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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.)
AMZN (Amazon.com
Inc.)
BIDU (Bidu.com Inc.)
CMG (Chipotle Mexican
Grill Inc.)
FSLR (First Solar
Inc.)
GOOG (Google Inc.)
GMCR (Green Mountain
Coffee Roasters Inc.)
ISRG (Intuitive
Surgical Inc.)
MA (Mastercard Inc.)
PCLN (Priceline.com
Inc.)
SHLD (Sears Holdings
Corp.)
WYNN (Wynn Resorts
Ltd.)
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, AMZN,
BIDU, GOOG, IBM, MA, PCLN, SHLD, WYNN)
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 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
2010 Market Trading Technologies
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