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Options Trader

Trading options can be tricky business but if done correctly is a great way to make money investing. The options trader must understand everything there is to know about options. An option is a contract that gives the buyer the right, but not the obligation to buy or sell an underlying asset. This asset must be bought our sold at a specific price on or before a certain date. Just like stocks and bonds, options are securities and there are two types.

The two types of options include puts and calls. Put options give the holder of the asset the right to sell it at a specific price within a specific time frame. When buying puts, the goal is that the stock will decrease a significant amount before the option expires. Puts are often compared to having a short position when trading stock.

Call options give the holder of the asset the right to buy it at a specific price within a specific time frame. When buying calls, the goal is that the stock will increase a significant amount before the options expires. Calls are often compared to having a long position when trading stock. 

The options trader does one of four things when trading options trading. They will buy calls, sell calls, buy puts or sell puts. Additionally, traders will speculate or hedge when options trading. Speculation is what gives options their risky reputation. Traders bet on the movement of a security and they are not limited to making a profit only when the market goes up. When speculating options, traders can make money when the market goes down, or even when the market goes sideways. What makes it so tricky is that in order to successfully trade options, traders have to accurately predict not only whether the stock will go up or down, but also how much the price will actually change, and the time frame in which this change takes place. Wow!

Hedging, on the other hand, acts as a sort of insurance policy. Hedging is particularly helpful to large institutions, depending on the hedging strategy used, in addition to the individual investor. Hedging allows investors to not only restrict your downside, but it also allows investors to take advantage of the full upside in a cost effective manner.

There is a lot to learn for those investors interested in online options trading. It can be very risky, but with great risk comes potential for great profit. While it is risky, options trading has made investors a lot of money. Continue to learn about options to determine if you would like to become an options trader yourself.


Market Direction: Markets do not like uncertainty! Current market conditions reveal the perfect example of why prices move based upon perceptions of fundamentals versus fundamentals. The market is perceiving the possibility of the economy getting better because of the stimulus package. Although the stimulus package may not be a perfect allocation of funds to stimulate the economy, it  is perceived as being an improvement. Always keep in mind, price movements become  exaggerated as a trend persists. The market slammed down to new lows based upon the fear of not only a recession, but a possible depression. If you remember back one year ago, when the Dow was trading at 14,000, the projections were indicating an economy of great splendor.

DOW

The Dow has been trying very hard to bottom over the past three weeks. Candlestick signals have made it evident the Bulls were coming into the market at these levels. Many investors have become discouraged after a steady market decline of the past 12 months. Professional money managers are now courting the fact that they beat the indexes, even though they have lost fortunes for their clients. The past 12 months have clearly revealed that fundamentals are not the leading force for making money in the stock markets. Analysts were writing glowing reports on companies such as US Steel Corp. when it was trading at $190 per share. They have a completely different perspective when US Steel Corp. is training at $35 a share.

As many of you have observed over the past year, the candlestick signals and patterns revealed the bearish trend. The length of the trend made many individual stocks stay in oversold conditions. This made it difficult to recommend shorting stocks that were already oversold. Fortunately, the short funds provided an excellent trading entity to take advantage of the downward trajectory of the markets. Candlestick analysis provides the most important factors for making money. It demonstrates which direction a trend is moving. As investors, it becomes a much simpler process to extract profits from the markets knowing the direction of the trend. It becomes a function of finding the best trading entities that will utilize the trend information. Short funds have not been in existence for very many years. They greatly reduce the risk of shorting the markets versus shorting individual stocks.

It does not take extensive candlestick research to analyze the proper vehicles to be participating in during a trend. Candlestick analysis has the capability of analyzing general market trends, sector trends, and the individual stock trends. Whereas short funds may have been the best vehicle for profiting in the downtrend, the analysis of specific sectors can produce much bigger gains when a market bottom has been reached. This can clearly be seen in the dramatic change of investor sentiment in the banking stocks. The question is always "where do we grab for a falling knife". When do prices get so low that it is time to buy. Without candlestick signals, that becomes a high risk guessing game.

As witnessed over the past few weeks, there have been sectors that have exhibited extremely strong price patterns. Oil stocks are a good example. As seen in one of the Candlestick Forum recommendations, PetrolHawk Energy Corp. has produced a good steady profitable trend over the past two months. This opportunity was clearly made apparent by the visual buy signals found in the oil and gas sector scan. The same potential opportunities are now being witnessed in the banking stocks. Obviously the banking stocks have been out of favor. But the implementation of the government bailout program may now be perceived differently by the investment community. That perception change could be seen by the strong candlestick reversal signals occurring throughout the banking stocks.

HK

 

Bank Of America, BAC demonstrated a strong reversal signal on Friday. A Hammer signal in the oversold condition followed by a gap up in price, that was closing above the tee line, becomes an extremely strong buy signal. If this was occurring in one or two banking stocks while the rest of the industry was still heading down, that would not be strong confirmation. However, witnessing strong buy signals in a large number of stocks in a sector reveals a completely different message. The big money is starting to come back into that sector with great force.

BAC

FITB

What reveals a great force? Very simple rules applied to candlestick signals followed by a gap up in price allows investors to make large profits. This is not any secret formula. This is merely taking advantage of what the Japanese rice traders have revealed over hundreds of years. Learn how to use the signals, the entry and exit strategies, stoploss procedures, and easy to apply money management procedures and you'll have a much better probability of producing consistent profits.

Chat session tonight for members at 8 PM ET. There will not be a Thursday night chat session due to a travel conflict this week.

Good investing,

The Candlestick Forum Team


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