Part II of Day Traders and Swing Traders and Options? Maybe!
Before every protective put trade it is possible to calculate
your anticipated maximum loss. Use the formula: (stock price
minus strike price) plus option price. For example, suppose you
will pay $30.00 for your stock, and you want no more than a $3.50
loss on the position. Then you would choose the $27.50 strike
put which costs $1.00. Following the formula, you take your
stock price ($30.00) and subtract the put’s strike price (27.50)
which leaves you $2.50. To this $2.50 loss, you then add the
amount you spent on the option ($1.00), which gives you a
combined, maximum loss of $3.50 for this position. You can set
your loss limit by the strike price of the put you buy and the
cost of the put. This formula will work every time. Remember,
stock loss, (stock price paid - strike price), plus option cost
(option price) equals maximum potential position loss.
The protective put strategy, when used correctly, will allow
investors to take advantage of the same opportunities that could
provide large potential gains, but without being exposed to the
extreme risks the position could potentially present. In these
scenarios, the protective put strategy deserves consideration.
For example, a stock in the process of a steep decline would be a
good opportunity to implement a protective put, when trying to
pick a bottom. Quite often, stocks experience bad news or break
down through a technical support level and trade down to seek a
new, lower trading range.
Everyone wants to find the bottom to buy and go long, catching
the technical rebound, or to start accumulating the stock at
lower levels for the longer term.
There is a potential for a very big reward if you pick the
“right” bottom. However, with the big potential gain comes the
big potential loss that is common in these types of risk/reward
scenarios. Here is a perfect opportunity to employ the protective
put strategy! It will provide protection against substantial
loss, while allowing room for potential gains if the stock should
bounce.
Remember, the protective put allows for a large potential upside
with a limited, fixed downside risk. If you feel that the stock
has bottomed out and is starting to consolidate, you purchase the
stock and then purchase the put at the same time as insurance
against further decline in the stock.
If you are right, and the stock runs back up, the stock profit
will well exceed the price paid for the put. Once the stock
trades back up, consolidates, and develops its new trading range,
the need for the protective put is over. At this time, if you
still like the stock and want to hold on to the long position,
you could always start selling calls against it.
Use the formula for maximum loss discussed earlier. Calculate the
loss in the stock and the amount you paid for the put and add
them together for your maximum loss in this position. The
protective put has limited your loss.
Maximum Loss = (Stock Price – Strike Price) + Option Price
This protection will save you enough money when you pick a false
(wrong) bottom that you may, if you like, try to pick the bottom
again at a lower point. The exhaustion scenario, as described
here, is a perfect opportunity to apply the protective put
strategy.
As seen with the exhaustion example, the protective put strategy
is best used in situations where the stock has a potential for an
aggressive upside move and the chance of a big downside move.
Another potential opportunity for using the protective put is in
combination with Technical Analysis. Technical Analysis is the
study of charts, indicators oscillators, etc. Charting has
proven to be reasonably accurate in forecasting future stock
movements.
Stocks travel in cycles that can and do form repetitious
patterns. These patterns are predictable and detectable by the
use of any number of charts, indicators and oscillators.
Although there are many, many forms and styles of technical
analysis, they all have several similarities. The one we want to
focus on is the technical “break-out.” A break-out is described
as a movement of the stock where its price trades quickly through
and beyond an obvious “technical resistance” or resistance point.
For a bullish breakout, this level is at the very top of its
present trading range. Once through that level, the stock is
considered to have “broken out” of its trading range and will now
often trade higher, and establish a new higher trading range.
The “break-out” is normally a rapid, large upward movement that
usually offers an outstanding potential return if identified
properly and acted upon in a timely fashion. However, if the
break-out fails, the stock could trade back down to the bottom of
the previous trading range.
If this were to happen, you would have incurred a large loss
because you would have bought at the upper end of the previous
trading range. As you can see the “break-out” scenario is an
opportunity that has large potential rewards but can on occasion,
have a large downside risk.
However, if you were to apply a protective put strategy with the
stock purchase, you can drastically limit your downside exposure.
For instance, say you were to buy the 65 strike put for $2.00.
If the stock trades up to $75.00, you would make $9.00 if done
naked but only make $7.00 if done with the protective put.
This difference is the cost of the put. This $2.00 investment is
more than worth it should the stock go down. If the break-out
turns out to be a “false” break-out and the stock reverses and
trades down, your 65 put will allow you to sell your stock out at
$65.00 minus the $2.00 you paid for the put. This limits your
loss to $3.00 instead of a potential $8.00 loss. This is a much
better risk/reward scenario.
Most professional traders, including day traders and swing
traders can reap huge rewards for the protective put strategy.
The reason is in how most traders attain profits and losses.
Normally, successful traders make a little money on a consistent
basis. They make a little bit day in and day out. But when it
comes to losses, they lose in large chunks. They spend a month
building up profits only to lose that money in one day usually in
one stock. If a trader could figure out how to avoid even a
handful of these large losses, his or her profitability would
soar. My answer is to start using the protective put when buying
on breakouts and when bottom fishing.
_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
Amazing Options Trading Strategies For Safer Investing
and Explosive Profits. Discover how to protect your
investments with the leveraged power of options. Step
by step video tutorials show you how. Click here now:
http://www.options-university.com
_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ |
Other Trading Tips Articles
Saab Withdraws International Trade Deal with Venezuela on Arms Early this month, Saab Group, which is the largest producer of defence in Sweden, announced its withdrawal from an international trade deal with Venezuela concerning weapons. It must be noted that the Swedish company used to be one of the major providers of weapons to the South American nation. However, Saab said that it could no longer continue ...10 High Octane Ways To Unleash Your Profits 1. Use more than one P.S. in your ad copy. It is one of the most read parts of any ad, so why not use two or three of them instead of one.2. Gain your visitors attention by telling them your problems. People like to hear about other people's problems because it takes away from their own.3. Create trust with your prospects by telli ...Burglar Alarms Think About it knowing about a burglar's three worst enemies -- light, time and noise -- can help you protect your home from crime. A burglar won't find your home an "easy mark" if he's forced to work in the light, if he has to take a lot of time breaking in, and if he can't work quietly."Case" Your Place Take the time to "case" y ...Fundamentals of Preparing an Effective Business Plan? Commencing a new business can be easy or difficult and the most essential step when starting a new business is to have an effective business plan. So the question arises, what actually is a Business Plan?A business plan includes an outline of the goals, expected expenditures, promotion materials and even the exit plan. As the business pro ...Deciding Between Long-Term and Short-Term Investments In an age when investments are more easily accessible by everyone, it can be difficult to decide what type of investment is best for your needs. Should you invest primarily in short-term investments that will yield results quickly, or would it be better to invest in long-term investments that will yield results farther down the road?Each ...Forex Trading Education Foreign Exchange (FOREX) Trading is the concurrent buying and trading of different currencies. The industry is very fast paced with sudden changes happening everyday. There are a lot of factors that affect the market value of each currency, a lot of analysis and computation involved to try to make accurate predictions of the next direction the m ...Part II of Day Traders and Swing Traders and Options? Maybe! Before every protective put trade it is possible to calculate your anticipated maximum loss. Use the formula: (stock price minus strike price) plus option price. For example, suppose you will pay $30.00 for your stock, and you want no more than a $3.50 loss on the position. Then you would choose the $27.50 strike put which ...Tips and Techniques to Keep Your Investments Organized “You have to earn money the hard way. Because no-one will serve it up to you on a silver platter.” -Gordon WuMonitoring your investments is extremely important and one of the key components to establishing a fruitful and secure investment portfolio. Many people get involved with investing and when the novelty wears off, they simply forge ...Bicarbonate of Soda: The Magic Ingredient? For well over a century professional cooks have known that adding bicarbonate of soda to cooking vegetables enhances their color; greens turn bright green and old carrots look like new.It’s a chef’s trick that has crept into some recipe collections and often appears in lists of cooking tips and hints. It is not a good practice.The ...Psychology - How to Reduce Negative Thoughts Relating to Trading? The thinking process of the brain relating to the psychology of trading involves:-- Beliefs -- Feelings -- Values -- Dispositions and -- FaithThe positive or negative energy brings power to a person's actions, which ultimately determines whether a person is a winner or a ...African Travel Tips For Visiting Zimbabwe Zimbabwe's biggest draw is undoubtedly the majestic Victoria Falls, one of the seven natural wonders of the world. But the country also has other natural and historical advantages to captivate travellers and beckon them to return. Wildlife, fish and birds abound including a number of unique, rare and endangered species making game viewing, bird ...American Home Builder Tips; Senior Baby Boomer Market Although they're loathe to admit it, Baby Boomers are rapidly becoming senior citizens. However, just has been the case throughout their lives, the fact that Boomers are entering their golden years has made the senior market the fastest segment of the real estate market today. If you're a builder, this can mean more sales for you, but you'll hav ...Energies Update – Bank Profit or Wait for New Highs? If you have followed these energy updates over the last few days you will have seen our analysis that got us in at the bottom of the channel and has produced great gains.Unleaded gas has moved to the top of the channel and crude has also moved higher at a slower rate.The question now in unleaded gas is:Are we set for new hig ...The Email Jungle - 10 Tactics To Help You Tame Your Email Problems Can’t cope with the e-mail overload? Having nightmares about e-mails stalking you through the corporate jungle? Waking in the middle of the night with the sweats because you accidentally sent that dirty joke to your boss instead of your work mate?Don’t despair! Here are 10 tips that will restore your sanity, improve your reput ...Screenwriting Competition: Lord of War (2005) Deconstructed From our deconstruction of hundreds of Hollywood blockbusters....The Hero's Journey is the template upon which the vast majority of successful stories and Hollywood blockbusters are based upon. In fact, ALL of the Hollywood movies we have deconstructed are based on this template.Understanding this template is a priority for stor ...How Sports Arbitrage Trading Can Make You Money So you are looking for a way to make money. Sports arbitrage trading is one of the easiest ways one can earn unlimited amounts of money working any time of the day from anywhere in the world. Why is it so easy? Simple with arbitrage trading you CANNOT lose. Imagine betting $200 on something you know you are guaranteed to win ...A Real CRM Strategy or Just Tracking Customers? Exactly what is CRMThe idea itself is nothing new; its roots have been around since trading began. The principle of looking after your customers so that they come back regularly is, after all, merely the basis of good trading. In an increasingly competitive commercial world however, strong customer relationships take on an increasing impo ...Investment Strategies – Choosing Between the Specialist and the Generalist It is common knowledge that in business you need to focus. How would this -- focus -- relate to different investment strategies?To grow into a successful stock trader you do not need an academic background, although it might help. Imagine that you start concentrating on one stock, for example an oil company. This is not the easiest choice ...The Best Free Currency Trading Courses If you are just starting out in currency trading, or looking to sharpen your trading skills, there are plenty of currency trading courses to choose from - and this article will help you find the information you need to make big profits.One advantage of the Internet, is that most of the information is available free of charge – once you kn ...Simple Techniques For Mastering The Best Trading Systems That Turns Big Profits Once you`ve developed the best trading systems that accurately reflects your goals, and can respond to any market situation with clear actions, you are ready to take the next step in your trading. These are some principals and techniques that I have found to be indispensable in my trading career. Once you`ve begun using them, I`m sure you`ll fee ...Preserve Equity, Build for the Future Using a 1031 Tax Exchange Thinking of trading up on an investment resort property? If so, look into 1031 Tax Exchanges (based on IRS Code Section 1031), which allow taxpayers to defer taxes on capital gains resulting from the sale of investment real estate, often a sizable sum since combined Federal and State taxes can run as high as 38 percent.With an exchange, o ...Online Stock Trading Games The best way to learn online stock trading is to actually do it - in a game, that is. Before you invest top dollar in the real deal, try online stock trading games first. These games simulate the stock market very realistically. You can develop a lot of investor insight and tactics just from losing and winning.Benefits of Online Stock Tra ...Ten Tips to Build a Culture of Inspirational Leadership Leadership, leadership development and leadership training are “Hot” issues in today’s business world. A recent Internet search uncovered over 44 million hits on leadership, over 20 million hits on leadership development and 15.7 million on leadership training. Visiting an Internet bookstore revealed similar interest with almost 18,000 titles ...Former Enron Chief - Kenneth Lay, et al - Society's Lesson Lay 'Shocked' by Enron Verdict—Former Enron Chiefs Convicted in One of the Biggest Business Scandals in U.S. History--headline for one of the first articles written about the verdict of former Enron Chiefs Kenneth Lay and Jeffrey Skilling By Kristen Hays, the associated press, jumps off the page with stark clarity.One wonders how either ...Why Splits Are Exciting and Profitable One thing that generally gets us smiling is when we have a mess of good companies doing splits when the overall market tone stinks. Why? Well think about it for a minute. If XYZ announces that they are going to do a 2 for 1 split and the stock is at 100, it stands to reason that they will be trading in the 50's in the near future. But, if befor ...
|
