Are you a warrior in options trading?

Before we start on our options trading journey, we need to understand the various styles of equity or options traders. This is because one of the most confusing aspects of the trading profession is there is no single definition of "traders". Traders come in many different styles, sizes, behaviors, characters and varieties.

Professional options traders will generally undertake one of several styles and stick only to that style. This is an important point since traders are always at the risk of being distracted by various market commentaries, analysts’ opinion and conflicting trading styles.

Find out which types of trading warriors you are.

1. Fundamental Warriors

Fundamental trading is a method by which traders focus on company-specific events to determine which stock to buy and when to buy it. Trading on fundamentals is more closely associated with the buy-and-hold strategy of investing than short-term day trading. There are, however, specific instances in which trading on fundamentals can generate some nice profits in a short period.

This type of traders trade companies based on fundamental analysis, which examines things like corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions. One of the richest man in this planet earth, Warren Buffett, is famous of investing in companies which are underpriced based on some form of fundamental analysis.

Most of the equity investors are aware of the most common financial data used in fundamental analysis: earnings per share, revenue and cash flow. These quantitative factors can include any figures found on a company's earnings report, cash-flow statement or balance sheet; these factors can also include the results of financial ratios such as return on equity and debt to equity. Fundamental traders may use such quantitative data to identify trading opportunities if, for example, a company issues earnings results that catch the market by surprise.

2. Swing Warriors

Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamental traders are actually swing traders since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.

Swing trading is actually a mix of day trading and trend trading. A day trader will hold a stock anywhere from a few seconds to a few hours but never more than a day; a trend trader examines the long-term fundamental trends of a stock or index and may hold the stock for a few weeks or months. Swing traders hold a particular stock for a period of time, generally a few days or two or three weeks, which is between those extremes, and they will trade the stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism.

3. Technical Warriors

Technical traders are obsessed with charts and graphs, watching lines (esp support and resistant lines) on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.

In general, a technician is somebody who looks back in history, using the recognizable patterns of past trading data to try to predict what might happen to stocks in the future. This is the same general method practiced by economists and meteorologists: looking to the past for insight into the future.

4. Momentum Warriors

Momentum traders look to find stocks that are moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit. Momentum traders may hold their positions for a few minutes, a couple of hours or even the entire length of the trading day, depending on how quickly the stock moves and when it changes direction.
By watching the momentum line, the momentum trader has already engaged in technical analysis, examining stock charts for signs of the breakout. However, the technical indicators used in momentum trading are very limited and only the tip of the iceberg compared to technical guys.

5. Scalping Warriors

The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread. Scalper generates trading profits from stocks that are not moving, make tiny profits from each trade by buying a stock on the bid and then turning around and selling at the ask.

Personally, I am a fundamental warrior because I do play earning during peak season. At the same time, I am a momentum day trader riding on the wave when I see signals to enter and exit.

How about you?

It is very common that options traders are constantly soul searching and questioning their own chosen approach. Novice traders might try and test each of these techniques to find their style. Some experimentation is advisable, particularly at the beginning of the options trading career, but deviating from a disciplined, focused approach can be disastrous later when we are establishing our style.

At the same time, there are a lot of options trading related books entirely devoted to each style, although many titles such as "Day Trade Online" or "How to Get Started in Electronic Day Trading" are unclear about what type of trading they are deploying.

Ultimately, it is critical that we settle on a single niche, matching our investing knowledge and experience with a style to which we feel that we can devote further research, education and practice.

Happy trading!

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It is always easy for me to adapt and change. I am flexible and flowing.

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Everything I need is supplied to me abundantly

Everything I need is supplied to me abundantly.

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Why Option Trading Is My World?

Options trading becomes the in-thing and most trendy investment strategy nowadays. In fact, option is a much popular financial instrument especial in Asia lately. There was even an Options Trading Championship or competition being organized at Singapore, Malaysia and Indonesia concurrently in Oct 2007 organized by Freely Business School headed by Dr Clemen Chiang.

So, why options trading is so popular and in fact being viewed as a tool to attain financial freedom?

Generally, there are 4 main reasons we should consider options trading:

1. Limited risk and exposure
2. Hedging
3. Leverage
4. Generate additional income on existing portfolio

1. Limited Risk and Exposure

In options trading, buyers benefit from being able to control the movement in a stock for just a fraction of the cost of purchasing that stock. At the same time, we can never lose more than this modest dollar amount. Therefore, we can keep the bulk of the investment dollars in the safety of cash where it is immune to the wild and often scary swings in the market.

2. Hedging

One of the most conservative options trading strategies is to help protecting our investment portfolio against sudden downward pressure on stock prices. It is just like an insurance policy. Investors often buy puts as a hedge to protect their portfolio value.

For a comparatively and fairly minimal investment, through option trading, we can secure the right to sell our stocks at a particular price (a "put") regardless of how is the market doing.

By buying a protective put, an investor increases their break-even point of the stock by the cost of the put and if the stock price rises instead of falls, this strategy may limit the upside potential by the cost of the put.

The way this works is fairly straightforward. Let's imagine you decided to buy 1,000 shares of ABC Corporation for $88. To protect your $88,000 investment, you might consider buying puts.

Since each put controls 100 shares, you would need 10 contracts to protect 1,000 shares.

By choosing a strike price of $85 and an expiration date several months away, you would lock in the right to sell your shares with a maximum loss of $3,000 ($88 purchase price - $85 strike price x 1,000 shares) plus the cost of the puts.
Of course, the best scenario would be for the stock to increase in value so the puts would expire worthless. In either case, knowing that you'll be able to sell your shares at $85 -even if the stock drops to $50- might just help you sleep easier.

3. Leverage

For investors with a high level of risk tolerance, options trading enable us to use relatively moderate sums of money to leverage sizable positions.
For a fraction of what it would cost to purchase large blocks of stocks in high-flying volatile companies, investors can buy calls giving them the right, but not the obligation, to buy shares at a specific price (strike).

If a stock trades at $50, it would take $25,000 to buy 500 shares.
Through options trading, the same investor might buy ten 50 call contracts at $8. Now, for just $8,000 (10 contracts x $8 x 100 shares per contract), the investor owns the rights to buy 1,000 shares of stock at $50, any time before the call options expire.

If the stock price is $70 at expiration, the options will be worth $20 each ($70 - $50) or $20,000 (10 contracts x $20 x 100). The investor will have a profit of $12,000 on a $8,000 investment through options trading.

In contrast, the investor who paid $50 for 500 shares spent $25,000 to make $10,000 ($70 - $50 x 500 shares). That's the power of leverage.

However, the risks are equally high. If the stock doesn't move, the investor who paid $8,000 for the $50 calls will lose the entire investment. Likewise, the investors who bought the stock will have lost nothing because they still own the stock.

4. Generate Additional Income On Existing Portfolio

Another relatively conservative options trading strategy is covered-call writing to generate income on stock positions already held. Many investors use this strategy to help generate additional income from stocks in their portfolio or to lower the breakeven on stock positions being purchased.

This is can be done by selling out-of-the-money calls (i.e. options with a strike price that is above the current stock price). When we sell calls, we take on the obligations (if the buyers of the calls exercise their rights) to deliver the shares at a certain price (strike price) by a certain future date (expiration date). When selling options, we pocket the premium received from selling the options. Normally, the owners of the stock decide to sell calls when they think the stocks will stagnate over the short term. In this case, by selling calls generate income even if the stocks fail to stage a rally.

Here's how the strategy works:Let's imagine that you currently have 1,000 shares and the stock is trading at $67. If you sold 10 calls or less against the stock in your account, they would be considered "covered" because you wouldn't have to buy shares at the open market in the event of an assignment. For this reason, the position is far less risky than uncovered (naked) calls that, by definition, are written without stock as collateral.

If the $70 calls are trading at $3, you could sell 5 contracts and earn $1,500 ($3 x 5 contracts x 100 shares). Now, all you have to do is hope the stock remains below $70. If it does, you keep the $1,500 and all of your stock.
If the stock jumps to $72, you have two choices.

First, to keep the stock, you could buy the calls back. While this may result in a loss, from taxation perspective, this option could be preferable than incurring capital gains.

Your other option would be to wait for the assignment and sell 500 shares to the option holder at $70 per share. In this case, you still keep the $1,500 premium you collected from selling the calls. In addition, you capture the profit associated with the stock's move from $67 to $70 i.e. $3 x 500 shares = $1,500.

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I look forward with joyous anticipation to the day

I look forward with joyous anticipation to the day.

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