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Investing Education Advice If You're New to Options Trading

Investing Education Advice If You're New to Options Trading
By Travis W

Finding investing education advice for stock options trading can be a frustrating endeavor at times. New traders often share with me that it feels like the options trading community is a very tight-lipped community with a high price of admission. I've been through that process so I'd like to offer you some advice.

Learning to invest your own money is a journey, not a destination. It takes time, patience, and education. It's a proactive journey for those who no longer desire to be a victim of the so called experts.

Over the years I've made enough mistakes and have had enough successes to know that the ability to master your money is not something that just happens. It takes a bit of work on your part.

Increasing your investment IQ is a key part, especially when you're dealing with stock options. You have to find a qualified and trustworthy source for investing education. There's quite a bit of hype out there so you have to filter out all the "noise". You may have already searched online for information on stock options, or read a few books. Most people are drawn to options trading by the potential to create large sums of money in a short period of time.

Here is my forewarning; having a great deal of head knowledge about stock options doesn't necessarily mean you'll be a great trader. It's going to take some real world practice.

Most of what I've learned about investing did not come from a classroom or a book; it came from real world experiences. I found people who were willing to give me unbiased investing education and I applied the knowledge through practice and a bit of trial and error.

Investing Education is your Financial Roadmap

Investing education has a purpose in our lives like a map has a purpose to a traveler. A map can take you from point "A" to point "B" when you're traveling. Investing education can take you from school loans, credit card debt, and no budget to debt-free with money to burn. It's your financial map so to speak.

You could try to figure out options trading on your own, but if you're smart and value your time you'll find a map that can get you to your destination quicker.

It's extremely rare for me to meet someone who doesn't want to provide additional income for their family, position themselves to retire early, or even pay off a mountain of debt.

Don't you feel those things are important? I do, and I believe stock options can help you accomplish just that, so let me share with you 3 bits of advice to help you succeed at options trading:

1. You must have realistic expectations: There are more "crash and burn" option trading stories then there are "rags to riches". The probability of you becoming an overnight millionaire is pretty low. It's like going to school to be a doctor. It's going to take 1-3 years for you to master your craft, not 1-3 months.
2. Continuously learn the art of trading: You won't learn how to be an expert options trader from a two day seminar. Imagine a doctor that learned how to operate in a two day seminar. Would you let this doctor operate on you? Have patience, it's going to take some time to learn the art of options trading.

3. Have a Plan or Plan to Fail: Yes you actually have to have a plan. You can't just throw money into stock options, close your eyes, and then wake up an instant millionaire. You have to plan your entry, plan your exit, and decide before hand when you're going to take profits and what you'll do if and when things go wrong. Because believe me, things do go wrong.

Learning to invest in stock options has dramatically improved the quality of my life, as well as my family's. The skills I have and the money I make give me walk away power from any corporate job.

When my 401K and mutual fund accounts lose value, my options trading account continues to grow. Why? Because stock options allow you to make money regardless of the direction of the stock market.

I happen to particularly enjoy stock options so I decided to make that my focus. But make your own decisions and decide what trading/investing style you're comfortable with. What works for me might not work for you.

Be a smart investor. A smart investor is one who finds the best trading system that works with their own unique character traits. They then find a vehicle (stocks, options, mutual funds, etc. etc.) and use it to create wealth.

Do your own research, and gain a better understanding of investing. I can't tell you how many people I encounter on daily basis that are victims of misinformation.

Don't be a victim, find a source for investing education and educate yourself. Create financial freedom by learning to invest.

Are you looking for an easy way to learn stock options trading?

http://www.learn-stock-options-trading.com/ is an educational Web site for investors who want to learn the basics of stock options trading without paying a fortune for the education. Come let me share my option trading tips, techniques, and strategies with you.

Article Source: http://EzineArticles.com/?expert=Travis_W
http://EzineArticles.com/?Investing-Education-Advice-If-Youre-New-to-Options-Trading&id=2290480

Free Paper Trading Account Review for tradeMONSTER

This is my no fluff review of tradeMONSTER's free paper trading account.

This review does not reveal everything that tradeMONSTER's free paper trading account offers. The review only outlines the major aspects that were of interest to me.

I highly recommend that you check out tradeMONSTER for yourself. Unlike some of their competitors, tradeMONSTER provides a convenient way for you to test out their trading platform.

I had been hearing about tradeMONSTER for some time, but since it's a fairly new broker I stayed clear of them until I could learn a bit more about them.

I finally found the time to open up a free paper trading account to test out tradeMONSTER's trading platform. I've been reviewing their service for the last few weeks and I thought I'd give you a review of my experience.

Opening a Free Paper Trading
Account at tradeMONSTER

The first benefit that I noticed is that unlike my other two brokerage accounts, (thinkorswim and optionsXpress) I did NOT have to open up a regular brokerage account to access the paper trading account.

It's been awhile since I opened up my thinkorswim and optionsXpress accounts, but with both accounts I had to go through the lengthy application process and fund the account in order to gain access to their free paper trading account.

Opening up a free paper trading account at tradeMONSTER was much easier!

All I had to do was fill out a short form that took less than a minute and hit submit. It took me straight to the trading platform. Short and sweet, just the way I like it.

Signing up for tradeMONSTER's free paper trading account is ideal for...

• Time conscious traders such as myself
• New traders who are often intimidated by the long application process of a regular brokerage account
• And people who want to get a free sneak peak before they commit to opening up a regular brokerage account

Through tradeMONSTER's free paper trading account, you can experience all the features of a regular account without using your own money.

It's a zero-risk real world experience of trading.

So if you transition from a free paper trading account to a regular brokerage account or IRA, it should be a smooth transition as you will already be familiar with the trading platform.

They give you $50,000 to trade with and a $100,000 margin.

Trading Platform

When I initially opened my paper trading account, I did not have the chance to look around and figure out how things worked. I immediately logged out.

A few days later I found a trade I wanted to make so I figured this would be an ideal opportunity to test out tradeMONSTER's trading platform.

I went in blind. I didn't know how the trading platform worked, I didn't watch any video tutorials, or read any help instructions.

Can you guess what happened?

Within 5 minutes I had successfully executed two trades and had their orders filled. And for one of the trades, I even had to go back in and modify my bid price. I was able to do all of that without even knowing how tradeMONSTER's trading platform worked.

Now what I did was risky, but hey… it's a free paper trading account so I had nothing to lose. Buying and selling was pretty easy. You click on the stock option you want to buy and there's a green button that says "BUY" and a red button that says "SELL.”

Now granted I've been trading for many years, so over time I began to get a feel for how to place orders. The companies may change and their order screens are all completely different, but the basics stay the same.

However, I admit if tradeMONSTER's trading platform wasn't so easy to use, I would have had to fumble around awhile like I did with my first thinkorswim trade.

TradeMonster's trading platform is web-based so there is no software to download on your computer. You can trade from anywhere you like.

No need to drag your laptop on vacation with you (yes I'm guilty of doing that).

I like it because my thinkorswim software I downloaded on my computer works fine until my virus scan comes on, then my computer locks up.

I can't tell you how many times I was in the middle of a trade when my computer locked up. Thinkorswim does have the capability to trade through a browser-based platform like tradeMONSTER, but I'm not too crazy about it.

TradeMonster also has a “drag and drop” feature that is pretty unique for a trading platform. You can customize your trading screen by using the “drag and drop” function to move menus around.

They also have a mutual fund screener and a list of mutual funds that they offer. This is important as you should not have all of your available trading capital tied up in stock options.

One interesting thing that happened while I was testing out the platform was that I placed an order to buy stock options after market hours (8:09 PM EST) to see what message I would get. I was rather surprised when it said my order was filled.

What the heck? That's not realistic and it could throw some new traders off.

You're generally suppose to get some kind of message that the markets are closed and your trade will be executed at the opening of the next trading day OR your order should just sit there as an open order until the next morning.

Managing Your Trades

No more calculating your stop losses by hand or through an excel spreadsheet. They have this really cool stop loss calculator and exit plan function. Discovering this alone was worth the time it took to test out the trading platform.

When you place any trade, you have the option to enter in your exit strategy and any alerts will be sent via email or as a pop-up on the site. You can set your exit plan by Price, Price Change, or Price % Change.

The mere fact that tradeMONSTER even has an "exit plan" function means they are serious about helping you become a successful trader because EVERY, and I mean EVERY trader should have an exit plan for EVERY trade. I think you get the point.

Charting Software

They don't have quite as many studies (technical indicators) to apply, but they have the most important ones that I use.

Also, once I applied the indicators to the chart I had to scroll down to see them. This was a minor annoyance.

Commissions

They have lower options trading commissions than their competitors, .50 per contract with a $12.50 minimum per order. You can take a look at tradeMONSTER's pricing here.

Customer Service

Yes, I even tested out their customer service.

I tried their live help feature and the experience was good. I didn't have to wait long for an operator to respond and he answered my questions to my satisfaction.

There was one question he could not answer so he directed me to their contact form on the website.

When you submit an e-mail to support this is the e-mail you will receive:

"Thank you for contacting us! We have received your inquiry and are assigning it to a representative. You can expect to receive a response from us within one business day."

One business day great! 1, 2, 3, 4, 5, 6 DAYS LATER I FINALLY GOT A RESPONSE!

And then to top it off my issue was still not resolved. All the person did was ask more questions. The annoying part was that the answers to those questions were in my first e-mail.

I politely explained that I was annoyed and copied my original e-mail within the body and highlighted the information he was looking for.

Roughly 12 hours later, my issue was resolved. Now that was a better response time! So they were 1 for 1 with regards to their response time.

I assume they took so long to respond the first time because they are being bombarded with so many new members signing up. You know how it is. A new company grows so fast that sometimes the staff has a hard time keeping pace with the growth.

Besides, it's not like I haven't had a bad customer service experience with my other brokers.

Final Thoughts

My other two brokers, optionsXpress and thinkorswim, have a huge head start on tradeMONSTER so I can't expect them to have all the nifty resources and reading material as everyone else.

For those who may consider opening up an account at tradeMONSTER...

If you become frustrated because they don't have all the bells and whistles as other brokerage accounts, I'd say be patient.

I believe great things are going to come from tradeMONSTER.

After all, it was started by 3 trading veterans and respected investment industry experts - Jon Najarian, Pete Najarian, and Dirk Mueller - which all have more than 20 years of experience cultivating financial and technology-driven businesses.

Here are some of the additional benefits of opening an account with tradeMONSTER:

• Account Transfers - they will reimburse your ACAT fees up to $250
• Truly streaming data - through real accounts and also when you open a free paper trading account
• Single-screen trading platform, so you're always near the next trade

Ultimately, free is still free no matter how many ways you look at it. And the great thing about tradeMONSTER'S free paper trading account is that it takes less than a minute to open.

Don’t just take my word for it though. You won't ever know what they have to offer until you check them out for yourself…don't miss out on the next big thing.

Here's the link to tradeMONSTER's paper trading account.HURRY UP and join now so you can sign up for their new beginners webinar on June 24^th.

Regards, Travis

P.S.

And for all you Twitter fans who don't like to be confined to your brokerages forum tradeMONSTER has integrated their trading platform with Twitter.

Does your broker offer that service?

Check it out the FREE paper trading account at tradeMONSTER's for yourself. Visit http://www.trademonster.com

Investing in Stock Options: Expectations vs. Reality

 

Investing in stock options has its positives and negatives. Most people are enticed to learn about options trading because of the amazing returns that can be achieved.

 

What they don't realize is that great reward and great risk usually go hand in hand.

 

Investing in stock options is not a get rich quick endeavor. As I tell my friends there are more crash and burn stories than there are rags to riches.

 

I was reading an article that reminded me of my own journey as an options trader, as well as that of the many traders I've seen come and go. Those who are determined to succeed, stick with it. Those who are looking for quick gains fall by the wayside.

 

Here is a snippet from the article:

"I remember my start in trading more than a decade ago. It began with a book I read that just hooked me. It talked about some amazing returns and exposed me to strategies that previously had been unknown to me; strategies like writing covered calls and buying LEAPS calls and selling naked puts. I suppose it was the amazing returns that first attracted my attention, but it was only after trading a few years that I realized that the returns the author used to illustrate his points were annualized, not annual, returns...Some of the examples as I recall even referred to annualized returns over 3000%! Definitely, that kind of trading was for me so I embarked upon my career as a trader."

 

 

It's funny how sometimes the greed for more money draws people into not only investing in stock options, but trading in general. We then spend the next few years trying to suppress and control the same emotion that caused us to want to trade in the first place.

 

Fear and greed are the two emotions that will always get in the way of trading success.

 

Here is what the author noted next:

 

 "My naivety was rapidly crushed when I learned that trades could actually lose as well as win, especially when the market turned over and rocketed downward...I needed to learn how to trade a down market and I needed to set aside the greed factor as much as possible and figure out what I really was trying to do."

 

He then went on to say that figuring out what he was really trying to do was not easy as he thought. I concur. One of the things that new traders have a hard time understanding is that investing in stock options is not as easy as it sounds. If it were, then everyone would be doing it.

 

I relate it to enrolling in school to be a doctor or lawyer. Those two professions pay fairly well, but there's a huge upfront commitment. It also takes years to master the profession.

 

Investing in stock options and trading in general is the same. Yes the rewards are great, but it's going to take a huge upfront commitment and time to master the craft.

 

 

You can read the full article here: http://www.marketfn.com/blog/2009/05/what-do-we-really-want.html

 

 

 

Happy trading, Travis

http://www.pursuingwealth.com/

 

 

P.S. Why were you enticed to trading in the stock market? Were your expectations met, or did you hit the "wall of reality?"

I'm Long 20 APPL Call Contracts and I'm up a combined 39% or $4,800

I'm pretty excited, cautious, but pretty excited. I bought some call options on Apple Inc. (AAPL) on Monday after seeing a picture perfect pattern on the chart (perfect for me at least). I was pleasantly surprised to log into my brokerage account today to see that I was already up 39% or $4,800. This Bear Market has been brutal on everyone's portfolios, so whenever I can squeeze in a good trade I'm happy.

Once I close out the trade I'll write up a trade overview.

I gained an extra boost of confidence on Tuesday when I received an e-mail from Market Club informing me that they had created another video for AAPL because it has come across their radar screens also. I've copied the e-mail below:

"In this week’s video we are revisiting Apple, Inc. I last looked at Apple on April 9th, when it was trading at considerably lower levels than where we are right now. At that time I made some projections using MarketClub’s Fibonacci tool, as to where I thought Apple was headed.

Obviously Apple has moved quite a bit and I want to revisit some of these key levels that I think may be a real challenge to this market in the very near term. It’s a short video, but I’ll go into details about levels I think could affect this market.

MarketClub’s "Trade Triangle" technology has been right on the money with Apple and continues to maintain a long position from $103.60. The videos are always free to watch and there is no need to register. I would love to get your feedback about this video and your own predictions about these markets on our blog."

All the best,

Adam Hewison President, INO.com Co-creator, MarketClub

-----------------------------------

That's it for now. I hope you enjoy the video.

Regards, Travis

 http://www.pursuingwealth.com/

P.S. Did you sign up for the trading videos I told you about? If you did let me know, maybe we can make some trades together and start practicing the things we learn in the videos.

Trading Videos

I know you all have been patiently waiting for me to write a new post. I do apologize for the wait. My editor was out of town last weekend so she did not have a chance to review the material. I should have something for you in the next day or so. In my downtime this weekend I was logging in to watch a few trading videos to fine tune my trading skills, and you crossed my mind.

I was remembering how frustrating it was to be a new trader. As a new trader you can't really decipher the good learning material from the bad. You don't know which $5,000 seminar will be worth your time and which one will be a total rip-off.

So with this site I'm passing along what I know as well as the resources I currently use to help me make money. I joined a service that gives me access to more trading videos than I have time to watch. It's a company I trust, because they have been more than generous with the information they provide and it actually helps me to be a better trader.

I'll be the first to tell you that I'm a frugal trader. My friends call me cheap, but oh well. I'd rather be a cheap Warren Buffet than a broke nobody. It cost me a measly $8 a month. Less than I pay to go to the movies here! Less than I pay at Arby's, bla bla bla, you get the point.

I could go on and on about how they have access to 150 experts and 500 hours of seminars for you to view at your own leisure, but I've arranged for you to see for yourself. Click on this preview link and right above the preview video you can click on the Experts or the Titles tab and you can get a free sneak peak of everything that you'll have access to BEFORE you cough up your hard earned dollars.

I was going to login and do a video showing you everything but they have already recorded a INO TV Tutorial for me and you get to see the tremendous value you will received. Put it this way. I have been a member for almost a year and I haven't even finished the all the options trading videos.

By now you have read most of the material on my site (PursuingWealth.com) and you can get a feel for whether or not you can trust my advice so I don't have to sell you on joining. Either you trust me or you don't. Those who trust me will gain access to what I know and will invariably benefit from that, and those who don't trust me will go find someone that they do trust. To me it's a win-win situation either way.

To Your Success,

Travis

P.S. After you finish watching the tutorial here's a link that goes directly to the order screen Join INO TV Today!

Options Trading Questions

Someone had asked a few questions on one of my earlier post. You can check out my reply here:

http://www.tradinggoddess.com/2009/06/options-trading-questions.html

Regards, Travis

Stocks of Interest

This is a bit late but I thought I had already posted this. Instead I posted it to another options trading blog and thought I had shared it with you also. Anyway...

I've been so busy creating an options trading home study course that I haven't had much time to devote to full time trading. I was creating a tutorial on the slow stochastics oscillator. This technical indicator is generally used to generate buy and sell signals. As I was creating the material and editing the pictures I spotted a few charts of interest.

All four of these stocks signaled for a long entry (the up direction) with the slow stochastics oscillator:

AAPL, BIDU, AMG, and QQQQ

I'm a bit bias, I like the chart of APPL best though. It appears ready to take off and it formed a chart pattern that we haven't discussed yet, the double bottom.

Here is my extreme caution!!!!

Since early March the stock market has risen 30 or so percentage points. Can you flip'n believe that? Yet on the news people are still screaming doom and gloom. Often when a stock, or stock market index, rises an unusual amount in a short period of time there is often a pull back in prices as people decide to take profits. So there is no need to open a ton of new positions, and this is not a trade recommendation. You won't "miss out" on anything. The stock market will be here for ages to come. These stocks are just on my "stocks of interest list". I am merely going to watch them to see what happens....Although the more I look at it, AAPL is looking even more tempting. 

Invest with Prudence, Travis
http://www.learn-stock-options-trading.com/

Puts and Calls

Puts and Calls are essentially the main two components of options trading. They are the only two types of stock options. Everything else is just a variation or combination of Puts and Calls.

** For the sake of simplicity, I'm only going to refer to stock options, even though options can be traded on stocks, exchange-traded funds, indices, commodities, etc.**

Last week we discussed options trading and briefly explained the concept of trading these contracts (Puts and Calls). Let's do a quick recap:

Stock Options are contracts; they don't represent ownership in anything. They are merely contracts that grant you certain rights. In the case of a stock it gives you the "right", but not the obligation, to buy (Calls) or sell (Puts) shares of a stock at a set price on or before a given date.

An options trader is in the business of buying and selling contracts.

A stock option is often referred to as a derivative and its value is dependent on the price of the stock it was created for. The contracts go up or down in value as the underlying asset (stock) goes up and down in value.

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2 Types of Stock Options: Puts and Calls

The "Put" option gives its buyer the right, but not the obligation, to sell shares of a stock at a specified price on or before a given date. After this date, your contract expires and your option ceases to exist.

The "Call" option gives its buyer the right, but not the obligation, to buy shares of a stock at a specified price on or before a given date. After this date, your contract expires and your option ceases to exist.

Stock option contracts grant you the rights listed above, but you don't have to buy or sell the stock if you don't want to. If you don't exercise the rights of your contract then you simply lose the money paid for the contracts.

This is why Puts and Calls are called wasting assets. They have expiration dates. A stock option is nothing but a contract, and like most contracts they are only valid for a set period of time.

For example, I have a one year contract with a local gym here. It gives me the right, but not the obligation, to go to the gym whenever I want for a year. They don't make me go, but if I don't exercise my right to go then I lose the money I paid for this right. After a year my contract ends and I no longer have the right to workout at that particular gym.

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Puts and Calls in Action

1 stock option contract = 100 shares of a company's stock. So when you buy 1 contract you are buying the right to buy or sell 100 shares of that stock.

Puts and Calls allow you to make money whether the stock market is going up, down, or sideways. This will only make sense if you understand how these two contracts work so let's dig deeper.

"Put options" increase in value when the underlying stock it's attached to declines in price, and decrease in value when the stock goes up in price. Remember Put options give you the right to sell a stock at a specified price.

For instance if you bought an IBM December 130 "Put option", the option (contract) gives you the right to "sell" IBM stock for a price of $130 on or before the third Friday of December.

If IBM falls below $130 before the 3rd Friday in December you have the right to sell the stock for more than its market value. So let's say that IBM falls in price to $76. Everyone else who owns the stock has to sell it for $76, but you own a contract that says you can sell it for $130!

Now can you see why Put option contracts go up in value as the underlying stock goes down in price? The further the stock falls in price below your exercise price ($130) the more valuable the option becomes.

"Call options" increase in value when the underlying stock it's attached to goes up in price, and decrease in value when the stock goes down in price. Remember Call options give you the right to buy a stock at a specified price.

Let's say you bought an IBM December 95 "Call option" instead. This option gives you the right to "buy" IBM stock for $95 on or before the 3rd Friday of December.
 
Now imagine that IBM comes out with a new product and the stock shoots up in price to $127. You own a contract (Call option) that says you can purchase it for $95 a share. Think shopping, you get to buy it at a ($32) discount or sales price when everyone else has to pay the full retail price.
 
So as the stock goes up in price, the 95 Call option goes up in value. A $140 stock price means you get a $45 discount in price etc. etc. And vice versa, if the stock falls in price to $50 a share who wants to purchase a contract that gives them the right to purchase it at $95, when it's selling cheaper on the open market.

If you exercised the right and bought the stock at $95 you'd immediately be at a loss of $45 since the stock is trading for $50 on the open market. That's the equivalent of someone trying to sell you a car for $2000 when the blue book value of it is $1500.

**Tip** The easiest way to understand the difference between Puts and Calls is to realize that they function opposite of each other.

Most Puts and Calls are never exercised (the stock is never bought or sold). Option traders buy and resell stock options before their expiration date. This is primarily because minor fluctuations in the price of the stock can have a major impact on the price of an option. So if the value of an option increases sufficiently, it often makes sense to sell it for a quick profit.

Now of course this is only one reason why someone would trade options. There are numerous reasons why people trade options and just as many strategies to go along with those reasons.

If you're interested in learning how to trade stock options just take your time and make sure you fully understand the concepts before you engage in any real money trading. Confusion on top of confusion just equals more confusion. Take the time to learn it right the first time; it will be well worth your time.

For more information on puts and calls and to learn how to trade stock options go to http://www.learn-stock-options-trading.com/.

Question, comments, or feedback on these two post? Leave your response below, and I'll try to follow up on future option post.

Trade With Prudence,

Travis
http://www.pursuingwealth.com/

So What is Options Trading?

Often I feel like stock traders are lucky. Explaining what they do is easier than explaining options trading. Heck, I would even go so far as to say that investing in stocks is easier than options trading, but that's another argument for another day.

People, for the most part, understand investing in stocks. If you were to tell them you are a stock trader, they would at least have a vague idea of what you do, but when I tell people I trade stock options I get blank stares more than anything else.

If they are aware of stock options, they either think I'm talking about employee stock options or have heard of the apparent risk of options trading. Stock options are gaining popularity, but the mass population is still not fully aware of their existence.

I've decided that my first few post are going to be educational overviews of options trading. If my simplicity offends you educated folk, I give you my apologies up front. This is for the newbies and the uninformed (smile).

Stock options are versatile and can be quite complex. There are numerous trading strategies and trading combinations that one can use. I'm just going to give a very basic and simplified idea of what I do as an options trader, but first let me give you my overview of trading stocks.

Buying Stocks for a Profit

1. You buy shares of a company's stock. A share is a small piece of ownership in a company. You're "sharing" in that ownership with other investors. This share (piece) is assigned a value
2. The shares increase in value (the company's perceived value increases)
3. You sell your shares (sell your piece of ownership to someone else) and pocket the difference between what you paid for them and what you sold them for

Stock Options

A stock option is not a physical thing like owning shares in a company. Instead, it's a contract between two parties. When you own stock (or shares), you actually own a piece of the company. An option is an agreement, or contract, where one party agrees to deliver something to another party within a specific time period and for a specific price. Now let me explain option trading (the buying side only):

1. You buy a contract
2. Your contract goes up in value
3. You sell your contract for more than you paid for it and pocket the difference

So as an option trader I'm essentially in the business of buying and selling contracts (stock option contracts).

"Real estate investors" buy and sell homes. "Option traders" buy and sell contracts.

Stock Option Definition: If you buy or own a stock option contract it gives you the "right", but not the obligation, to buy or sell shares of a stock at a set price on or before a given date.

It's merely a contract that grants you certain rights. Having a membership to the gym gives you the right to go to the gym, but you're not obligated to go.

Stock options are called derivatives. That's actually their proper name.

Children are derived from their parents. Cheese is derived from milk. Stock options are derived from stocks. You can't have the latter without the former.

Technically speaking, the term derivative refers to how the price of these contracts is derived from the price of the stock. Their value is dependent on the price of the stock it was created for. IBM stock options are created for IBM the stock. Generally, the option's value will rise and fall in sync with the stock price.

Okay, I assume you understand how buying shares of stock can be profitable, but how can buying contracts be profitable?

Buying Contracts for a Profit

Let's assume you find a house you want to buy for $100,000. You go to a realtor and submit a contract to the sellers, and it's accepted. Let's say the closing date is 3 months away. Within those three months Donald Trump announces he's going to build a high end golf course down the street from that house. Lucky you, you have a contract that says you get to buy the house for $100,000.

My assumption is that property values in that area would most likely increase. So let's say the house increased in value to $130,000. Once you buy the house you could immediately turn around and sell it for a $30,000 profit. Or you could take the approach of an options trader.

That contract now has more value because the underlying asset it's attached to has increased in value. So you could sell or assign your contract to someone else easily for $5,000 because that still leaves $25,000 equity left over in the deal.

So that's my over simplified example of how buying and selling contracts can be profitable. Stock contracts (options) work essentially the same way.

Let's say that back in March you purchased a stock option (contract) that gives you the right to buy Goldman Sachs (GS) for $70. Now 3 months later GS is trading for $143, but you hold a contract that gives you the right to purchase it for $70. Do you think your contracts perceived value has increased? Yup, it sure has. So essentially you turn around and sell it for more than you paid for it.

The option contract went up in value because the underlying asset (stock) it was attached to went up in value.

I hope these examples at least gave you a better understanding of stock options. Next time I'll talk about the two different kinds of stock options, Puts and Calls.

Happy Trading, Travis
http://www.pursuingwealth.com/

P.S. On a side note, these stocks triggered for long trades (AAPL, BIDU, AMG, QQQQ), but I'm not taking the trades because the stock market has risen too sharply in too short of a period of time. I am leery of a pull back in prices as people take some profits. I put these stocks on my watch list. I will merely watch and see what they do. There are a few more market conditions I want to see met before I enter any more long positions.

Market Videos | I Need Your Feedback

I received an e-mail from one of my partners to review 4 free videos and give feedback on them. I love free resources, but honestly I don't have the time to review them right now. I'm passing the videos along to you for your viewing pleasure. If you want to give me feedback just send it through my contact page, if not, that's okay. You can watch the videos either way.

The descriptions of each video are below. Once you get to their site just sign up (for free) and you'll be taken to the video page.

Enjoy, Travis

P.S. If you enjoy free resources or videos like this please let me know, because my inbox is flooded with them. I can easily pass them along to you.

Daily Market Studies
Dan Gramza
Watch as Dan Gramza gives daily analysis, set-ups, and insight into the current market conditions. Updated every morning, Dan's commentary shows you exactly what's happening in the most active and volatile markets including Stock Indexes, Forex, Grains, Precious Metals, and more. Dan is the President of Gramza Capital Management, Inc. and DMG Advisors, LLC. He is a trader, consultant to domestic and international clients, and an advisor to the St. Croix hedge funds.

Check out this video HERE.

CME FX Product Trading
Derek Sammann
Derek Sammann discusses the development, market focus, product availability, and beneficial aspects of trading foreign exchange products in the current market conditions. Watch as Derek explains the development, liquidity, and product adaptation of the CME Group's FX products culminating in the recent release of E-micro contracts for the self-directed trader. Derek is the Managing Director of FX Products at the CME Group and has over 15 years of experience in the global FX markets.

Check out this video HERE.

Gramza Special Monthly Video Report
Dan Gramza
In this special video report, Dan Gramza covers proprietary trading strategies by reviewing market moves in the previous month. Learn specific price levels for placing entry, exit, and risk management stops while examining current opportunities. Dan is the President of Gramza Capital Management, Inc. and DMG Advisors, LLC. He is a trader, consultant to domestic and international clients, and an advisor to the St. Croix hedge funds.

Check out this video HERE.

Crude Oil and Energy Update
Joseph Raia
Watch as Joseph Raia, managing director of energy and metals for the CME Group, speaks about crude oil, natural gas, and world energy markets. Raia has spent more than 22 years in the energy and transportation sectors and has held various positions in oil transportation and trading.

Check out this video HERE.