Options are the most adaptable trading instruments available to investors and are a great way to make additional income. Options trading costs less that stock trading and option investing provides a high leverage approach to trading that can drastically limit the overall risk of a trade.  To trade options means that there is a contract between two parties regarding the price direction of a particular share. One party believes the price is going to fall within a certain time and the other party believes that the price will rise during that time. The party trading options will either buy or sell the option, depending on the direction they believe the price will turn. Option investing gives the right to a person to buy an option, with no obligation to buy or sell a set number of shares, also at a pre-determined price on or before a set date in the future.

In order to trade in the options markets, there is terminology that you must be familiar with. The “strike price” is the price at which an underlying stock can be purchased or sold if the option is exercised. There are several strike prices available that are above and below the current price of the underlying asset. The “premium” refers to the price on an option when option investing.  The strike price, the time remaining until the option expires, the option volatility, and many other factors, determine the premium. When option investing, you must also know that each option on a stock corresponds to 100 shares.  When conducting online options trading, you also must know that there are two types of options. There is a “call” option that gives the owner the right to buy shares, and there is a “put” option that gives the owner the right to sell shares. 

Option investing also follows a cycle that contains a four-month interval as well as three fixed expiration cycles.  Stock options expire by the close of business on the 3rd Friday of each expiration month and each stock has a corresponding cycle of months that they offer options in. How it works is that all listed options are available for the current month and the following month and additionally for specified future months. The four month cycles for online option trading are the following:

 1)  January, April, July, and October
 2)  February, May, August, and November
 3)  March, June, September, and December

Option investing is a little more complicated than shares when investors begin their option trading education.  After some practice successful traders realize that they are able to generate a nice monthly income and they can assure their portfolio. They realize as well that they are also able to get a return on investment equaling 100% or more on successful trades. It is also important that you take that extra step and trade creatively!  Creativity in option investing is a winning characteristic that is rare in this market.  If you can learn how to trade option effectively and show creativity in your trades, then you are already a step ahead of the next guy! 

Dow

Simple visual analysis shows us the Dow traded indecisively for the past three trading days, a Doji, a Hammer signal, and a Spinning top. Trading all at the same level indicates a possible bottom. The qualitative word is 'possible'. Look where the stochastics were trading. They were in a downward trajectory but with a possibility of curling back up. What would we want to see after a possible reversal signal? Bullish confirmation! The bullish confirmation is required to confirm a potential reversal signal. Three days ago a Doji formed. The next day opened flat and immediately traded down. That would not have been the bullish confirmation required to start establishing long positions. However, that day formed a Hammer signal. What was required to confirm a hammer signal? A bullish confirmation day.

Keep in mind, a bullish candle is required at the end of a trading period. Although the day following the Hammer signal initially traded positive, it required a bullish close. On those types of days, it is advisable to be extremely nimble. That means any positions established that day might require closing out the position if the day does not finish with a bullish confirmation. As was seen, after the Dow touched the T-Line, it backed off, went hundred points negative, and then finished up at a Spinning Top. This indecisive formation was not bullish confirmation.

Knowing what should occur after a candlestick signal allows an investor to make a game plan. There are expectations for what trading should occur after a candlestick signal. When those expectations do not happen, that should keep you from entering positions at the wrong time. Yesterday's Spinning Top in the Dow provided another trading set up. What is expected for bullish confirmation after a Spinning Top? Positive trading! A bullish candle! But when you wake up and see the pre-market futures are strongly negative, that immediately tells you the Bulls are not confirming a possible bullish candlestick signal of the previous day. Any intentions of going long today would have been a stopped upon the lack of bullish trading.

This may seem like a simplified point, but if you know what to expect after a possible reversal signal and that result does not occur, it has kept you from committing funds to a position that might not be worth while to be in at that time. The candlestick signals can keep you out of trades that are not performing as expected.

Conversely, knowing what 'should' occur after a reversal signal allows you to make a fairly safe entry decision. As illustrated in the May coffee chart, the sell signals were evident. Coffee opened and started trading higher, showing a possible support on the T-line. When it started coming back down through the open, the short entry becomes viable. First, it shows the T-line may not be acting as support anymore. Second, trading near the open price, after initially trading higher, a Shooting Star signal would be formed. Going short as the price comes down through the open price makes for a very low risk, high probability trade potential.

Commodity Corner - World Cup Advisors account August 1, 2008 to March 6, 2008 - Positive 113.75% gross. Live Cattle and Feeder cattle still in strong downtrend. Good profits were booked from the May Coffee trade.

Candlestick training session - Los Angeles CA. March 15, 2008 - A 2 hour Candlestick presentation will be given in the LA area to the "Colleagues in Trading" group. Details will be on the home page tomorrow.

Stock Chat Session tonight at 8PM ET open to the public - Click here for instructions.

Good investing,

The Candlestick Forum Team