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A Step-by-Step Plan and Strategy for Buying Stock
Options!
Fellow Investors & Traders,
First of all "Congratulations". What you are about to find out in
these next few pages of information is exactly the same methods and
process that I use to make profits from buying “Stock Options” just
about every week!!
The
first thing that you should do is take a little time to read the
“FREE” online classes that I recommended at www.888options.com. For now just concentrate on the
“Basic” class to get a understanding of what
stock options are, and how they work.
As you have more time you can read through the other FREE
classes and information at your convenience and learn some of the
more advanced strategies.
For
now, we’ll keep it “simple” and to the point! Don’t try to get fancy with any of
the complicated strategies such as “straddles”, “butterfly” and
“credit spreads”!
Just
concentrate on the basic strategy of buying a simple “CALL” option or
a simple “PUT” option. Those
other strategies are much more complex and take an extreme amount of
understanding in order to make them profitable!
Your
goal is to “Keep It Simple”, do your research, buy your stock options
ahead of any significant up-coming events, then take your profits
(close out your positions) to make your “CALL” or “PUT” options
successful.
So….lets get started!
The
simple strategy that I’m going to talk about in this step-by-step
plan is how to buy a “Call” option (which gives you the “right”, but
not the obligation to “buy” the stock at a particular price for a
specific amount of time)! The
other simple strategy is how to buy a “PUT” option (which gives you the
“right”, but not the obligation to “Sell” the stock at a particular
price for a specific amount of time.
Both of these type options are explained in the FREE Basic
class as you have read, so I’m not going to go over the details, but
let me know if you have any questions after completing this
step-by-step plan and I’ll be happy to help you out any way I
can.
Step 1.
Print out and read my special strategy report “One of The Best
Stock Market Strategies”!
You can find it in the same section where you clicked on this
step-by-step plan. Read it –
follow the advice and try it out on a few papertrade
test scenarios and see how your profits add up.
Step 2.
One of the most important tools you will need is a good Stock Price
Calculation Program to help you get prepared to understand the
calculations for how much your stock options
will costs, how much profit you can make and also how to figure when
to exit a position if your plan doesn’t work out the way you intend.
I’ve
developed a great calculation program that handles all of the tough
calculations and makes it really easy to see all of the different
calculations quickly and easily for both regular stocks and “stock
options”. I highly recommend
you download a Free Trial version – try it out and see first hand how easy the program works! Everything is included and there
are help screens to tell you exactly what to do.
Step 3.
You need to have a brokerage account in order to buy stocks or stock
options, so you need to get that setup as soon as possible. My favorite brokerage company is “OptionsXpress.com.
I use that brokerage account for most of my major transactions. I
think you will also find it to easy to
manage and understand. They also have quite a few additional features
to help you gain more knowledge and understanding about stock
options. Their fee costs are
one of the lowest for stock option transactions.
One of
the nice features is the “Funds Transfer” function that you can setup
to transfer funds between your bank account and your brokerage
account. Once you set it up you will be able to transfer funds in one
business day and see the funds in your account the next day – and
also transfer funds from your brokerage account back to your bank
account for funds to be available the next business day. The instructions are easy to
understand and follow, so you shouldn’t have any problem. Of course there are several other
brokerage firms that you can choose from, but if you want a
recommendation – I would go with OptionsXpress.com!
Step 4. Fund your account. After you
have your brokerage account setup -- transfer some investment money
to your brokerage account to use for buying your stock options. You can start with as little as
$150 (that is what I would recommend to start with, you certainly can
start with more
-- $500 - $5000 would allow you to buy a larger
amount), but $150 would be just fine! After you have transferred your
funds into your account, normally it takes 2 business days for the
funds to be available for stock option buying. This is standard, other brokerage
firms take longer to make the funds available, so I’m just making you
aware now – it’s no big deal…this will give some extra time to look
for buying opportunities for those 2 days!
Step 5. Look for buying opportunities. This is where the “rubber meets the
road”. Now you have got everything in place to start preparing to
find good solid buying opportunities. Look for companies that are
leaders in their industry, have a great
product or service that businesses want and need. Doing the research
to find out when these companies are due to report earnings and
preparing to make a buy on one of the listed stock options for the
company are the important tasks in this step.
How to find the right stock option opportunity to buy:
Not
every company will offer stock options or have stock options
available on the open market for individual investors to buy. The
best approach is to look at some of the major corporations (good
solid companies) that have been around for years and have a good
solid product/service that businesses have used and will continue to
use in the future. If you need
a start, you can see my “Top 2011 Investments List” for some ideas.
Here is
the link: http://www.newstocksoftware.com/Top_2012_Invstmnts.htm
Of
course you can choose others beside the ones listed, but my Top 2012
Investments list are the stocks that I regularly pick from to buy
their stock options and follow
on a weekly basis.
When
you are first starting out, I would recommend you choose no more than
“5” stocks to track and research.
Any more than that can get to be time consuming and you don’t
want to have so many that you spend to much time trying to keep up with
everything. Keep it simple –
look for one or two opportunities a week and you will do fine!
How do you pick which stock option to buy?
This is
a question that you will ask yourself just about every week! The good
thing about stock options is that you have “multiple” stock options
to choose from. The normal
stock shares have “1” company stock symbol assigned to the company!
The stock options for the company are assigned for each “month” at
different prices referred to as a “Strike Price”. The first thing you should do is
decide which company you want to invest. Then do some research and
find out if there are any significant upcoming events (such as
company earnings) and also read the latest news items to help you
determine which way the stock price could potentially move in the
next few days.
Go to
the “Quote” section after you log into your online account and look
up the “CHAIN” view to see the available stock option symbols
associated with the available “Strike Prices”! The way I pick which option to buy
is to first decide if I’m going to buy a “CALL” option (if I think
the stock price will be going up in price) or if I’m going to buy a
“PUT” option (if I think the stock price will be going down in
price). Then I generally buy
the stock option with the ‘Strike Price” closest to the actual stock
price. Normally there will be more price movement with stock options
that are near the actual stock price, which are referred to as (in-the-money
or near-the-money).
If
there is a major upcoming event (like the company earnings
report), I usually look to buy
the “CALL” options for that stock because I am anticipating the stock
price will be heading higher – and the stock options that I plan to
buy should also go up in value. If I think the stock price will be
heading down, I buy one of the “PUT” options. That’s my strategy and
it works!
Once
you have some practice this will become an easy exercise and your
potential profits can be generated quickly as the stock price moves
higher when you have a “CALL” option position at the right time!
Staying with the “CALL” option strategy as you first start buying
stock options
-- look for opportunities that could potentially be
heading higher and buy the “CALL” options to capitalize on the price
rise, then take your profits before the options expire!!! That is why you buy the stock
options!
Remember,
all equity stock options expire on the 3rd Friday of every
month. So…make sure you keep
up with your positions and stay aware of the 3rd Friday of
every month. Your brokerage
firm will also have the expiration date information list on your
account information, so you will notice it in plan
sight!
How do you enter the transactions?
OptionsXpress.com
has a great “help” section on the “Trade” screen that shows you
exactly what (and how) to enter your stock option information. I will
cover the main points here to get you started!
 Click here to see the actual Trade Screen!
Every
stock option has a “symbol” just like the actual stock symbol itself,
so the first thing you will want to know is “the stock option
symbol”! If you are using
“OptionsXpress.com, you can find the stock option symbols under the
“Quotes” tab – then select “Chains” and enter the actual stock symbol
(Ex. AAPL) in the entry field under “Symbol”. When you press enter
all of the available stock options for the current month will be
displayed and if you want to look at future months
stock option symbols you will be able to see those too.
Click here to see a real stock option example
screen!
The
available “CALL” stock options will be on the left side. The
available “PUT” stock options will be on the right side. If you click on one of the stock
option symbols you will see the detailed information about that
particular stock option.
Here
are the steps to make your complete “Buy To Open” stock option
transaction.
1.
You
need to find the Stock Option Symbol and enter it in the “Option
Symbol” entry field.
2.
Select
“Buy To Open” as the Action.
3.
Enter
the Quantity. (How many do you
plan to buy)?
4.
Click
on “Limit” and enter your limit price. Note: Always enter a limit
price which specifies the price that “You” want to pay for the stock
option. If you choose “Market” you may not get the price you expect,
so always use the limit price and set it yourself so you know exactly
what price you want to pay.
5.
Click
on “Preview Order” and review the order instructions you have
entered. If everything is correct, click on “Place Order” and the
transaction will be sent to the market to be filled.
6.
Monitor
your position if it gets filled at the limit price you
specified.
7.
When to
take profits? That’s always a good question and
the answer is “whenever you get ready”!! It’s your money, it’s your gain and
you decide when to take profits or let your position continue to
trade up. If you have a big
gain, you should probably take some profits and bank the money –
there is nothing wrong with taking profits at anytime. That is my
approach, so don’t be afraid
to take your profits!!
How to
close your position and take the profits!
Here
are the steps to make your complete “Sell To Close” stock
option transaction and lock in those stock option profits.
1.
Go to
your “Open Positions” and find the stock option you want to close.
2.
Click
on “Trade”.
3.
The
Option Symbol will be entered automatically, and the Action “Sell To Close” should also be automatically
selected. If not, select “Sell
To Close”.
4.
Click
on the round radio button option next to “Limit $” and enter the
limit price you want.
5.
Click
on “Preview Order” and review the order instructions you have
entered. If everything is correct, click on “Place Order” and the
transaction will be sent to the market to be closed. At that point your transaction will
be completed when the status has changed to “Filled”!
6.
Now you
can use the Stock Calculation Program to quickly calculate your
profits.
If you
have to take a loss on a particular stock option, you simply use the
same transaction information to close out your position and limit
your losses.
The
Final Step. Now
it’s up to you to put all of this into action. There is money out
there in the stock market to be made, you have to define a plan to
get it and use a strategy that works consistently. It takes a little bit of work and
it will be well worth the effort when you take the profits! Stick with buying the “CALL”
options as your main strategy – use the “PUT” options strategy when you recognize
a high probability that the
stock price will be heading down. Usually this is due to some
negative event or negative news and you can take advantage of that by
using “PUT” options and capitalize on the share price trading down.
I
generally try to find stock options in the price range of .35 cents
to $1.75 that I think has the potential to increase significantly in
value over the next few days or weeks. Also, depending on if I’m
researching some of the more volatile companies (like AAPL, AMZN,
BIDU, GOOG, GS, IBM, MA,
PCLN, or WYNN ), I might consider paying for a
higher priced stock option (Over the $2.00 range), because
there will generally be much more price movement with these type of
companies.
“Planning, “Research”
(researching your information to find good opportunities) and
“Timing” are the keys to making a
good decision to buy stock options (and which stock options to
buy). Once you have everything
setup, looking for good stock option opportunities will be the main
activity to concentrate on.
A.
Planning: You have to plan for the upcoming
opportunities (Ex. You want to
buy Apple Inc. stock options next week).
B.
Research: Do some research to find out
what’s happening with Apple Inc. over the past week, and if any
special events (earnings date, or any anticipated product
announcement news) is expected to be released soon.
C.
Timing: Decide when best time to take some
investment positions ahead of any particular event to capitalize on the anticipated
price movement (if you anticipate the stock price to move higher –
buy the CALL Options – if you anticipate the stock price to trade
down – look to buy the PUT Options)!
Generally when a stock price has a big price run upward over
several days or a week (on good earnings news, upgrade, or new
product announcements) investors will start to “take profits” and the
share price will start to trade back down. Timing is really important
in todays market
environment, you need to “price track” and know what’s
happening with company events in order to know when to buy into your
position.
The
best time to start planning and looking for low-cost stock options is
at the beginning of the month through the third week of the
month! That’s when stock
option prices are mostly lower and potentially provide a better entry
point with less cost. Do some
“stock option price tracking” on AAPL, AMZN, GS, IBM or MA at
the beginning of the month compared to what the prices were 2 weeks
earlier (you can see this in the historical pricing information in
your OptionsXpress account).
I
have posted a section on my website with examples of some previous
low-cost stock options from top quality companies bought
ahead of earnings.
Click
Here! to see real examples of
some low-cost stock options that turned into nice profits gains. That’s
why I look to buy the “Stock Options” instead of the actual
shares. These
same examples will occur again over the next earnings time frames for
these companies – that’s when you will have another opportunity to
plan ahead and look for “low-cost” stock options ahead of earnings or
any special upcoming events.
Now
that you’ve seen these examples of how to find low cost stock options
– the one thing you will need is a easy way
to calculate these type of costs and projected profits.
You
need to have a good, simple, easy to use stock price calculation
program that quickly performs all of your potential price calculation
scenarios so you will see first hand what
your projected costs, percentages, gains or potential loss would be
before you place your buy transactions. My Stock Calculation Program is an
excellent tool to handle all of your stock price calculations quickly
and easily.
Follow
my M.T.T. Quarterly Newsletter for some good ideas to consider. Make notes of important dates for
the companies that you are considering (Ex. Company Earnings Dates), keep up with company news events (which affect how the
stock price will react) and practice some different scenarios using
my stock price calculation program to help you see where your profit
or loss opportunities would be! This is a great tool to practice with
and get a feel for making real stock option buys!
You
can take the 7-day FREE Trial (with no cost) to play with the
calculation tools, then order your full version copy to have for a
complete program of tools for all your future buy opportunities.
Click here! To
see all of the Software Program Advantages!
If you
have not taken the 7-Day Free Trial!
Download your free copy today -- play around with some calculations
and see how much simpler the program makes all of your cost, profit
and exit planning calculations.
See the
7-Day Free Trial link on
the homepage!
www.newstocksoftware.com
If you
have any questions or need some “one-on-one” guidance to help with
your research and planning, let me know – I work with stock options
every week and continuously look for opportunities -- I’ll respond as
quickly as I can!!!!
To
your success!
Jimmie V. Smith
markettrading@juno.com
Copyright
2010 Market Trading Technologies
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