New Option TraderLearning how to be a successful option trader and blogging about it

It can be tempting in a bull market to let it all ride on a single trade.  This may work out once of twice but eventually you will end up giving it all back.  Especially with the volatility swings we’ve been seeing lately, what looks like a no-brainer high probability trade can very easily turn against you in the last two weeks before expiration leaving few options but to take a loss.

More than anything else smart money management is what determines trading success.  Remember, it’s not about making the big wins on every single trade but minimizing the losses and living to trade another day.  Look at it this way, if you have a spectacular month and make 300% on every trade — and each time you’re putting 80% or more into each trade — all it takes is one bad trade to take away all your gains and maybe even your whole account!

The goal here is not only to preserve what you have but grow that capital at a steady pace.  There will be losses along the way.  But, if you’re only risking a small percentage of your account then that’s the most you can lose on any one trade.

I was going to post money management rules in this post but then realized this is actually a bigger topic that deserves more than, “dont’ risk more than 2% on any trade..”

So, consider this an introduction to money management and stay tuned.  I’ll be back in the next post with a more information on what money management rules to consider when placing a single trade and for your overall trading strategy — yes, it is that deep.

Parity:
Parity
is the term that refers to an option whose price consists strictly of intrinsic
value. In essence, parity is the amount by which an option is in-the-money.

Taking classes on options trading and reading books on option trading are both definitely the best way to learn at an in depth level.  But, that can get expensive and it does take a while to really feel comfortable with what you’re learning.  So, I recommend supplementing these paid educational classes with the multitude of free training that’s available on the web.  Personally, I don’t believe the following resources are enough on their own but they are a great supplement.

I have alot of resources to post so won’t do it all in one post. So, here are three places where you can go to view free trading videos:

Free Trading Videos
Informed Trades
You Tube

Support and Resistance are basic concepts everyone should understand. But, I remember back when I first was introduced to support and resistance I had a lot of questions and was unsure where I was seeing support and where resistance.

Last night I was roaming around You Tube and and found a bunch of great videos about trading so want to share them we you guys. The video posted below is from the Informed Trades site which I have yet to explore but judging from this video alone, looks pretty good to me — and from what I can tell is FREE!

This is a short video that does a great job of explaining and illustrating support & resistance.  Look for me to post more videos soon.

I can hear it now.. naked puts are risky and dangerous — never use naked puts! Ever! That’s what we’re told when we’re first learning how to trade options, right? I know I’ve heard it more than once.

Well, there is a place for naked puts and it’s a good place — in an IRA. But, as long as you understand why you’re
buying them and what you’re trying to accomplish. Naked puts are a great way to acquire stock — stock that you want to buy, you’re GOING to buy anyway — at a lower price and a ultimately a higher ROI on the trade.

Normally, I’m not that into stock; too expensive. But, IRAs are a good place for stock and it’s still just as important to get the best return possible. You might hold a stock trade a little longer, but the purpose is still the same — to make a profit. So, getting the stock when it pulls back is a good thing because it increases your total return.

Key Points:

• If you’re going to use this strategy, you must want the stock — just at the cheaper price.
• You must have the cash in your account to buy the stock in case you get it at the cheaper price.
• This is a bullish stock acquisition strategy and not a bad way to to continually acquire stock that you intend to hold for a while.
• If you’re wrong about the direction of the stock, this trade can go against you because now you’ll be buying a falling stock on it’s way down. The goal is to buy a rising stock on a pullback but that is still in an uptrend.
• Your ROI will be higher due to two factors:
  1. The premium you receive from the naked put offsets the price of the stock
  2. Plus, you’re getting the stock when it pulls back, so it’s cheaper

How to Sell Naked Puts to Establish Long Stock Positions

1. Find a stock you like.  Use all your technical analysis skills and understanding of the company to determine to if it’s a good stock to own
2. Find the nearest available expiration date that has at least 23 calendar days to go. That may be the front month or it may be the next month.
3. Find the put option one strike OTM with a delta of 30-40
4. Sell that put short using a limit order. Selling this put short will give you the quickest rate of decay (in this case a good thing) relative to the highest probability of success.

By the way, I got this info from taking a free Options Planet class called, Options in Your IRA.  Options Planet is run by Think or Swim and they give these free classes because  they believe that an educated option trader is a successful option trader — what a concept!

One last thing… if your broker won’t let you do this, find another broker.  Think or Swim has no problem with it because they know this strategy is using cash secured puts and is just a more cost effective way of buying stock.