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Option Trading Strategies

1) LEAPS

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."

When we own LEAPS we also like to write covered calls against the positions for added income.

Our Option Trader Real-Time Trading Alerts Service recently provided a 16.48% return in only 5 days by trading the Yahoo Leaps! If you had been with us, you could have used the leverage of option trading by buying these Leaps when we did at $9.10 (while Yahoo was trading near $33.95) and selling them only 5 days later when we did for $10.60 (while Yahoo was trading around $35.90) for a gain of over 16%!

By utilizing the power and leverage of options, you could have bought 1 Leap on Yahoo (which controls 100 shares of Yahoo) for $910 and sold it 5 days later for $1,060! For a profit of $150! (If you bought 100 shares of Yahoo stock, you would have paid $3,395 and sold them for $3,590 for a gain of $195 -- or a return of only about 5%.)

So, by trading options we:

reduced our cash-out lay
($910 for the option trade vs $3,590 for the stock trade)
increased our percentage return
(16% for the option trade vs 5% for the stock trade)

Here's another example of a LEAPS purchase. This trade made 10.5% return in only 1 day by trading the Lam Research Leaps! If you had been with us, you could have used the leverage of option trading by buying these Leaps when we did at $3.90 and selling them the next day with us for $4.20 for a gain of over 10% in one day!

2) STRADDLE

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."

Here's an example of an actual Straddle play from our Option Trader. This trade made 29.5% by trading Safeway options. Opening position alert: "I am entering a straddle on Safeway buying 5 contracts of the Dec 25 calls (SWYLE) and buying 5 contracts of the Dec 25 puts (SWYXE) for a net debit of $3.55. Earnings are scheduled to be released on July 15 and the approach to that date should give a volatility pop. The breakevens at expiration are $28.63 on the high side and $21.37 on the low."

1st Trade adjustment alert: "I am adjusting my straddle on SWY. With a signigicant short term downtrend in place, I am closing the losing side of the straddle on Safeway (SWY) by selling the Dec 25 Calls (SWYLE) for $0.50. At the same time, I am placing an order to sell the Dec 25 puts (SWYKE) CONTINGENT on the stock price hitting or exceeding $22.59. That stop will help to protect most of the profits on the put side unless there is an unexpected gap up."

2nd Trade adjustment alert: "Yesterday, I got out of the call side of the Dec 25 straddle on Safeway (SWY). Today, the stock has moved down a bit more so I am tightening my stop on the Dec 25 Puts (SWYXE) I own. I now have a stop order to sell the Dec 25 Puts (SWYXE) contingent on the stock exceeding $22.40. Assuming no unanticipated gap up, I am currently in a profitable position on these puts and a profitable position in the overall straddle taking into account the loss on the call side as well."

3rd Trade adjustment alert: "With Safeway's continuation of its' downward movement, I am moving the stop down as well to attempt to capture more profit. I now have my stop to sell my Dec 25 Puts (SWYXE) contingent on the stock (SWY) exceeding $22.26."

4th Trade adjustment alert: "Safeway (SWY) is down again this morning so I am attempting to capture yet more profit by lowering my stop on the Dec 25 Puts (SWYXE). My stop to sell is now contingent on the stock exceeding $21.55."

5th Trade adjustment alert: "As Safeway (SWY)approaches support, I am tightening my stop to lock in more profits. Therefore, I am moving my stop to sell my Dec 25 Puts (SWYXE) contingent on the SWY stock exceeding $21.20."

6th Trade adjustment alert: "I am tightening my stop on the Safeway (SWY) Dec 25 Puts (SWYXE). With support at 20 and the stock up modestly for the first time in several days, I want to lock in more profit. I now have an order to sell my Dec 25 puts (SWYXE) contingent on SWY stock exceeding $21."

Final Note: "A fine ending to a fine week. I was stopped out of my Dec 25 Puts (SWYXE) on Safeway (SWY) today when the stock bumped above $21. That closed my Dec 25 straddle for a decent profit considering there had been little risk from the beginning."

Note: As the above shows, we keep you informed every step of the way!

3) CREDIT SPREAD

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."

4) 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."

5) NAKED PUT

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."

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