We live in a computerized world and traders today have access to option software that makes it possible to access brokers, obtain trading recommendations and perform complex calculations within seconds. Option trading would be nearly impossible for smaller investors without the software because of the complexity of many of the risk and premium calculations and the need to obtain real-time market information for good decision making.
The quality software packages usually have many great features.
- Tutorials that explain option trading terms and strategies
- Historical information presented in chart form
- Practice modules so you can test your trading skills
- Updated market information
- Analyticals
- Math calculations for break even and others
- Trend spotting
The types of option software programs that are available range from the simple to the complex. For example, the simple programs may perform a few basic calculations but will not provide any analysis or option value alerts. The higher priced and more comprehensive systems let you input a variety of assumptions and variables (what-ifs), generate historical and analytical information upon inquiry, and will notify you when options over or under-valued.
Another consideration to keep in mind is that over time you will develop trading strategies that meet your investment needs. The software program you choose should be able to support those strategies and not keep you locked into strategies or investment methods you don’t like.
There are also option software programs that give you enormous flexibility and let you virtually build a customized trading system.
All the Right Features
Options trading is complex and so the option software must be able to handle the complexity in addition to providing trading assistance to the user. Obviously such a system will have to have a number of built-in features. When looking at software, keep in mind some of the following features that could prove to be beneficial.
- Chart creations
- Hypothetical trading
- Fair modeling option price calculations
- Ability to use live market data
- Ability to produce live price quotations
- Allows input of modifying information
- Historical pattern generation
- Analysis of portfolios
- Risk-reward calculations
Some software also lets you input option trades that are uploaded to the market. The software interfaces with the indicated broker turning your computer and option software into a trade placing tool. Software also offers spreadsheeting capability so you can keep track of information including trades and also be able to re-arrange the information to your liking.
Because of the internet, small traders are becoming more and more self-directed which can save thousands of dollars in broker commissions. The key to selecting the right software is to take the time to identify and rank what you require in terms of information and calculations and then choose a program that meets the most items on your list.
No Hasty Decisions
The one thing you should not do is make a hasty decision as to which option software will work best for you. It will take some time and effort to install the software and get it up and running to your satisfaction, not to mention the need to learn how to use and interpret the program. You don’t want to spend a lot of money and time only to discover the program fails to meet your needs.
Filed under All About Options by on Jul 6th, 2010. Comment. 
There are common option strategies that have been tested in the marketplace and are used regularly by investors. In options trading it is the spread strategies that take front and center because they focus on maximizing profits while limiting losses. Spread strategies also take advantage of the full capabilities of the options market by utilizing both puts and calls in a number of investing formulas. How complex the trade becomes largely depends on the trading knowledge of the investor and market conditions.
Option trading with puts or calls is the simplest strategy in many ways. In fact, the largest category of option trading among self-directed traders is the purchase of call options. Though that is an excellent way to begin trading option, it is only using one-half of a versatile equation. Instead, even beginning investors use spread trading to improve market performance.
Spreads represent one of the primary types of option strategies that use both purchases and sales of options. A vertical spread strategy, by definition, involves purchasing and selling options and the various options will have different strike prices and/or they will have different expiration dates. In effect, you are buying and selling at the same time, or another way to say it is that you are trading long and short.
Some of the more common spread option strategies used including the following:
- Bull spreads – used when the market is expected to move higher
- Bear spreads – used when the market is expected to move lower
- Volatility spreads – the put and call are purchased at the same strike price with the expectation volatility is about to hit the market
- Risk reversal spreads – put and call are purchased for underlying futures that are expected to move in the same direction
- Butterfly spreads – involves three steps composed of option purchases, selling options and then purchasing another option
- Straddles – combination of purchases or sales of puts and calls (includes strangles)
- Credit spreads – used in volatile markets where monetary risk is to be limited
Each of these strategies could fill pages with explanations and examples. The fact is that advanced investors will even combine multiple strategies. When combining two or more option strategies, it is necessary to thoroughly understand the options market and have the means of closely tracking complex transactions.
Deciding on a Strategy
Choosing the right strategy to implement is dependent on a number of factors. For example, you should understand how the market price movements and direction will impact option trading. You have to understand price action and pricing of the option. You even must decide if you will be a holder or a writer of options.
What separates beginning traders from experienced traders is the ability to apply hedging strategies to minimize risk. Since options traders must be willing to risk loss of their entire investment, learning how to hedge to your advantage is important. The goal of options trading is always to limit risk taking as much as possible in the pursuit of profits.
The spread strategies are designed to add a type of hedging to options investing because risk is lowered through the purchases and selling of puts and calls in different configurations. The good news is that the more you trade in options, the easier it will be to learn new option strategies.
Filed under All About Options by on Jul 20th, 2010. Comment.
When choosing an option strategy, the first question to ask is: what are my goals? In options trading there can be several goals. For example, if you are interested in trading stock options, your goals may be one or more of the following.
- Benefit from anticipating that a stock price is going to increase or decrease but without actually buying the stock
- Cover for potential stock losses on stocks currently held as the market declines
- Try to buy stock at a lower price because you believe the price will go down
- Enhance the income you are earning on the stock currently held
- Prepare for major market moves
So in other words you may want to take advantage of a bull or bear market, or you might want to hedge against losses. You also might want to maximize income.
The option strategy you choose will impact your probability of successfully reaching those goals. Traders can generally be classified into two types which are speculators and hedgers. Speculators are more willing to take risk because they are anxious to generate quicker income. Hedgers are more interesting in protecting investments. Hedgers are more in a mode of preventing loss rather than generating gain.
Don’t misunderstand though – all option traders want to make money. That’s why they invest in the options market. But the strategies chosen to reach goals can vary widely. The goal is to let the winning trades become as profitable as possible while cutting the losing trades off as soon as it is discovered they are losers. Eventually you will learn how to calculate your percentage of success based on the successful and unsuccessful trades you make.
Strategies can be very simple lie buying a call option or a buying a put option. But many of the strategies involve many more steps and are delicately balanced sets of transactions involving calls and puts with a variety of strike prices, expiration dates and even underlying assets. Following are some of the more common strategies that can be used to meet different investment goals. This list does not include all the possible strategies though because people develop new ones all the time as they gain trading experience.
Goal: Income
- Covered calls
- Sell naked calls or puts
- Condors
- Credit Spreads
Goals: Take Advantage of Rising Market
- Buy calls
- Bull call or put spreads
- Sell naked puts
Goal: Hedging
- Collars
- Married puts
- Protective puts
Goal: Take Advantage of Falling Market
- Buy puts
- Bear call or put spreads
- Sell naked calls
You can even choose strategies for a stagnant market. For example, if the market is neutral, you might want to choose the straddle option strategy. This strategy lets you anticipate a market move in either direction and limits risk either way. Other stagnant market strategies include strangles, ratio spreads and reversals.
If you have gotten the idea that options investing is complex then you are right. Yet you do not have to start your investing career in options by choosing the most complicated option strategy. Instead you can start with an easier strategy and then gradually progress into more advanced strategies.
Before option investing, first choose your goal and then match the strategy to that goal. With each investment the goal can change…but so can the strategy!
Filed under All About Options by on Jul 27th, 2010. Comment.