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Fellow Investors & Traders,
Today we are going to talk about another strategy to use when buying
“stock options”!
The most common strategy used by business
professionals that buy stock options is the “call option” strategy,
where you buy the call options in anticipation that the share price
of the stock will be moving up (higher in price)!
The “Put Option” strategy works in
reverse. You buy a “Put Option” in anticipation that the share price
will be moving down (lower in price)! When the actual share price trades down, the “Put
Option” price generally rises in value.
“Put Options” are simply
a financial instrument that gives you the right (but not the
obligation) to SELL a specific stock at a specific price within a set
time period.
Over the past few weeks we have seen
the stock market make some extremely big price swings both up and
down. Most of the time the
“call option” strategy has enabled me to take some good gains as the
stock market quickly recovers after having a big price drop.
Not only can you take advantage of
the price moves when the stock market trades back up – you can also
take advantage of price moves when the stock market starts to trade
down. If you have followed my
MTT Quarterly Newsletter (published each week), or kept up with the
news events through the nightly business reports website www.nbr.com you should have
noticed the big price swings in the stock market from week to
week. This is exactly the
kind of activity that presents good opportunities to pick up stock
options at good prices.
What are some good company stocks to
watch for potential “Put Option” buys? Glad you
asked! Here are my top
companies that I follow for potential “Put Option” buys: These stocks
are volatile stocks which sometimes have extreme price swings when
negative news is reported!
AAPL (Apple Inc.)
BIDU (Bidu.com Inc.)
DRYS (DryShips Inc.)
FSLR (First Solar Inc.)
FWLT (Foster Wheeler Ltd.)
GOOG (Google Inc.)
ISRG (Intuitive Surgical Inc.)
MA (Mastercard Inc.)
PCLN (Priceline.com Inc.)
RIMM (Research In Motion)
SHLD (Sears Holdings Corp.)
WYNN (Wynn Resorts Ltd.)
X (United States Steel)
So, how do you know when it’s a good
time to use the “Put Option” strategy? The first thing you need to do is pay attention to what
is going on in the stock market and understand what the market trend
is doing. Is the overall stock market trend going up (are stock
prices moving higher) due to good news events, or is the stock market
trend going down (due to negative news events)?
If the overall stock market trend is
going down, that is when you look to use the “Put Option” strategy. Stock
prices in general trade down more often than they move higher, so
using the “Put Option” strategy can give you another advantage when
prices start to trade down.
When companies announce any type of
“negative news events” such as a bad earnings report, lawsuits, bad
news about products or services – any of these negative events can
cause the stock price to start going down. That’s when you look to use the “Put Option” strategy
to take advantage of the stock price trading down.
Another opportunity to buy potential
“Put Options” would be shortly after a “Big run up in the share
price”. Generally when there is a great news event and a companies
stock price rallies up in price over a few days, investors start to
cash in some of those profits (start to sell their shares) and the
share price then starts to trade back down. That is another great time to buy “Put Options” to
capitalize on the downward price move which in turn causes the value
of most “Put Options” to go up in value! That is the basic reason you
want to buy these type of stock option contracts!
Let me show you how to calculate a
“Put Option” calculation!
Click
Here! to see a example of GS (Goldman Sachs Group) “Put Option” calculation.
Just like other strategies – “It’s
All About Timing” – and Planning! This is the key to getting in position to take
advantage of stock price movements whether you are buying the “Call
Options” or buying the “Put Options” for the company stocks that you
pick.
Here’s your “Step-by-Step” plan for
Practicing or actually making a “Put Options” buy transaction.
1. Make sure you
have your brokerage account open and funded with at least $250. I
would strongly suggest “OptionsXpress.com.”
I use them also!
2. Pick 2 – 3
companies that you are interested in researching for potential buy
opportunities. (Ex. AAPL,
BIDU, FWLT, GOOG, MA, PCLN, RIMM, SHLD)
3. Pay attention
to the stock market events to know when the stock market has the
potential to start going down, or if any negative news events happen
to the companies you are planning to buy. This is the signal to start
planning to buy your “Put Options”.
4. 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 a excellent tool to handle all of your stock
price calculations quickly and easily for “Call” or “Put”
options. You can take the
7-day FREE Trial to play with the calculation tool, 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!
5. Look for
opportunities to buy those company stock options that might have the
potential for their stock price to start going down. Negative news
events can cause the stock price to drop, so look for those types of
events. When you recognize a
potential opportunity, that is
when you start to take action and put the numbers into the
calculation program to see what your potential costs, percentages,
gains or potential loss would be before making the actual buy
transaction.
How do you pick which stock option to buy?
This is a question that you’ll 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”.
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”!
Look on the right side of the quote view under the “Put
Option” section. I generally
buy the “Put Option” with the “Strike Price” closest to the actual
stock price or the “Put Option” just under 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). You will see these simple terms on the screen also.
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 listed on your account
information.
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 “Put
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 “Put Option” “Buy To Open” transaction.
1. You
will 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 to see if it gets filled at the limit price you
specified.
7. When
to take profits? That is 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. With “Put Options” the value of
the options will rise as the share price falls and trades down on the
negative news. Depending on how severe the news is, the share price could continue to drop for
several hours, a day or several days after the negative news is
announced. Your “Put Option”
position should have a good gain by then. At this point you can
decide when to close out your position and take your profits. If you have a good gain, close out
your position and take the profits. Every day is a new day in the
stock market and stock prices can change trends very quickly, so lock
in your profits whenever you can. There will always be another
opportunity if you pay attention.
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”, find the “Put” 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 Price 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. Use “PUT
Options” when you recognize a high probability that the stock price
will be heading down.
“Planning, “Timing” and some information
“Research” are the keys to making a good decision
to buying 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.
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! Take your time and practice – this will give you the best
opportunity to be successful with either strategy you use!
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, let me know – I work
with stock options every week and continuously look for
opportunities.
To your
success!
Jimmie V. Smith
markettrading@juno.com
Copyright 2007
Market Trading Technologies
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