Stock Options

• Our Option Trader Service is for active and aggressive traders who enjoy the challenge of frequent option trading—and the profit opportunities this brings—but who also appreciate the need to control risk.
  
  
  LEAPS (or "Long-term Equity AnticiPation Securities") are call and put options with an expiration as long as thirty-nine months. Generally, equity LEAPS have two series at any time with a January expiration. LEAPS are a powerful way to leverage your trading dollar. They allow you to control 100 shares of a quality stock for a fraction of their current trading price.
  
  Example trade alert: "I am buying 10 contracts of the Jan '06 20 LEAPS (XYZAD) calls on XYZ with the stock at $20.80. I would buy these with the stock between $20.35 and $21.00. My initial stop is contingent on the stock closing below $20.06. Currently these LEAPS are trading at $5.30 bid by $5.60 asked. I have placed a limit order to buy at $5.50. As the stock advances, I will raise my stop contingent on the movement of the stock."
  We like LEAPS and trade them frequently. From time to time, we will buy LEAPS and also write covered calls against the positions for added income.
  
  BUYING PUT OR CALL OPTIONS An "option" is the right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock at a specified price (the strike price) during a specified period of time. For stock options, the amount is usually 100 shares.
  
  Example trade alert: "With a bounce down off both price and trend resistance and a bearish engulfing candle on Friday, I am buying puts on XYZ. I am placing an order to buy the April 15 Puts (XYZPC) for a limit of $1.60. My initial exit will be contingent on the stock rising above $16.37."
  
  STRADDLES A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same strike price, expiration, and underlying stock. A long straddle is when both options are owned and a short straddle is when both options are written. Example: a long straddle might be buying 1 XYZ May 60 call, and buying 1 XYZ May 60 put.
  
  Example trade alert: "I am opening a straddle on XYZ with the stock between $20 and $20.70. I am buying the October $20 calls (XYZJD) and the November $20 puts (XYZVD). Implied volatility is in the 2nd percentile. The bid is $4.90 and the ask is $5. Current breakevens are $15 and $25. With a 6% move in implied volatility, there is a 91% chance of the position hitting either breakeven during the life of the trade. I have a chance to make money if the stock moves in either direction and/ or if the implied volatility increases."
  
  CREDIT SPREADS A spread strategy that increases the account's cash balance when it is established. A bull spread with puts and a bear spread with calls are examples of credit spreads.
  
  Example trade alert: "I am opening a bull put spread on the XYZ. I am selling the May 1375 puts (XYZQH) $8.10 x $9 and I am buying the May 1350 puts (XYZQQ) $4.60 X $5.50. I am placing a limit order to enter this trade for a net credit of $3.20. Notice that the leg I am selling is below support which is currently at about 1400. There are 16 days left in the trade. These options expire at the OPEN on the third Friday, so I can't trade them after market close on the Thursday before the third Friday. They are European style so they could not be put to me before expiration. They are cash settled. For each pair of the spread, I will receive $320 before commissions, and I will have a net risk of $2,180.00."
  
  RATIO BACKSPREAD
  A purchase of an option and the writing (or selling short) of a different number of the same type of options at a different strike price than the purchased options. All options involved have the same expiration date.
  
  Example trade alert: "I see a reverse skew on the XYZ. With the XYZ at 140, I am selling 1 June 140 call (XYZFH) for $5.40 and with the money I take in, I am simultaneously buying 2 June $147.50 calls (XYZFT) for $2.10. I will take in a credit of $1.20. If the XYZ goes against me, and goes below 140.95 at expiration, I will still make $110. If it goes above $154.20 I will have a profit on the upside. This profit has an unlimited upside and will just increase as the price of the XYZ increases. If I remained in the positions until expiration and the XYZ was between 140.95 and 154.20, I will have a loss. The maximum loss would occur at 147.47 and would be $620."
  
  CALENDAR SPREAD The simultaneous purchase and sale of options on the same stock with the same strike price but different expiration dates
  
  Example trade alert: "With the XYZ at 45, I am buying the June 45 puts (XYZFH) and I am simultaneously selling the Dec $45 puts (XYZMT). If filled, this spread makes money at expiration of the stock price is anywhere between about $43 and $47.99. The options are somewhat overvalued and there is a nice volatility skew in place between the two months I am trying to trade. An increase in volatility should help this volatility based trade."
  NAKED PUTS A naked put position is established by writing (or selling) a put option and the writer is not short stock or long another put option.
  
  Example trade alert: "With a bounce off support at $32.80, I am selling 5 contracts of the June $32.50 puts (XYZRZ) on XYZ for $1.15. I will take in $575 less commissions. My initial exit will be contingent on the stock price of XYZ going below $32.65. As long as XYZ stays above $32.50, I will be able to keep the $575. If XYZ goes below $32.50, I may be required to buy the stock at anytime before expiration for $32.50 a share."

by www.AnotherWinningTrade.com