the shares from Sarah at $25 is too expensive as he can buy them on the open market for $20 and save $5. In this situation, lawrence would choose not to exercise his right to buy the shares and let the options contract expire worthless. His only loss would be the amount that he paid to Sarah when he bought the contract, which is called the Option Premium - more on that a little later. Sarah would, however, keep the option premium received from lawrence as her profit.

In the real world of exchange traded options, transactions don’t really take place between two people like I’ve explained above. The process of Novation actually removes the identity of who is on the other side of the trade. You simply Buy or Sell an option contract from the exchange without knowing who is on the other side.

Have you ever lost money trading options before, or has someone told you that options are a losing game? That is probably because the methods being used to trade options were faulty or overly simplified. My mentor Conrad identified the follow 6 reason why the majority of option players fail to make money.

1 Inappropriate selection methods

Selecting the right stock (and the best corresponding option) is the first step in successful option trading. Some option traders will take a situation they just read about in the news as an option play. Others tend to look at longer-term measures like a stock’s valuation as an indication of its short-term potential. This mismatching of time frames is one of the biggest mistakes made by those who trade options. My staff and I sort through the entire universe of stocks with listed options, in order to pinpoint only those situations that look most attractive for sharp movements. The Option Advisor uses a methodology based on not one, but all of the key short term factors that drive stock prices — technical, fundamental, and sentiment.

2 Betting against trends
Trends in prices, whether up or down, have a tendency to last longer than people expect. Most traders lose the bulk of their money betting against trends. I’ve specifically developed my indicators to tell me not only the nature of the trend, but also the investing public’s view of the current trend. What I’ve found is that a prevailing disbelief of an existing trend gives a confirmation that the trend will continue, since there’s money on the sidelines that will eventually be convinced to buy into the trend before it ends. Thus, my approach in buying options with the trend allows you to trade on the right side of the market.

3 Inability to take a loss
Sure, everybody loves to hear about gains and profits, as this is what we all seek to achieve. While “loss” has negative emotions attached to it, the key is not to be emotional in trading, but rather to stay objective in all trading decisions. If the market is not validating my analysis, I have specific exit rules that get my subscribers out of option purchases before their expiration, so that big losses are often avoidable and capital can be preserved for future trades that are likely to be more profitable.

4 Lack of discipline

Many option traders fail because even when they do have gains, they let them slip away by not knowing when to get out and take a profit. Often, you should be taking a profit when the position is moving most obviously in your favor. What I’ve been able to teach option traders is that a mechanical system for entry and exit prices must be in place before the trade is initiated. I pre-determine the highest price that should be paid to enter the option, and the subsequent price that, when reached, will automatically force profits to be taken. This allows traders to prevent profits from slipping away, and enforces the discipline necessary in any successful trading approach.

5 Poor money management

Every smart option trader knows that even with a winning approach, money management is crucial in building an account’s value. The primary consideration is how much to invest in each trade every month. Often, amateur option players come into the business and make some nice gains right off the bat. Then, thinking this is a simple way to riches, they let all their capital (including all their profits) ride on a subsequent trade that wipes them out. Then they vow to never trade options again. The answer here is to first know the rules of the options game: there is great upside on winning trades, while you can also lose all of your investment in a particular option trade. Clearly no matter how good your approach, you will never win 100 percent of the time, and you should not allocate all (or even the majority) of your trading capital to any particular trade. How much do you invest? Each month, I tell Option Adviser subscribers how much of each portfolio’s cash reserves to devote to the recommendations in a particular newsletter.

6 Consensus thinking

Amateur traders tend to bet with consensus thinking, which is a sure way to lose in option trading over time. Whether it’s an article in a national publication, a hyped new product or a “tip” you’re betting on, Wall Street has a way of already discounting such news before it becomes widely disseminated. By that time, smart traders are looking for opportunities to bet opposite from the conventional wisdom. I’ve learned that you can use options very successfully in contrarian bets. Understand that a contrarian does not always “zig” when other say “zag,” but rather looks for extreme viewpoints that are apt to spotlight the key turning points in stock prices. That’s what defines true contrarians, and that’s a major reason why I’ve been so successful for those who subscribe to the Option Adviser.

By Conrad - (My mentor)