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Profit Strategy By Jeff
When most people think of options, they think of speculation, risk and the chance for quick profits. If you trade in and out of short-term options, that is an accurate assessment.
But that is not the best way to approach options trading. Options are not purely ways to speculate and make a quick buck. Options are also used by professionals to hedge risk and enhance profits from positions in the underlying stocks.
A good way to think of options trading is to equate it to a trip to Las Vegas. To start with, you will have your best results if you only use money that you can afford to lose. Options trading can require making decisions during the “heat of battle,“ and you will make those decisions with a much clearer head if your mortgage money is not also riding on the outcome.
As with going to a casino, with options you can bet your money on a variety of games. These games run from somewhat favorable to the bettor to other games where your odds of winning consistently are not as good.
The least risky way to trade options is to use them as vehicles to generate income. Option novices may be surprised by that statement, but it is true. Options can be used to generate regular income, and the strategy you use to generate this income is the least risky of all option strategies.
The easiest of all option trades is to sell (write) covered calls. Anyone who owns at least 100 shares of a stock can do this.
But the options game most people want to play first is to buy short-term call and put options. However, before you start doing this you should realize that it is a tough game to win over the long run. In addition to battling the stock market and pros in the options market you will also incur commissions and other trading costs on a regular basis.
Buying short-term options is similar to playing the slot machines or the roulette table -- you will have fun doing it and you always have a chance of hitting it big. But you must also recognize the odds of success are the steepest in the game. Even the pros lose their bets buying short-term options more often then they win.
Fortunately, there are games in a casino where with some skill and a little luck you can win over the longer term. Blackjack (twenty one) is an example. In the options game, buying long-term (LEAP) options is similar. A LEAP gives you several months and even years to wait for a payoff.
This tilts the odds of winning much more in your favor, and also reduces your trading costs. You cannot help but pay less commissions when you spread your purchases and sales over several months rather than weeks
After you have a solid portfolio of LEAP positions, then venture into the waters of buying short-term options to play short-term market swings. You can use these options to augment your LEAP returns in a bull market, and also shelter your LEAPs in a bear market.
In fact, we believe that the best use of short-term options is to profit when stocks and the market decline.
In short, that is our profit strategy. Start by buying long-term LEAP options as substitutes for stock positions. Then use short-term options to increase or protect your LEAP profits. Experience and time have shown us that this is the best route for new traders to follow. It keeps your trading costs and commissions low and gives you the best chance for long-term success.
Our Intensive Options Seminar is now available on video. It's over ten hours long and reveals all of our trading successful techniques. For more information on options trading strategies click here.