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Truth of Option Trade: 10 Ways to Move From Risk to Profits

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option-trade-profit

Stock options are not lottery tickets, chips in a casino, or a path to easy street. They are tools for the transference of risk from one person to the other. When trading options you must understand where the risk lies in your specific option play and what  the odds are of you winning. The Black-Scholes option pricing model does an excellent job of pricing in known variables of time and volatility into options. Implied volatility does not predict direction of the movement it predicts the amount of movement. The edge lies in three places #1 following the chart and trading in the direction of the trend #2 managing your risk on every trade allowing your wins to be bigger than your losses in the long term, and #3 having the discipline to follow your trading plan. Option trading is no different than any other kind of trading, just more leverage and speed of percentage movement.

  1. The first question to ask in any option trade is how much of my capital could I lose in the worst case scenario not how much can I make.
  2. Long options are tools that can be used to create asymmetric trades with a built in downside and unlimited upside.
  3. Short options should only be sold when the probabilities are deeply in your favor that they will expire worthless, also a small hedge can pay for itself in the long run.
  4. Understand that in long options you have to overcome the time priced into the premium to be profitable even if you are right on the direction of the move.
  5. Long  weekly deep-in-the-money options can be used like stock with much less out lay of capital.
  6. The reason that deeper in the money options have so little time and volatility priced in is becasue you are ensuring someones profits in that stock. That is where the risk is:intrinsic value, and that risk is on the buyer.
  7. When you buy out-of-the-money options understand that you must be right about direction, time period of move, and amount of move to make money. Also understand this is already priced in.
  8. When trading a high volatility event that price move will be priced into the option, after the event the option price will remove that volatility value and the option value will collapse. You can only make money through those events with options if the increase in intrinsic value increases enough to replace the vega value that comes out.
  9. Only trade in options with high volume so you do not lose a large amount of money on the bid/ask spread when entering and exiting trades.
  10. When used correctly options can be tools for managing risk, used incorrectly they can blow up your account. I suggest never risking more than 1% of your trading capital on any one option trade.
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TRY TO KNOW SOMETHING ABOUT MARKET…

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market is always rightRemember that the stock market is always right and price is the only reality in trading. In case if you want to make money in any market, you need to mirror what the market is doing. On the other hand if the market is going down and you are long, the market is right and you are wrong. Moreover if the stock market is going up and you are short, the market is right and you are wrong.

Other things being equal in stature, the longer you stay right with the stock market, the more money you will make. On the other side of the coin the longer you stay wrong with the stock market, the more money you will lose.

 

 

up-down

In general every market or stock that goes up will go down and most markets or stocks that have gone down, will go up. The general thumb rule in this regard is the more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also termed as “the trend always changes rule.“

 

 

 

 

 

looking for resone

In case if you are looking for “reasons” that stocks or markets make large directional moves, you will probably never know for certain. Since we are pretty much dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move.

A huge blunder most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only mandatory to know that markets are moving – not why they are moving. In an ideal scenario stock market winners only care about direction and duration, while market losers are obsessed with the whys.

 

 

newsStock markets normally move in advance of news or supportive fundamentals – sometimes months in advance. In case if you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late.

You required to get positioned before the largest directional trend move takes place. Theoretically speaking the market reaction to good or bad news in a bull market will be positive more often than not. On the other hand the market reaction to good or bad news in a bear market will be negative more often than not.

 

Improving Trading – 4 Points

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Improving Trading – 4 Points

  • Eliminate the potential that the market will disappoint you, think probabilities before executing a trade.
  • Don’t look at a trade outcome as being right or wrong, but again in terms of probabilities
  • When a pattern you know presents itself, trade it, don’t think, just respect your stops.
  • When analyzing your trade, how much are you willing to put at risk to see if other market participants will come alongside your view. In other words, look first at the loss potential instead of focusing on gains.

Why 90% traders are losing Money…?

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losing moneyIt is far easier to funnel a vast amount of money from the masses to a few winners than for a few people to give out money to the majority.
Any given game there are few winners
So knowing that statistic, do you want to be in the majority or minority?

“Do the hard thing” ~Richard Dennis
They watch Blue Channels,They dont do Homework
They lack one or two of these four-Money, Mind, Method & Target

There is an important difference between being reactive and predictive. Trend traders never say “I think that market is going up so I’m going to buy it”. They buy when it goes up.
“The price is always right.”