Options trading basic

Options trading basic

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Article #1

First Steps in Trading Futures Market

  1. Patience for a real clear situation.
  2. Trends and sound fundamentals are almost perfect market tone.
  3. Calculate risk reward: at least a 1 to 3 ratio.
  4. Place stops beyond some technical barrier, a hard to reach spot.

Follow These Technical Indicators

  1. ADX: Average Directional Movement Index.
  2. RSI: Relative Strength Index.
  3. Moving Averages.
  4. Stochastics.
  5. Key Reversals.

Pitfalls to Watch For in Futures Market

  1. Risk control, poor money management, and too many correlated trades.
  2. Make Rational Bets.
  3. Don't Wish, Don't Hope. Diagnose the process of trading.
  4. Cut losses. Ride winners. Close positions you are not comfortable with.
  5. Don't over trade.
  6. Expect the unexpected or the extreme. Don't be too tied to the past.
  7. Use different strategies so you don't have all your orders going in at one point.
  8. Buy on break outs: New Highs! New Lows!
  9. If there is a major trend, your approach should assure that you get in that trend (sooner or later) depending on how the market reacts to news.
  10. Decrease your trading volume when you trade poorly.
  11. Increase your trading volume when you trade well.
*Note:

'Futures Market 101'

Source: https://www.cannontrading.com/tools/education-futures-market-101



Article #1

Investors buy and sell options just like stocks. There are two basic types of options:

  • The call option
  • The put option

The Call Option

You would buy a call option if you anticipated the price of the underlying security was going to rise before the option reached expiration.

For example:

Company XYZ in trading at per share and you believe the stock is headed up. You could buy shares of the stock or you could buy a call option. Say a call option that gives you the right, but not the obligation, to buy 100 shares of XYZ anytime in the next 90 days for per share could be purchased for 0.

If you are right and the stock rises to per share before option expires, you could exercise your option and buy 100 shares at per share and sell them for an immediate profit of per share ( - = - for the option = per share profit).

If you had figured wrong and the stock went nowhere or fell from the original per share to per share, you would simply let the option expire and suffer only a 0 loss (the cost of the option).

The Put Option

You would buy a put option if you felt the price of a stock was going down before the option reached expiration.

You could purchase a put option at per share for 0 (or per share), which would give you the right to sell 100 shares of XYZ at per share.

If the stock drops to per share, you could, in theory buy 100 shares on the open market for per share, then exercise you put option giving you the right to sell the stock at per share – making a per share profit, minus the option cost.

As a practical matter, you would trade your put option, which would now be worth something close to per share or 0.

Basic Option Facts

  • Options are quoted in per share prices, but only sold in 100 share lots. For example, a call option might be quoted at , but you would pay 0 because options are always sold in 100-share lots.
  • The Strike Price (or Exercise Price) is price the underlying security can be bought or sold for as detailed in the option contract. You identify options by the month they expire, whether they are a put or call option, and the strike price. For example, an “XYZ April25 Call” would be a call option on XYZ stock with a strike price of 25 that expires in April.
  • The Expiration Date is the month in which the option expires. All options expire on the third Friday of the month unless that Friday is a holiday, then the options expire on Thursday.

Source: https://www.thebalance.com/options-understanding-the-basics-3140542



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