Stock Options Strategies
Stock Option Timing Service for Trading and Investment
Our trading strategy begins with determining the overall market direction both from the economic and technical points-of-view.
Subsequently, we like to trade with the overall trend of the market using our technical analysis tools developed from 29 years of research and trading experience. We use monthly, weekly, and daily charts to analyze the market's strengths and weaknesses - as well as our own proprietary theories - to time the buying and selling of the stocks.
This includes the Dow Indicator's ability to time the overall markets turning points, which often coincides with a stock's turning price. (Track Record)
Options Trading
Why Options are Profitable?
Options are a trading tool that leverage an investment, and limit the loss. The disadvantage of buying an option is the premium that one has to pay. The premiums erode with time and eat away the profit; therefore, when the gain is measured in percentage of price move the options move less than the the underlying stock. However, due to the leverage options earn more money than the underlying stocks. Here is a simplified formula to illustrate the point. The stock moves $2 and the most you can leverage a stock is 2 to 1, so the gain can be as much as $4 on a $2 price move. The option for the same stock will move less than the stock, so assume it moved $1.50 instead of $2, but it is leveraged 6 to 1, so the gain is 6 x $1.50 or $9. That is a gain of $9 for options versus $4 for stocks (if the stock is leveraged 2 to 1) for the the $2 price move the underlying stock made.
The most attractive part of options are the leverage, and the fact that the losses can be limited if there is a major adverse price move. Even though the premium erodes the profits, due to the high leverage one can earn more money using options then stocks or ETF's. Key to success in options trading is timing. If the timing is not right then the option's value will erode with time faster than the underlying stock.
Swing trading is one of the best ways to take advantage of option trading. With swing trading you are in and out within few days; therfore, there is not much time for the option to erode. Yet, if the timing of the options purchase is right the value of the investment can gain 50% to 150% within days.
What is an Option?
An option is a contract giving the buyer the right to buy an underlying asset such as stock or ETFs at a specific price on, or before a the expiration date of the contract. A contract could have just one day left in it, or a contract can be more than one year to expire. An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties.
As an example assume you want to buy a house, but you are not sure which way the housing market will go. Today is March 20 and you approach the seller of the house and offer to buy the house six months in the future (in September) for $300,000 with no obligation to buy it when September arrives. The seller agrees but charges $6,000 premium for the option to buy the house.
If the price of the house appreciates to $320,000, you will buy the house for the $300,000 the seller agreed to. Your cost will be $300,000 plus the $6,000 premium paid for the option – a net profit of $14,000. However, if the value of the house declines to $280,000 then you would not pay the agreed price of $300,000, and forgo the $6,000 premium. Instead of losing $20,000 you only lose $6,000.
Buying an options contract works the same as the above example. IBM is trading at $80 and you want to buy it, but at the same time you want to reduce the risk of loss in case the stock price of IBM declines. So, you buy a call option at a stricke price of $80 that expries in two months. At this point you do not own the stock at $80, but you have the right to buy it at $80 any time within the two months that the options contract will expire. If the IBM stock goes up in two weeks to $85 you could excercise your option to buy the IBM stock at $80, and then turn around and sell it at the current market value of $85. That will earn a profit of $5 minus the cost (premium) of buying the option which would have been in this exampel about $2.20. However, if the IBM price went down to $75 you would not exercise your option to buy the IBM stock, and instead of losing $5 you would have only lost the premium of $2.20.
Three Major Factors Will Influence the Price of the Option:
Stock Appreciation
When the underlying stock price goes up, the value of the option goes up as well. That is why by far most of the time people do not exercise their right to buy the option, but sell the option at a profit. If IBM goes up in value to $85 from $80 in two weeks, the value of the option could appreciate from $2.20 to $5.80, and you would simply sell the option at $5.80. The net profit is $3.60 ($5.80 current option value minus $2.20 the option purchase price). If you would exercise the option to own the IBM stock at $80 when it is trading at $85 then your profit would be less than selling the option. Here is why:
$85 current price of the stock minus the purchase price of the stock $80 equals $5 profit. Minus the cost of the option $2.20, and the net profit is $2.80). The reason selling the option earn more profit is that there was still 80 cents worth of time value until the expiration of the option. By exercising your right the buy the IBM stock you lose the intrinsic time value of the option. To not lose the time value of the option is the reason that it is better to sell your option rather than exercising it before the expiration date.
Time Value
Premiums have time value. Assume that the $2.20 IBM option contract is going to expire six weeks from today. The time value of the option for each week will be about $.36 ($2.20 divided by 6 weeks).
Going back to the above example of the $80 IBM option that was bought for $2.20. If IBM reaches a $5 profit target in one week the option would erode in time value only 36 cents, so there would still be $1.84 time value remaining in the option. Because of the time value in an option it is better to sell it rather then exercise it, but if the $5 gain is reached in six weeks then the value of the entire $2.20 time value of the option would expire. In that case, if one wishes to own the IBM stock for a longer term it may be better to exercise the option and own the IBM stock at $80.
For most people the object of buying an option is not to hold till the expiration date, nor to exercise the option to buy the underlying stock. The object is to profit from option appreciation due to the underlying stock’s increase in value. The sooner the value of the stock appreciates the less time erosion there will be and more profit will be appreciated.
Volatility
The volatility of the market greatly effects the value of an option. One way to measure the volatility of a stock is to measure the Average True Range (ATR). If a stock has $2 a day ATR then it is twice as volatile as a stock that has $1 a day ATR; therefore, the premium for the option is greater for more volatile stocks. Going back to the IBM example. A $5 profit target will be reached twice as fast with $2 ATR than with $1 ATR volatility; therefore, the cost of the options goes up when there is higher volatility.
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Best Time to Buy Options
To minimize the loss of option value due to time it is important to buy a stock just before it turns back up. The Dow Indicator for many years has been an excellent timing tool. With over 70% of the time it has been able to predict the day a stock will turn within a day or two.
To minimize the cost of option due to high volatility buy stocks when the relative volatility is low. An option could be twice as expensive when the volatility is high. That means during low volatility you could buy, as an example, twice as many options, and earn twice as much money for the same risk.An option contract with the right to buy [go long] the underlying asset is a ‘call option’. An option contract with the right to sell [go short] is a ‘put option’.
Leverage
One contract of option conveys the right to buy or sell 100 shares of the underlying stock. If one contract of ‘call option’ is purchased then the value of the option is equal to the share price of the stock times 100 shares.
In the above IBM example, the strike price of the option was $80, so it was worth $8,000 ($80 x 100 shares). Instead of paying $8,000 to buy 100 shares of IBM, one contract of ‘call option’ for $220 premium can be purchased ($2.20 premium per share x 100 shares).
If 100 shares of IBM goes from $80 to $85 in one week, there is a profit of $500 for an investment of $8,000 - a 6.2% profit. On the other hand, if one ‘call option’ is purchased for $220 ($2.20 premium x 100 shares), and the option’s premium value goes up to $580 then there is a $360 profit on an investment of $220 - a 163% profit.
The above example is an ideal scenario, and ideal scenarios do not happen often. A $5 rise in IBM in one week does not happen that often. If the timing is not right, the share value of IBM can go down and then may take weeks to recover. Each passing week would eat up more of the premium.
Going back to the original option example above, if it takes six weeks for IBM to go up $5 then there would be a profit of $2.80 ($5 profit - $2.20 premium). That would yield a return of $280 profit on an investment of $220 – a 127% profit. Even if it takes six weeks to achieve a $5 rally the leverage of options will still provide a substantial profit. The key is in timing the entry and buying the option during average or below average volatility.
Using Options with Dow Indicator
When it comes to trading options timing is the most important aspect for earning a profit. Dow Indicator is an excellent timing tool that often picks the turning points within a day or two.
DIA, SPY, and stock options that have high volume give the most flexibility for efficient trade execution. You will have a selection of strike prices at lower premiums.
We have found that the DIA options to be slightly less expensive than the SPY options.
Strike Price
In general it is more profitable to trade out of the money options that are two or more strike prices out. However, pay attention to the asking prices for various strike prices. Different strike prices could be over inflated, and buying the less inflated options will give a bigger return.
The value of an option depends on number of days left to expiration, volatility and the strike price. The best opportunity is when the number of days to expiration is one to two weeks and the volatility has shrunk for a day or two. At that time the options are inexpensive and when the price moves in the directions desired the value of the options will appreciate substantially.
To learn more about how options work, you could visit the link below:
Chicago Board Options Exchange
Why We Are Successful When Others Fail
We do overall economic analysis, followed by long-term, technical analysis. And, for Entry and Exit points, we use short-term technical analysis. Markets are dynamic and ever changing. With 29 years of research and trading experience we have built resilient market analysis methods that adjust to market changes. Our experience helps us and you navigate all kinds of market conditions to much better protect your assets and increase your gains.
What we offer you?
+ Market timing service for E-mini S&P 500 Index, Stocks, Options, and Currencies.
+ Asset protection against down markets.
+ Asset gains that are above industry average.
Real-time ASSISTED TRADING for e-mini S&P 500 and Currencies through Mirus Futures.**Special offer: One-Year E-mini Membership option (up to $209 savings annually!). For a limited time, this option includes Forex and Stocks timing services for NO ADDITIONAL CHARGE! (Stocks and Forex timing services subject to change and removal from the Dow Indicator System at the discretion of Dow Indicator. However, your current subscription and discount will remain intact and unchanged)**
Why we are different?
Unlike most companies we have a verifiable third party brokerage firm real time executed trades track record.
We have been successful in helping our members earn profits during up and down markets.
Markets are dynamic and ever changing. With 29 years of research and trading experience, we have built a resilient market analysis methods that adjust to market changes. Our experience helps us and you navigate all kinds of market conditions to much better protect your assets and increase your gains. See testimonials.
