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Options Trading Strategy: Long Calls
Written by troy on Monday, February 14, 2011 | No Comments
Categories: Options Trading Strategy
There are many options trading strategies available to the options trader to profit from while at the same time trying to limit risk. The options trading strategy that is most used by trader and investors alike is the long call strategy.
In the long call strategy you are buying the right to to the underlying shares of the stock (or futures contract if trading futures) at a certain price until the expiration date is upon you. You would use this strategy if you felt that the price of the stock was going to go up. If you expect an increase in price and would like to participate then it would be better to employ the use of options as opposed to buying the stock. A long call strategy still gives you the unlimited upside of the stock but it protects you downside risk.
When you own a call you make money when the stock increases in price. When stock goes up your call goes up. When the stock goes down you call will go down but it can only go down to zero. You can only lose the amount that you invested into the trade. However, there is no cap on the upside potential profit.
Let’s look at why employing an option trading strategy with long calls is a smart trading strategy. Let’s say that you had an interest in owning XYZ which was currently trading at $74. You would like to own 200 shares of the company.
However, a 200 share purchase would cost you $14,800 plus commissions to buy the stock. Now if you bought the stock and laid out nearly $15,000 in cash then would make money if the stock went up and you would lose money if the stock went down. And you would make or lose equally in each direction. If you stock went up $10 then you would make $2000 dollars. Conversely, if the stock fell $10 you would lose $2000. The same would not be true of a call option.
Let’s take a look at what would happen if you purchased a 75 strike price call for the same stock. If you expected the stock price to occur in short order then you might purchase the following month’s expiration date. Depending on the volatility of the stock you might pay a wide range in options premium but let’s say for the sake of our example you pay $3.50 for the call strike. You would be buying a call that is currently $1 out-of-the-money ($74 share price and $75 strike price) and paying a total of $700 (plus commissions) to leverage 200 shares of XYZ. As you can see, the amount of money that you have had to lay out is much lower than what it would have taken to purchase the stock itself ($700 vs $14,800). This is already a big plus. You will sleep a little better knowing that you don’t have as much money on the line.
Now let’s look at what would happen if the stock increased in price and if the stock decreased in price. We will assume that you held the stock till expiration and that you lose all of the premium that you paid for the stock.
If the stock increase in value to $85 then at expiration you would have a total profit of $1300. Your breakeven price would be $78.50 ($75 strike plus $3.50 in option premium). Therefore, when the stock closed at $85 on expiration day you would have $6.50 per option in profit. Since you would have had two option contracts that would give you a profit of $1300. If the stock had increased to $95 then you would have a profit of $3300. Not bad for an options investment of $700.
But what would have happened if the stock decreased in value. If you had owned the shares of stock and the stock decreased by $10 or $20 then you would have lost $2000 or $4000. However, if you had employed the option trading strategy of long calls then you would only have lost the $700 that you had invested. In fact, if the stock went to $0, the most that you could lose would be $700.
You have unlimited upside profit potential but limited downside risk for only a fraction of the overall cost.
Hopefully, this will point out to you the power of options trading strategies.
Strategy #1 for Consistent Profits In Penny Stock Investing
Written by troy on Sunday, February 13, 2011 | No Comments
Categories: Penny Stock Articles, Penny Stock Investing
I had promised that I would give brief write ups about the three penny stock strategies that I take that help provide consistent profits in my penny stock investing. So without further adieu let’s dig right in.
The first penny stock trading strategy that I use is trading penny stocks that are breaking out. Now I use that term loosely to refer to four different types of breakout. I take long positions on penny stocks that are breaking out above a significant moving average, breaking above a trendline, breaking through an area of resistance and setting a new two week high.
I prefer to buy penny stocks that meet the above criteria and that are also doing so on larger than average volume. I find that there is no better way than to look at a few examples to show you what I am looking for. In this article I will specifically cover buying penny stocks that are breaking above a significant moving average. The others will be dealt with in the coming days.
When I refer to significant moving average I am talking about the standard mid range moving averages. The ones that I focus on are the 20 day, 40 day and 50 day moving averages. I do not do anything with the 100 or 200 day moving average because the time frame is a little too long for my trading time frame. But if it suits yours then, by all means, use them. I use exponential moving averages but if you want to use simple moving averages or weighted moving averages then that would be fine. In the examples below, I will use the 20 day EMA.
The chart below is a chart of Level Three Communications (LVLT). I have centered in on the last few months. You will notice that on December 22, 2010 it broke above the 20 day EMA (red line) but it failed to hold above the line. Then on December 30, 2010, it broke above one more time. This time it held. If you had bought there at around 98 cents per share you could have conceivable achieved a 20 percent return in a matter of days depending on how long you stayed in the trade.
Here is another example of Synovus Financial (SNV). On December 1, 2010 the penny stock closed at $2.1. One month later it increased in share value to $2.90 on the first trading day in January 2011. The is a return of more than 40%. You see you don’t need to make penny stock investing a difficult process. Take what the market is giving you. Stop forcing trades or simply taking a trade because your next door neighbor had a hot stock tip or because you had heart from some penny stock newsletter that this company is the next Microsoft and is set to make you 4000% in the next 6 months.
Below is one more example for Fuel Cell (FCEL). This shows you how to look at volume to determine if it is a trade that you want to take. I would not have taken a trade on FCEL unless it was accompanied by an increase in volume. The stock had been trading right around the 20 day moving average. One day it would be above the moving average and a few days later it would move below. There was nothing unusual about the trading volume. It was merely in a trading range and none of the crossovers above the moving average would have carried any significance. However, on November 4, 2010, it closed above the moving average on about 3 times normal average volume. This indicated a possible trade. On the 4th, it closed at $1.26. Two days later it closed at $1.58. That represented about a 25% gain in only two days. However, the stock did pull back. Once again it broke above the moving average on December 6th and added more than $1 to its share price at one point on the first trading day in 2011. That represented around more than a 70% move.
If you make your triggers to enter penny stock trades a little more simple you will see your penny stock investing profits begin to skyrocket.