This option play made 400% on the way down to 72 from 110. The Call made 360% on the way up to 105 from 65.
When I first started out trading I was trading shares of stocks. As I learned more about the markets I switched to options instead on the underlying shares. The reason I did this was because I like the defined risk of the option contract. Let's face it, when we trade the shares not only do we have to have a big account, but we are at the markets mercy if the stock gaps against us at the open. When I want to trade stocks, I will actually use options 75% of the time.
When we buy a call or a put the most we can lose is the premium paid for the option contract. So even if the stock gaps 10 points against us, we have a "built in stop" which is the premium we paid for the option contract. On average, my option trades are 3-4 days with a target of 60% or greater. When buying option contracts they are sold in increments of 100 shares for 1 option contract. Remember that when trading options you should stick to buying the same amount of contracts as if you were buying the stock. Example: If you were going to buy 1000 shares of DRYS at $65.00 a share, you should only buy 10 option contracts, keeping the option position equal to the amount of shares you would normally purchase.
The way I trade options is very simple. If I see a trade to go long with a stop loss of $5.00 on the stock, I will buy a $5.00 option contract. The risk is exactly the same buying the option as if I were to buy the shares. Except buying the option I am not taking up $65,000 of my account balance, I am only taking up $5,000, leaving me $60,000 to purchase more options and be in multiple trades instead of just one.
My emotions match swing trading the options instead of the outright shares of the stock. My upside potential is unlimited while I am in control of the risk on each and every trade.
If you are new to options or have any questions please leave comments and I will respond to each and every one.
Steve
eMiniSchool
No comments:
Post a Comment