In the previous two blog posts we talked about some simple strategies for BUYING AND SELLING OPTIONS.

In this blog post we will discuss more advanced options trading strategies:. When trading a vertical spread, you are buying and selling options of the same underlying stock e. AAPLsame expiration date, but at different strike prices. Limit your risk In my blog post "Swing Trading Options - Part 2" I discussed the strategy to collect premium.

I used the following example:. For a more detailed explanation please take a look at the previous blog post. As you know, when BUYING a put option, you have the right to SELL shares at the strike price. When SELLING a put option, you have to BUY the underlying stock at the strike price.

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The picture on the right is known as a "risk graph", and illustrates how a vertical spread works. Once the stock trades above the breakeven point of the spread the spread will start to make money as seen on the right hand side of the risk graphbut the total profit plateaus and the max profit will be capped as well. When I started trading inI traded option straddles. The idea is to buy two options one call and one put of the same underlying stock e. AAPL with the same expiration date, but different strike prices.

When trading straddles, you think that the stock is about to move, but you don't know yet whether the stock prices will go up or down. I used to trade straddles ahead of major earnings report, since a stock usually moves only sideways before the earnings report is released, and then you hope that it will move sharply up or down after the earnings. On May 7h 5 days from now Electronics Arts EA will release its earnings report. Both options expire in 18 days.

In this example the put option would expire worthless. In this example the call option would expire worthless.

The chart on the left illustrates how straddles work. As you can see, the stock has to move AT LEAST the amount that you pay for the spread, otherwise you lose money. This strategy works best if you can buy the call and put option cheap and expect an explosive move before the options expire.

Trading an options strangle is almost the same as trading a straddle. The only difference is that you are using different strike prices for the call and the put option. You'll notice, if you are buying options it's important to buy the options as cheap as possible.

The cheaper the options, the lower the break-even point and the faster you'll be "in the money". That's why swing trading options blog charting software packages provide powerful "scanners".

When I was trading options back inI analyzed all options of the 30 stocks in the Dax with my Casio calculator. It took me around 1. These days you can analyze hundreds of stocks and options in a matter of minutes - sometimes even seconds - to find the cheapest options and the best strategy.

In part 3swing trading options blog risk graph for the covered put tactic is identical to the covered call, that is apparently incorrect, could you please look into it? So the vertical spread is attractive.

What is the maximum gain in the example you cited? An the risk reward ratio in this AAPL example? Does it make sense considering you pay multiple commissions to do the trade? Thanks for the nice explanation.

May 3rd, at 3: I'll cover that in an upcoming blog post. Hell Markus, I like most of what you do and teach but you have made some embarrasing comments in discussing options in this lesson. First, you said " when you buy a put option you are obligated to sell shares at the strike price" That is not so. The usual formulation is that the buyer of an option has the right, but not the obligation to buy or sell the shares involved.

You prison stocks publicly traded choose to sell shares at that price if Apple has fallen below when the option expires, or before then if you choose. Most holders of profitable puts simply liquidate them in the market to realize the gain without further cost or effort if the stock price falls below the strike price.

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In fact your risk would be that if Apple dropped below then the stock might be put to you at that price. The extent of your loss would be the cost of buying shares of Apple at the then-prevailing price to pay for the shares you had to buy to meet your obligation to the put arbitrage forex trading ea. It might be very painful foods market stock quote but not unlimited.

Thanks Markus for such a great beginners stock trading basic stock terminology on these strategies. Look forward for your next blog for the other strategies. Markus, Your options info is very informative and somewhat simple. You should teach a course, because you are making complex procedures seem less intimidating to attempt. Thanks and please keep sharing. I also like Flash,whatever I am not a agreeable designer to draft a Flash,yet I have calculator software by hag a Flash is automatically created and no more to hard working.

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Left-leaning website Salon has removed a controversial article criticizing Otto Warmbier The Los Angeles Lakers and Brooklyn Nets have completed the NBA's second big offseason trade Trading Futures, options on futures and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources.

You may lose all or more of your initial investment. The lower the day trade margin, the higher the leverage and riskier the trade. Leverage can work for you as well as against you; it magnifies gains as well as losses.

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Swing Trading Options - Part 3 12 Comments. In this blog post we will discuss more advanced options trading strategies: Vertical Spreads and Straddles and Strangles. There are two main reasons for using vertical spreads: Limit your risk when SELLING options Reduce your cost when BUYING options Here are examples for both scenarios: I used the following example: Let's say you expect some major news in this earnings report that should move the stock. Now let's calculate our break-even points: In the next blog post we will talk about 2 more option trading strategies: Iron Condors and Butterflies I hope you're enjoying this series of blog posts on swing trading options.

Please let a comment and let me know if I should write more. Leave a Reply 12 comments. George Ta - May 3, Reply. Richard Krutenat - May 3, Reply. Mike - May 3, Reply. Earl McHugh - May 3, Reply. Bernie Durkin - May 3, Reply. David Yam - May 5, Reply. TAMMY Jones - May 14, Reply. Suliman Alamro - March 28, Reply. Click to cancel reply. Live Market Quotes Market Quotes are powered by Investing.

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