Options Education

Options Trading Rules

Let's discuss some of the most important options-trading rules for successful investors.

Rule #1 - Trade with the Market, Sector and Stock

This sounds like a simple rule, but it's an easy one to forget. Most of the time, when we're ready to enter an option trade, we're familiar with the trend for the stock. This is usually what attracted us to the trade in the first place. Checking the trend of the stock isn't enough. Before placing an order for the stock or its options you must clearly understand the direction of the general market, and market sector for the stock. Be sure that the market and sector trends are moving in a direction appropriate to your strategy.

There are 27 market sectors, (the Banking and Technology sectors for example) comprised of 247 Industry Groups as determined by Standard & Poor's. Every publicly traded company falls into one of these industry groups. It's incredible to see just how much industry group performance can influence the price movement of a stock. Companies are lumped together into a given industry group based upon the products or services they offer. Often each of the companies in a given industry group sell to the same client base. This is the reason that bad news from one company will tend to drive down the price of other stocks in the same group.

An example of this was the Enron fiasco a few years ago. There were a number of healthy utility companies that shared industry group placement with Enron prior to the discovery of questionable practices within the company. Once word of the scandal reached the public, the entire group dropped like a rock. Investors didn't know whom to trust within the group. As a result, even the "good" companies were punished.

Before we enter the trade, check the trend of the general markets, the specific market sector, industry group, and the trend of the stock.

Rule # 2 - Have an Exit Strategy Prior To Entering the Trade

Before you ever enter a trade, you should prepare an exit. Not only will this prevent you from being paralyzed into inaction in the event the trade begins to go against you, it will also help you to recognize when you should be happy with the profits.

When should you be happy with the profits? If you answered, "Never!" you may have a problem. Try this: When you're ready to enter a trade, instead of buying one contract, buy two. That way, when you first feel excitement over a great trade, you can think, "Should I be happy with this profit?" If so, then consider selling one of the contracts, leaving the other contract to run until you see sell signals. The secret here is to remind yourself: "I'll never go broke taking profits off of the table."

Another strategy is to analyze the stock chart for patterns of support and resistance. Try and identify the average move when the stock rises. If the stock tends to rally 20 percent each time it has a breakout, expect this run to be no different. Plan to exit near the 20 percent level.

Ask yourself when "good enough" should really be considered "good enough." Set exit points relative to the average move in the price of the stock, and exit in a timely manner. Consider selling half when you're happy and let the other half ride until your exit point is met, or until you receive sell signals.

Rule # 3 - Beware of Upcoming Announcements

Life is full of surprises. Hopefully, your investments are as free as possible from the sorts of surprises that tend to lose money. Fortunately, there are specific announcements that are easy to plan for, such as quarterly and annual reports. Watch the news items for your stocks, and mark your calendars to expect announcements. If you know that the last earnings announcement for a given company was May 20th, plan that the next announcement will be three months later on August 20th. It may not actually fall on that day, but you will know roughly when to expect it. A quick bit of research to identify the fiscal year-end and reporting periods for a stock will go a long way towards preparing you for the unexpected. You can find the Fiscal Year-End and quarterly reporting periods for your stocks by clicking on the "Company Profile" link on the left side of the page from the Corporate Snapshot page. This information will show you when the stock closes its books for the year, but it doesn't tell you exactly when the results for that year or quarter will be announced. Check the news for that information. Most companies will let investors know when to expect the actual announcement.

Watch for patterns in other relevant news. For example, whenever the Chairman of the Federal Reserve speaks, reverberations are felt in the markets. If he were to hint at an increase in interest rates, ask yourself if the stocks or options that you are currently trading would feel the influence of his comments. Watch the reactions of the market. This is one of those times when running with the herd may be a good thing. If your holdings drop in value on his comments, protect yourself. Consider exiting the trade. Make sure that you have stop-losses in place prior to the announcement. An appropriately placed stop-loss is the next best thing to knowing the future.

Schedules for reports and events from the Federal Reserve are available on the Web at http://www.federalreserve.gov/calendar.htm.

Check to see when the stock reports its quarterly earnings. Look for an announcement three months later on the same day. This may not give you the exact date, but you can fine-tune the date by following the news. Check to see when key economic reports are due for release.

Conducting a nightly review of your holdings is imperative to investing success. If you would like to build your wealth, you simply cannot afford to ignore your investments. As part of your nightly routine, you should check the stock charts for each of your holdings, as well as the market news for each. Review the information. See if the charts or news items would direct you to sell your positions. This is also a great time to review the placement of your stop-losses. Conducting this analysis should take you no longer than 15 minutes each night. Armed with information regarding your positions, you can submit orders for action the next morning.

There is no excuse for being uninformed with the events of your stocks. If you begin to notice weakness in the chart patterns for your holdings, consider exiting your trades, unless of course you're using Bearish strategies! Review the placement of your stop-losses. Consider adjusting them in order to protect yourself from unexpected news.

Option Ticker Symbols

The ticker symbols for an option are built according to a recipe that serves to identify the underlying stock, the expiration month, and the strike price for each option. The first three letters of the ticker symbol are used to identify the underlying stock, although the three-letter symbol for the stock may be different than you're used to. Here's an example of the index symbol for S&P 100 is, of course, OEX. The three-letter designation for options on S&P 100 is OXB. Just remember that as far as the ticker symbol for the option is concerned, the first three symbols represent the underlying stock.
The last two symbols represent the expiration month, and the option strike price. The expiration month is represented by the letters "A" through "L" for Calls and "M" through "X" for Puts

The last two symbols represent the expiration month, and the option strike price. The expiration month is represented by the letters "A" through "L," with January represented by the letter A, February represented by the letter B, and so forth. Each individual option strike price is represented by a different letter as well. The lowest strike price offered for an option is $2.50. With most optionable stocks, option market makers will offer options in increments of $2.50 up to the $25 strike price, at which point strike prices advance in increments of $5.00 ($25.00, $30.00, $35.00, etc.).
Decoding the strike price can be a bit tricky, since there are more strike prices than letters. For example, the letter B might represent $10, $110 or $210.
The symbols for the strike prices progress as demonstrated in the table above. As option strike prices increase the letters advance, each letter representing a higher strike price.

Since the option symbols follow a recipe, they are recycled year after year. That's one reason why it can be difficult to find historical quotes for options. Once a particular option expires, the symbol will lie dormant for a few months, until the re-issue of that same option ticker symbol next year.

Levels of Options Trading Authority

Back in the early 1990's a technology revolution quietly began to change our lives. I'm sure you can recall the first time you dialed into your Internet Service Provider's system, and took your first tentative steps through the World Wide Web. About the same time you were learning to navigate through the Internet, an enormous effort was under way to make use of this new medium as a tool to make investors better informed, and to streamline the entire investing process.
This streamlining process allowed investors unparalleled access to their brokerage accounts. Unfortunately, this access simply gave uneducated investors a way to lose their money more efficiently. Back then, there were no levels of option-trading authority. People more or less traded as they saw fit. That is, until the first lawsuits began to surface.
optionsXpress, in compliance with SEC (Securities and Exchange Commission) rules, requires clients to document their previous trading experience, financial well-being, and risk tolerance prior to granting options trading authority. This is done to protect not only the integrity of your account, but to protect your overall financial security. Education is the key to successful options trades. Learning how to use options in order to expand your investing toolbox should be the goal of every investor. Understanding the risks should be a priority.
When you apply for an options trading account, you will be provided with access to an online booklet entitled "Characteristics and Risks of Standardized Options" published by the Options Clearing Corporation. It's important that you learn to recognize the risks of options trading, and never risk money that you can't afford to lose. In order to help you manage risk, optionsXpress has established five levels of options trading authority.
These are general definitions only. We'll discuss specific options trading strategies available within each level of options trading authority in another section.

Level 1 Options Trading Authority:

Level 1 authority is granted to accountholders seeking approval to trade Covered Calls. This is considered a conservative strategy, and is a great way to build your experience in the application of options.

Level 2 Options Trading Authority:

Grants approval to buy Calls and Puts, as well as the ability to write Covered Puts. Generally given to accountholders with some history of trading stocks and an understanding of the speculative nature of options trading. To increase your level of options trading authority within the optionsXpress system, simply click on the "Account" tab, and options-trading authority. You'll generally find this form in the "FAQ" section of your broker's Web site. If you aren't certain where to find the form, or how to complete the application, contact your broker.

Level 3 Options Trading Authority:

This level allows the accountholder to execute Spread trades.
Spreads are more advanced than simple Call and Put option plays in that they can result in a Naked Position. A Naked Position simply implies that you are selling an option to someone else, without owning the stock first. An example of a trade requiring this level of authority would be a Calendar Spread, which is simply a Covered Call on a LEAPS option. In this example, although you own the LEAPS contract, which gives you the right to purchase the underlying stock, you don't technically own the stock. This places more of your capital at risk, since you are basically naked in the trade. This is why your broker would require a higher level of trading authority for a Calendar Spread.

Level 4 Options Trading Authority:

This level involves the selling of Naked Equity Options.
As mentioned above, Naked Equity Options would result in selling an option without the ownership of the stock itself. This would be used when you are fairly certain that a stock isn't going to move above a certain point. We sell the Covered Call at a strike price above the point at which we expect the stock price to stop moving higher. This then enables us to reap the premium from the sale of the Calls, without having to extend ourselves to actually purchase the stock first. Since you do need to be prepared for the possibility of being called out, your broker will require a certain cash reserve within your account. The size of this margin is determined by the exposure in the position determined by the current price of the stock.

Level 5 Options Trading Authority:

Basically authorizes the investor to trade Naked Index Options.
Some Index Tracking Stocks (also known as Exchange Traded Funds) are quite unique in that investors can purchase the options, however there is no stock in which to take ownership. The OEX is a prime example of this. The OEX tracks the performance of the Standard & Poor's 100. The value of the OEX is tied to this composite; however, you can't actually purchase the stock itself. Since options are available on the OEX, however, you could sell the Call options, but you don't actually own the stock...you're just pretending you do. What would happen if you're called out? Since there is no stock to turn over, you're forced to settle the trade with cash. This could result in an outlay of tens of thousands of dollars, again dependent upon the price of the issue in question. The margin requirement for this type of trade is usually far greater than for Naked Equity Options.

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Options Education

The Basics of Options

Before you actually start investing with and trading options you need to understand the basic terminology (the language of options) and more about what makes them tick. For example, the factors that affect the prices or premiums, and how that relates to the price of the underlying stock.

Definition

An option is the right, not the obligation, to buy or sell a stock at a specific price on or before a specific date.

Two Types of Options

Call	Put
The right to buy	The right to sell
The obligation to sell	The obligation to buy

Contracts

A Call option gives the buyer or holder the right to purchase the underlying asset and gives the writer or seller the obligation to sell a set number of shares of the underlying stock at a specified price (strike price) on or before the date the contract expires (expiration date).

A Put option gives the buyer or holder of the contract the right to sell the underlying asset and give the writer or seller of the contract the obligation to buy a set number of shares of the underlying asset at a specified price (strike price) on or before the date contract expires (expiration date).

An option contract usually controls 100 shares of stock. However, if there has been a recent split in the stock this may not be the case. The buyer of the contract will pay a premium, while the writer or seller of a contract will collect a premium.

Option Contract

Strike Price

The price at which you have the right to buy or sell according to the contract.

Expiration Date

The third Friday of the month.

Premium

The Cost of the option

Example

Let's take a look at an example of how all of these factors go together. You are interested in building a golf course and have found a 1,000-acre plot of land in a potentially high growth area. However, it will take time to obtain the necessary financing and land-use permits in order to begin building. You want to secure the land while you put everything into place, but you don't want to lay out a hefty price to purchase the land outright just in case you can't ultimately build the course there.

Strike Price

• You go to the property owner and strike a deal that allows you to purchase the property for 2 million dollars.
• He agrees and you now have the right to purchase the property at the agreed upon price.

Your solution is to go to the landowner and create a contract that will give you the right to buy the land, but not the obligation. The contract will control all 1,000 acres. The price that you agree to is called the strike price. If you are not successful in obtaining the right to build a golf course, you can simply walk away from the deal and lose only the amount that it cost you to purchase the contract.

The contract is written with an expiration clause so as to protect the landowner from being obligated to sell his property for an unreasonable amount of time. It also will decrease the cost of the contract to you, because you will only be tying up the land for a short pre-determined period.

Expiration Date

• The expiration date offers some protection to the property owner by invalidating the contract after 6 months.
• Gives the buyer only a limited time to decide whether to ultimately purchase the land or not.

The landowner will expect to collect a premium for being obligated to sell you the property. The amount of money he expects will be determined by how long he will be under obligation and what the expectations are for the property to move up or down in value. The more time the land will be tied up, the more money he will expect. Likewise, the more likely the land is to increase in value during the duration of the contract, the more money he will expect.

Premium

• The landowner will collect a premium for being obligated to sell us the land for the agreed upon price.
• His price is based on how much the property might move in value during that period and how long he will have the obligation.
• The premium is $20,000.

Of course, your reasons for entering into this type of deal are fairly clear, but why would the property owner be interested in such an arrangement? For one thing, he gets to keep the premium paid for the contract no matter what happens, allowing him to make a little upfront money on a property he may or may not wind up even selling. In addition, the agreed upon sale price (strike) is likely to be much higher than he could obtain if he sold the property without the land-use approvals that you're working to obtain.

This example is very similar to what happens with a call option in the stock market. Stock options are contracts that have strike prices, expirations, and premiums. Rights are transferred and the parties to the contract take obligations.

Strike Price

This is the price per share at which you will have the right to buy or sell the underlying stock. For example, if you see May 30 calls, this means you have the right to buy stock at $30 per share. If you have written or sold a contract, the strike price will be the price at which you will be obligated to buy or sell. Strike prices are determined by the exchanges and are stated in even increments.

Strike Price Increments

Stock Price	Strike Increment	Starting At
$5.00 to $25.00	$2.50	$5.00
$25.00 to $200.00	$5.00	$25.00
$200.00 to $60,000.00	$10.00	$200.00

Expiration Date

Every option contract has a month in which it expires. For standard options, the dates can range from one to nine months, and contracts expire on the Saturday following the third Friday of the month. However, since you can't trade on Saturday, the third Friday of the month is considered the option expiration date.

Options are identified in part by their expiration dates. If you see a quote for May 30 calls, the May refers to the expiration month and the actual date will be the third Saturday in May. The option no longer trades at the close of the markets on the third Friday of May, and officially expires the next day. If the markets happen to be closed on that Friday, the last trading day will be on the preceding Thursday.

Option Premium

The premium is the amount the buyer pays to purchase the option; in other words, it is the option's price. The premium also represents the amount the seller of the option will collect for assuming on the obligation of the contract. When looking at an option, you will see a bid and ask price, just like you would with a stock.

Note that options in the U.S. are generally for 100 shares of stock. The premium, or price, is quoted for one share. If you see a May 30 call at $4, the price for one contract is 100 shares multiplied by $4, or $400. (1 x 100 x $4 = $400)

Three factors affecting premium

• Time
• The underlying asset price relative to the strike price
• The volatility of the underlying asset

The value of an option is highly dependent on the amount of time left before the option expires. Options are considered wasting assets because they have a limited lifetime and their value decreases as their expiration dates approach. Time value is the portion of the premium that is dedicated to time remaining until a contract expires.

When buying time, the purchaser of an option is buying the possibility that an option's value will increase before the expiration date. As the option approaches expiration, its time value decreases toward zero. In the last two weeks, the weeks just before expiration, their decline in value accelerates. This works in our favor when we are the contract sellers. At expiration, the option's value will be zero unless the option finishes In-the-Money.

In-the-Money, Out-of-the-Money, and At-the-Money

In-the-Money (ITM), Out-of-the-Money (OTM), and At-the-Money (ATM) are three terms used to describe the relationship between an option's strike price and the current price of the underlying stock.

A call option is considered to be In-the-Money (ITM) when the stock is trading higher than the option's strike price, Out-of-the-Money (OTM) when it is trading for less than the option's strike price, and At-the-Money (ATM) when it is trading at exactly or very close to the option's strike price.

For example, the OEX Mar 390 Call would be In-the-Money if OEX was trading for more than $390, Out-of-the-Money if OEX was trading for less than $390, and At-the-Money if OEX was trading for exactly $390. If an option is In-the-Money, it has intrinsic value (value if it were to be exercised).

Intrinsic Value

Intrinsic value is the difference between the stock price and the ITM strike price. In other words, it is the ITM portion of an option's price. For example, if a stock is trading at $37.50 and the strike price on the option is $35, the intrinsic value in the option is $2.50.

Intrinsic value can never be a negative number, but the option does not need to be ITM to have some time value (this is called extrinsic value). Interest rates and stock dividends, if applicable, can also play a small role in the premium.

The General Rule of the Option Pricing

In-the-Money options are more expensive, but their value also increases more quickly as the price of the stock goes up.

Out-of-the-Money options are less expensive, but their values increases more slowly as the price of the stock goes up.

Delta

Delta is one of the "Greeks", a collection of analytical tools used by options traders to measure risk (more in-depth discussion of the individual Greeks is available in Level 2). Delta is the term used to describe the relationship between option price movement and the movement in the price of the underlying stock. Delta is the amount of change in an option's price if the underlying stock price moves by 1 point.

For example, if the stock price on the left increases from $390.44 to $391.44, then the price of the 385 Call (Delta .5463) will increase from $5.50 to $6.04. Delta is positive for call options and negative for put options.

It is important to note that delta is not a fixed value. As an option moves further In-the-Money (ITM), its delta increases. Similarly, the further Out-of-the-Money (OTM) the option becomes, the further the delta decreases.

Why is this important? It will give us insight into why we would want to buy an In-the-Money or At-the-Money option, rather than an Out-of-the-Money option. It is also a concept that, along with the other Greeks, is put to greater use in more advanced options trading strategies.

Volatility

One of the most important aspects in determining the value of an option is the behavior of the underlying stock. Given the many different opinions among investors about how a stock might behave going forward, it stands to reason that individual option traders may also disagree about the value of any given option. This difference of opinion can affect the price of the underlying security dramatically.

This brings us to the important concept of volatility. Volatility is the measure of stock price movement, or how much a stock price moves up and down – the greater the up-and-down movement of the stock, the greater the odds that the option will be In-the-Money during its lifespan. Higher volatility – and the greater chance of being In-The-Money – increases the price of the option.

Volatility of the underlying stock is a key factor in determining the value of an option. As the volatility of a stock increases, an option's premium will likewise usually increase. The difficulty of predicting the behavior of a volatile stock allows the option seller to command a higher price for the additional risk assumed.

There are two types of volatility – historical and implied. Historical volatility is a measure of price movement based on how the security has behaved in the past. Implied volatility is a measurement of price movement as implied by the current market price. It is basically determined by running the model backwards. If our model stated that an options price should be $4 but it was trading at $5, we would plug in 5 for the price and solve for volatility. This number would be the market's opinion of what the future volatility of the underlying issue might be.

Putting it all together

Time and volatility are closely related. Together, they are generally referred to simply as Time Value.

An option can have no intrinsic value and still have worth. However, when nearly the entire value of the option is based on time, risk increases significantly.

• Option price = Intrinsic value + Time value + Volatility + Dividend
• $5.70 = $2.50 + $1.50 + $1.60 + $.10

As you can see, only part of an option's price is made up of intrinsic value.

• Option price = Time value + Volatility + Dividend
• $3.20 = $1.50 + $1.60 + $.10

Now that you know the basics what makes up an option, let's move on to some of the most important option-trading rules that all investors should know.

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Options Education

Intro to Options

Every day, options traders around the world profit from the rise and fall of equity markets. Even when the general markets are down, there is profit to be made if you simply know how to make options work for you. Options can become very powerful tools in the hands of the educated investor. They allow investors to make money regardless of overall market conditions, with strategies so diverse traders can tailor their approach to be conservative, to protect or "hedge" their positions, or even be aggressive with money they can afford to lose.

Options are so versatile they can be used in a wide range of investment strategies and goals.

For Example

• Options may be used to buy stock at a lower price than "retail".
• Options allow traders to participate in the ups and downs of a stock's price without even owning the stock.
• By executing certain strategies, you can potentially make a monthly income on stock that you currently own.
• You can protect a stock or even make money when the market goes down.

You have probably heard of the inherent risks in options and have been told they are primarily used for speculation. In reality, options can be very conservative or very aggressive, depending on the forecast you have for the stock and the strategy you want to employ.

In fact, some of the earliest option applications were used to reduce risk rather than increase it. For example, in the commodity markets, options are used to lock in fair or reasonable prices in a potentially volatile future.

Background of an Option (Historical Example)

You may have already heard of the Dutch tulip mania in the 1600's. When tulips gained popularity with those of royalty, the general demand increased for all types of bulbs. Tulips became a status symbol and tulip bulb prices rose dramatically. As bulb prices increased, Dutch growers and dealers began to trade tulip bulb options to lock in prices and insure profits. As public interest grew, greater numbers of people speculated on future price increases. In the beginning, this proved to be profitable. This situation only caused the speculation to increase and tulip bulb prices continued to soar even higher.

The bubble soon burst and as prices dropped, the buying frenzy became a selling panic. People lost their homes and their livelihoods, banks failed, and fortunes were lost. Although greed, reckless speculation, and the use of borrowed funds to invest caused the financial collapse, people blamed options. This was because tulip options were responsible for enabling people to speculate with small amounts of money and large amounts of leverage.

We should learn the lesson that leverage can work against a trader just as easily as it can work in his or her favor.

In America during the 1920's, the option market was unregulated and there were many abuses by underground option pools. During the congressional hearings to establish an oversight committee, which eventually became the Securities and Exchange Commission, the initial reaction was to make all options trading illegal. However, Congress gave the Put and Call Dealers' Association a chance to speak out.

The Association explained the difference between options where put-call dealers deal openly for a consideration and manipulative options secretly given for no fee. In other words, there were both good and bad options, but the lack of knowledge about the proper use of options and the heightened public awareness of option pools led many in Congress to conclude that all options were speculative.

The proposed bill read: "not knowing the difference between good and bad options, for the matter of convenience, we strike them all out." Members of the committee also expressed concern about the number of options that expire worthless. It was stated: "If only 12 ½ percent are exercised, then the other 87 ½ percent of the people who bought options have thrown money away?" The reply was, "No sir. If you insured your house against fire and it didn't burn down you would not say that you had thrown away your insurance premium." The committee initially saw expired options solely as a monetary loss rather that a means of insurance against potential loss.

This argument convinced the committee that options have economic value and when properly used, options can be valuable investment tools. The options business survived the hearings and the SEC assumed regulating authority under the Securities and Exchange Act of 1934. The SEC still regulates the options industry today.

What is an Option?

An option is a contract that derives its value from an underlying asset. That contract either gives the owner the right to buy the asset (call option) or the right to sell the asset (put option) at a predetermined price and within some predetermined time frame.

The key idea here is that the owner of an option has a right, not an obligation. If the owner of the option does not exercise this right before the predetermined time, then the option and the opportunity to exercise it cease to exist, the option expires.

Seller (Writer)

On the other hand, the seller (writer) of an option is obligated to fulfill the obligations (requirements) of the contract if the option is exercised.

In the case of a call option on stock, the seller (writer) has given someone the right to buy the underlying asset. The seller of the call option will be obligated to sell the stock to the call option owner if the option is exercised. The owner of the options literally has the right to CALL the stock from you.

With a put option on a stock, the seller of the put option has given the right to sell that stock to another party. The seller of the put option is therefore obligated to buy the stock from the put option owner if the option is exercised. The owner of the options literally has the right to PUT the stock to you.

Option Examples

An option is a derivative. It derives or gets its value from an underlying asset. We are already familiar with them. Did you know that you are using a form of options as part of your daily life? Have you purchased insurance as a safeguard against a fire in your home, a crash in your car, or large medical bills? Do you pay a premium for your house, auto, and medical insurance? Then you have purchased a type of option. The fact is, options are a part of our everyday life, and have valuable application in our trading and investing.

Auto insurance, health insurance, and homeowner's insurance are all examples of put options. These options transfer the risk of loss from the owner of an asset to the writer (seller) of the put. Insurance companies are basically put option dealers.

Leverage

Leverage is the term used to describe the profit or loss potential when a small amount of money controls a large amount of money. The owner of one call option has the upside potential of 100 shares by investing a smaller amount of money rather than purchasing the stock outright. If there is a 10% rise in the stock, the option can double in value.

A word of caution: leverage also increases our risk. A 10% decline in the stock can result in the total loss of what we paid for an option.

Example

Purchase100 shares stock @ $32 for a cost of $3,200.00. If the stock rises from $32 to $42 you would have a $1000 gain or a 31% increase.
OR
Control 100 shares of stock by purchasing the option at a premium of $3 per share for a cost of $300 (1 contract x 100 shares x $3 premium = $300). If the option premium rose from $3 to $11, the original cost was $300 and it is now worth $1100. You have an $800 profit, but a 266% return!

When comparing the stock purchase to the option purchase, your stock purchase will have a moderately high dollar profit. But your option purchase will have a significantly higher percentage return.

Diversification of Options

• The possible payoff of options can make them very appealing – even seductive – for many investors.
• Those potential returns come from leverage.
• That leverage can also bring greater risk.

A ten percent increase in the underlying asset can potentially double your money in the options market. On the other hand, a ten percent loss in the underlying asset and you could go broke. Too many amateur investors or beginning traders do not take enough time to think about the potential downside before jumping in with leverage.

In the end it is all about control and choice. By having knowledge of options we are no longer limited to the buy and hope strategy. We can now make money in any type of market situation. We can be very aggressive or we can be conservative depending on our investing personality and objectives. There are several strategies you can implement with options. They can be broken down into basically two groups: trading strategies and investing strategies. Since the primary focus here will be on investing strategies, let's take a look at the breakdowns to get the big picture.

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Secret Head And Shoulder Pattern

Secret Head And Shoulder Pattern

-Initiated by the uptrend
-There are 3 pieces top
-Peak of the middle called the Head
Peak left-called left shoulder
Peak-called right of right shoulder
-Top of head should be higher among the three
-The line that connects "the two lowest point in the formation" called Neckline
-The closing price below the neckline is a validation.
-Target is determined based on the projected closing "the vertical distance the top of head to the neckline".

Ideal volume on the pattern Had And Shoulder
-Volume on Head should be thinner than left shoulder
-Most importantly, the volume on the right shoulder is the thinnest volume when compared to the head or left shoulder
-Volume increases during breakout
-Volume thinning when (if it occurs) pullback
-Volume again increased during continued downtrends after pullback.

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Head And Shoulder JSX.JK (IHSG)

Head and shoulders

Head and Shoulders pattern is one of the patterns reversal most popular and reliable. Head and shoulders pattern is the parent of the other patterns within patterns charts. Head and shoulders many technical experts say the pattern has the strongest and highest accuracy.
Figure above shows JSX.jk (JCI) was formed head and shoulders pattern which is initially formed from a up trending charts. The Basics (A, C) and peak (B, D) looks more and more high (higher lows and higher-high). Until the uptrend seen here is still normal, then gradually began to show signs of losing momentum since the last peak (F) is not able to reach the previous peak level (D). Peak B is called the left shoulder, peak D is higher referred to as the head, was the top F is called right shoulder. Straight line drawn by connecting points C and E is called the Neckline. Notice in the image above JCI (JSX.jk) shows that has not penetrated Neckline (position 2288.5), likely a few more days will happen efflux neckline line. If it happens the neckline line penetration, then the reversal signal is said to have a validation. Furthermore the minimum price objective is often called the target can be determined. The trick is to project the "vertical distance between peaks Head (D) with a neckline" to "breakout point on the neckline, looks at the position of the target 2016.33.

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Run Away Gap

SUMMARY GAP RUN AWAY
Run away gap represented an escape gap (run away) in the middle of an ongoing trend, a marked increase in the intensity of these trends. Sometimes Run away gap can also be both a significant level of penetration in a chart. Volume of the support gap-up or gap-down on the run away of this gap must be increased significantly.
As a contradiction, this gap can be a sign of the phase distribution of the so-called selling climax (if gap-down), or the end of the accumulation phase is called buying climax (if gap-up). Because of the volume that accompanied this gap and thereafter it is important to watch to not get caught. If this gap is not supported by the volume in question, and the closing price of the next session or a few days later to cover the gap the gap, then this gives the sign of reversal (the Exhaustion gap, which I will discuss in the next post).
 Picture above the stock AMAZON.COM (AMZN) 23-10-09 On the run away has been supported with a gap is a significant increase in volume.
Support at $ 110 and new Trendline also formed at the same time the New Support and the closing price on the date of 25-11-09 could be detained by resistance
at $ 135. If prices penetrate resistance is meant, then it is the entrance to buy AMZN stock where the price rise will likely continue relly that was delayed.
Disclaimer! decision to buy or sell shares or other intrument is the responsibility of each individual, traders and investors that this analysis is only just learning.

Happy Trading

GNR 178

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BREAK AWAY GAP

SUMMARY OF BREAKS AWAY GAP
Breaks away this gap is said to be a solid gap in the break away (break away) from the critical level in a charts, such as the level of support, resistnace, trendline, or the channel line completion stage of formation of a chart Patterns. Because of this gap should be monitored as a signal bullish or bearish signal is important. Break away gap is often the first sign of a price movement of a larger (relly) toward the direction of the gap occurs
Break away gap is also easily recognizable only because of the significant level of penetration, the gap is generally supported by a significant increase in the volume, and the gap is rarely closed the gap again. At the Break away gap that leads to the (gap-up) will form a crucial support line for the note. Although there is little price possible early opening corrected the next day because the action of profit-taking, support should not be impenetrable, or at least the price should be close higher against the previous day's closing price.
Break away gap while downward (gap-down) will form a crucial line of resistance. Although there is a possibility that prices will rise a little early in the opening of the next day because of impulse buying. However, resistance lines should not be impenetrable, or at least the price closed lower against the previous closing price.
In the above picture microsoft stock (MSFT) on 23-11-09 there is Break away gaps and support a very significant volume. New Support also had penetrated the date 25-11-09, and followed by volume began to decline along with the transpiration New Support. To buy this stock price we wait until prices are able to penetrate the Resistance $ 30.03. So thus likely price rises to continue its relly.
Disclaimer! decision to buy or sell is the responsibility of each individual whether an investor or trader, and only be an analysis of learning alone.

Happy Trading

GNR178

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Stock Analysis TINS (tin)

Shares TINS (tin), if we look at the picture above graph TINS 2 times a double top. In mid-May is the peak-to-1 and then formed again into the 2nd peak in mid-August this was the first double top and a moment later corrected the price rose again slightly in early October peak

to 1 minor form and a few days later formed another minor peak to lower prices and 2 could penetrate the support in 2100 which then support becomes new resistance if we look at the graph above prices already twice failed to penetrate the new resistance, there is a possibility prices will go back weakened and the target price will go to 1700 served until 1690 as shown in the image above.

Volume is very ideal for this stock (rise and fall)

Disclaimer regarding all acts with good decision in terms of selling and buying the sole responsibility of each individual, this analysis is learning and not merely for the recommendation to sell or buy the stock.

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Franchise Fee And Royalty Fee

When buying a franchise, you have to spend some money or often called fee. General there are two types of fees: a franchise fee and royalty fee.Fee besides these two, there is the added Franchisor marketing or advertising fees. Let us one by one surgeon.
Franchise fee is the fee you paid to buy the brand that franchisor.Fee normally wear because you bought a Franchisor experience over many years so you do not need to repeat the failures that had ever happened. Any brand prices are not cheap. Coca-Cola brand, for example, is more expensive than the entire capitalization of its physical assets.
Therefore, do not Grumble if the fee is quite expensive, depending on the brand, big name, and Franchisor of business experience that you select. This fee is generally valid for the period of 5 years and thereafter may be extended. Ask a franchise fee of 5 years after the first period ends if you want to extend.
The next fee is a royalty fee. This fee is paid every month. Most of the Franchisor wearing this fee from gross sales per month and several others of gross sales after taxes. Generally, these fees are used to support business frsnchisee Franchisor.
Support can be given control of the quality and national marketing support if Franchisor does not charge a monthly marketing fee.
The amount of this fee varies, depending on the category of business. In the food business, general, ranges from 3.5% -5%, while the range of educational services 10%.
Marketing or advertising fee is a fee levied Franchisor to conduct joint promotions. The amount also varies. But certainly, if the Franchisor picked this fee, ask what kind of promotional programs that do. If it is not clear, you are obliged to question these funds for anything.
The third addition to the above fees, there are other costs you would have to spend, the investment cost. This fee is used to buy assets for a sale. These assets belong to you completely. If things happen that are not desirable, such as business bankruptcy, these assets can be sold for some money you can go back even though the amount will decrease.
Franchisor have standards associated with the use of assets. There Franchisor who require the franchisee to buy these assets from him, but some are not, provided in accordance with the specifications provided. Most of the Franchisor assists in Preparing the opening franchisee outlets by providing assistance so that the asset purchase franchisee hassle.
Because the franchise is the general retail business, which sells directly to consumers, the form of his outlets are usually in the form of store.
When purchased the assets of the business attributes and identity, such as boards and neon box brands. In addition, tools and equipment necessary for the sale, such as tables, chairs, cash registers, and many more. Make sure you are sufficient funds to finance all the investment needed.
Should, in addition to information, general BO (business opportunity) does not apply BO fee. BO ekspilsit usually apply business packages to choose from.
In this package, including all tools and equipment and assets needed to be ready to operate outlets. Because this package usually includes a profit for the owners BO, measure whether the assets you receive fair and the value you paid are not too expensive. Whereas in the case of royalty fees, which have picked BO, but some do not. Amount is usually lower than those imposed in the franchise business.
NOTE!
Franchise fee = fee to buy a brand, a big name, and the experience of Franchisor
Royalty fee = monthly fee of gross sales per month to finance the Franchisor support the franchisee
Marketing / advertising fee = monthly fee to do joint promotions.
Investment = the funds to purchase assets for a sale.
Contribute a better translation.

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Stock Analysis UNTR

Ascending Triangle Saham UNTR

Ascending Triangle is another variant in the Continuation Patterns belonging to the group Triangles pattern,
but this pattern did not like Symmetrical Triangle neutral (depending on the trend that started).
Signal Ascending Triangle pattern is still giving bullish sign without being influenced by the trend of previous good --- uptend or downtrends.

These patterns can be seen in the image above is for UNTR.Garis shares (resistance) is horizontal, the bottom line (trendline) of increasing, flanked by fluctuations in the price movements increasingly .Formation  to belittle form peaks (1.3, 5) the same height, but the valleys (2,4,6) a higher and higher, indicating that the bulls are more aggressive and in control collision.Although require only a minimum of four reversal points (1,2,3, and 4) to establish this pattern, sometimes there are two additional reverse (5 and 6) prior to the closing of the above lines breakout.Price resistance required as validation of targets these .then pattern can be determined based on a vertical projection of the high range "point to line 2 resistance" to the point of breakout as shown above.

Mostly the volume will be thinned out as the formation of the formation took place, followed at breakout.In spite of surge to strengthen the bullish signal, traders can consider the volume that accompanied the fluctuating price movements in this formation, which should increase when prices go up and thinned when it comes down.
In the picture above chance UNTR shares rose to 19,000 + -, which is still going to form some price fluctuations swing 3 swing expected to require longer to breakout (through resistance).
Resistance's at 16,000 + - if the price was able to penetrate resistance's a strong signal to enter or buy this stock and see if there is a surge in volume is likely to achieve its target price on the 19,000 + -.
Disclaimer of all the decisions related to buying or selling is the responsibility of each individual and traders which is a mere analysis only.

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