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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 2010 Investments List” for some ideas.
Here is the link: http://www.newstocksoftware.com/Top_2010_Invstmnts.htm
Of course you can
choose others beside the ones listed, but my Top 2009 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, BIDU, FSLR, GOOG, GS, MON, PCLN, POT, RIMM, or X ), 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, GS, or FSLR 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 weekly
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 2007
Market Trading Technologies
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