Posts Tagged ‘stock trading’
The Calendar Spread is an option cash-flow technique that is loved by both pro option traders as well as the retail crowd to create a consistent monthly income.
The calendar spread is a theta trade – an option trade that benefits and generates profit – from the fact that options are a decaying asset. As time goes by, options decay – and the value that was initially in the option that was sold evaporates – leaving cash in the calendar spread traders pocket.
To construct a calendar spread trade, we need to sell a closest month option while buying a later month option at the identical strike price. During the trade, the time premium in the closer month option (the one that was sold) loses it’s value at a much brisker rate than the option that was bought. This difference is how the profit is generated.
Here’s a sampling of a calendar spread position: Sell 10 April 35 put. Purchase 10 May 35 put.
In the sample trade given, the trade was built using option strikes on conjoining months – however – this isn’t necessary. Calendar spread trades can be created using options with varying lengths between them.
For example, rather than constructing a calendar spread using Aug and Sept month options, it could be created using a Aug month option and an Oct month option – or a Aug month option an a Nov month option.
Usually this strategy is employed when the person trading it has a neutral outlook on the the vehicle being traded. These trades cal also be used in a more speculative way however – where the trader would place the calendar spread at the strike price he or she believes the underlying vehicle will be trading at on expiration day.
When you talk with some option traders, some will tell you they prefer the calendar spread strategy because they believe they are easier to manage than some of the other strategies like the iron condor, credit spread, or the butterfly spread. Regardless, the calendar spread is a great strategy to learn and have ready to use in your ‘option trading toolbox’.
Looking for more info on how to go about correctly trading the Calendar Spread, then visit www.calendarspread.org to find the best strategies – as well as mor info on trading the Credit Spread .
A preferred non directional trading strategy is the option Vertical Spread. This strategy is one of the easier option spreads to comprehend for newer option traders. In addition it is simple to place and there is not much to do management wise while the trade is in play – which allows the vertical spread trader to be freed from their trading chair and not have to watch every up tick and down that the market makes all day.
The vertical spread trade is a basic building block of many if not most other more complex option trading strategies such as the iron condor spread, the butterfly, and the double diagonal trade. For example, the butterfly is created using one credit spread and one debit spread, while the iron condor is made up from two credit spreads, one on either side of where the underlying is currently trading at.
Traders like to sell these vertical spreads because when invested correctly the trades have a good probability of success and can allow the investor to still profit and ‘win’ without having to be exactly right with priced direction and movement. When sold correctly, credit spreads can bring the trader a good monthly return while the individual actually placing the trade could be incorrect with their belief and ‘prediction’ of where the stock market would be heading next.
For example let’s say our trader is bearish on the stock XYZ. XYZ is trading at a recent high and our trader believes that the stock will not move any higher over the next 30 days. So, he sells a bear call spread – a call option vertical spread that benefits in a neutral to bearish scenario.
If the stock does move down as our trader anticipates, this spread trade wins. If the stock does absolutely nothing and just remains trading at it’s current level, this trade wins. Even if the stock moves up against our traders outlook, this trade can win just as long as it doesn’t move up too much. The only way this position will lose money is if the stock moves too high too fast – in which case the trade could still be profitable just as long as our trader knows how to properly manage and adjust the position.
Looking for specific instructions on how to trade the vertical spread, then visit www.verticalspread.net to find the best tips and step by step details on trading this strategy and the credit spread for monthly income.
There are two faces to the iron condor. And thankfully for all us iron condor traders – neither face belongs to Barbara Streisand. However, on second thought – it might be even worse…
The first face is the one most new traders are introduced to. When the iron condor and the rookie option trader first meet – usually the picture that is painted of the iron condor is one of magnificence – grandeur – a wonderful, little known, very difficult to lose from investment secret that has been hidden from the general public by market makers who didn’t want to let the cat out of the bag. A trade that requires just a few minutes per month to manage – that can kick off incredible returns of over ten percent per month, and on and on and on.
And so it goes with most new option traders who discover the iron condor. They fall completely in love with it – and having been there once myself, I certainly can’t blame them. It’s a magical trade that seems way too good to be true.
And sadly, sooner or later (mostly sooner) they discover that it IS too good to be true.
Sort of.
You see – in actuality, the iron condor really is a pretty amazing trade. One that can take a very small amount of time to manage – and yes, one that can spit out some pretty incredible returns.
It’s that most new option traders don’t take the time to really learn and understand this strategy. If they did, they would become aware that the trade has two faces – or two sides if you will – and one of those sides can be quite dangerous – that if is not managed and handled correctly can deliver some pretty ugly losses to a trading account.
Iron condors have a high probability of success – however that high probability of success comes at a steep price – which is an absolutely horrendous risk to reward ratio. And if not properly managed – and if the one trading them has no knowledge of the available iron condor adjustments – the returns that the iron condor can produce can be completely obliterated by just one bad month.
BUT – it doesn’t have to be this way. The secret to success in trading this strategy is to simply be aware of the iron condor’s potential danger – and then know how to correctly manage and adjust them so when those rare ugly months come along where the condor shows it’s nasty side – we know exactly what to do and we have a plan in place to adjust our way out of danger. This is the MOST important thing to learn about trading this strategy: how to make proper iron condor adjustments. For long term reliable profits and consistent success – this is the KEY.
Looking to find the best deal on iron condor adjustments, then visit www.ironcondoradjustments.com to find the best training on how to trade the iron condor for monthly income.