Option trading brokers may be your best friend in processing your orders, but it’s not always entirely smooth behind the scenes. Here is a brief list your option trading brokers are unlikely to tell you.

1. Broker-Assisted Isn’t Better

Outside the few products that brokers won’t sell via your online account, there isn’t much use in making a “broker-assisted” trade. Typically, broker-assisted trades cost two to three times the average cost of making a trade through your options trading broker, but only provide a few advantages.

Of course, the biggest advantage for new traders is the chance to get some advice on a trade, but is it really worth the cost? Not always. Although stockbrokers do bring some experience to the table, the particular broker you speak to may know little, if anything, about the actual stock or option in question.

Most brokers employed by discount operations are generally just there to approve purchases of irregular products, such as OTC stocks and other equities that are sometimes disabled to clients.

2. Yes, You Do Qualify for this Promotion

Promotional products abound, and it’s likely that while you’re paying your option trading brokers $9.99 per trade, someone else is paying just $6.99. The best way to find out if you’re paying too much is to give your broker a call, explain the situation about their latest promotion, and see what they can do for you. Sometimes all it takes is a call to one of the many option trading brokers to get the best commissions or a better margin rate.

3. You’re Still Paying for Charts, But Your Friend Isn’t

Investors with accounts open at option trading brokers could still be paying for benefits and tools other investors are getting for free. When you open an account, you’re entering into a contractual agreement to open an account and pay for the tools the broker offers to you.

As such, investors who opened accounts years ago may be paying for tools they no longer use. These same tools could now be offered for free. In many cases, real time quoting previously came with a monthly price tag, but competition has driven option trading brokers to give it away for free.

4. Please Trade Less – We Make More When You Do

Commission schedules can get hairy, especially considering the sheer number of products investors can trade through a standard brokerage account. With that said, your option trading brokers may be actually charging you more for less due to their pricing structure.

For instance, traders who make 90 trades or more in a quarter may get reduced commissions. However, those who make 89 are still paying just as much, but they may actually save money by making a small trade and closing it immediately to cross the 90 trade threshold.

While your option trading broker may not divulge what occurs behind the scenes, you are now savvy enough to ensure that your account is truly working in your favor.

Photo Credit: Swift Economics

New regulation attempts on the derivatives market could threaten the earnings of insurance companies and add new strain to the corporate debt markets.  A move by US legislators to de-leverage the derivatives exchange could bring about incredibly expensive margin calls.

The Basis of Regulation

A financial reform bill moving throughout Congress has one simple goal: to reduce the reliance on the derivatives market, as well as reduce the total amount being traded between investment banks, insurers and other institutions.  The new bill would require higher margin requirements for both parties in a derivatives bet, both for bets already made and for future bets between two parties.

Why the Regulation Matters

The derivatives market is perhaps the most leveraged market on the face of the earth, with most bets made with just 1-2% of the stake put up as collateral.  When one bank and another make a wager for $50 million in the future, only one party would put up $1 million as collateral, or a premium, to maintain the bet.  This allows for systematic leveraging throughout the entire exchange that has exploded the total value of all derivatives to an estimated $100-$500 trillion.  This figure is multiples above the total output of the entire world in just one year.

What the Bill Would Do

As mentioned previously, the goal of the bill is to reduce the overall size and scope of the derivatives market by requiring higher margin requirements.  The requirements would rise with the size of the individual banking institution, based on the amount of risk each bank poses to the financial system at large.

However, politicians have yet to consider how much new collateral would be needed should these bills pass.  If we assume that derivatives are worth a total of $100 trillion, and Congress mandates a new 10% margin requirement, $10 trillion will need be raised from the debt markets to continue trading.  This amount is just a fraction of the derivatives market, but some 70% of the total economic production of the United States in just one year.

Thus, should this bill pass and new requirements fall into place, insurers, bankers, and gamblers alike will have to pony up trillions to meet new laws.  Where will this money come from?  No one yet knows.

Photo: Corbis

Would you like to capitalize on a little known and underused tool, which generates additional profits for your already existing stock purchases?  Covered calls remain one of the best kept secrets in the investment world.

How Covered Calls Work

Covered calls are one of the best ways to generate extra income on your already existing stock portfolios.  Selling covered calls simply means you’ll be selling options against your stock holdings, generating income from the premium.  Though this strategy creates some additional risk, stockholders are able to create huge amounts of monthly income, especially when volatility is highest.

How to Sell Calls

Investors can sell calls on any stock in which they own more than 100 shares.  Since options are traded in lots, you’ll have to sell them to the nearest hundred.  This is completed with a brokerage through which you write the calls against your existing shares.

Covered Call Example

For example, you own 500 shares of Amazon (AMZN) stock worth $128 each.  At today’s prices, you could write covered calls on your AMZN stock with a strike price of $140 per share for March options and earn $.25 per option, or $125 total.  This is the premium that other investors are willing to pay for your stock options.

How You Make Money

Immediately after selling your stock options, you’ll receive $125 at a price of $25 per contract added to your brokerage account.  Now, should the price of Amazon stock stay below the target price of $140 (a 10% increase in price) through the month of March, the investor who purchased your options will not exercise the options, and you’ll get to keep both the premiums ($125) and your stock.  However, should the price rise above $140.25 per share (the target price PLUS the price of the option) the options will be exercised, and you’ll have to sell your shares at the contracted price of $140.  Even if the stock rises to $150, you’ll have to sell at $140.

Limiting Risk

The best way to limit your risk is to issue options each month, and pick a price well out of the current trading range.  In the example above, $140 was 10% out of the current trading price, and there were only 12 trading days for the price to move above $140, which is an unlikely event.  Doing this each month could generate a full $1500 a year in extra income for a total 2.5% extra return on your investment each year.

For those unfamiliar with covered call writing, the strategy is fairly simple and straightforward.

In a nutshell, covered call writing is simply selling the right for someone else to purchase stock that you currently own (100 shares per contract) at a certain price (called the strike price). If the stock closes above that strike price, the call will be exercised and you’ll be required to sell at the specified price. If not, following the expiration of the option, you’ll retain ownership of the stock and you’re free to write another covered call for additional premium (the cash you receive for selling, or writing, the call).

The covered call writer can increase his or her potential returns by choosing stocks with higher implied volatility (which equates to higher corresponding premiums on its options) and by writing the calls out of the money (i.e. choosing a strike price that’s higher than the stock’s current price). Writing an out of the money call allows the call writer not only to collect the premium from the call, but also to participate in any capital gains up to the difference between the purchase price and the strike price (should the stock trade through that strike price).

For many covered call writers, however, the more important question isn’t, “How do I maximize my potential covered call returns?” but rather, “How can I generate income more consistently from my covered call trades?”

Here then are 3 tips:

Tip #1 – Choose a High Quality Company. There’s always a temptation to employ covered call strategies on stocks where the options have a very high premium. But in many instances, there is good reason for the high premium–the stock is highly volatile and the market has priced in the likelihood of a large move one way or the other (think of a biotech company with an important Phase III drug awaiting an imminent approval decision from the FDA).

It’s important to stick with high quality companies. Unless you truly believe a stock is a legitimately strong business to invest in for the buy and hold investor, you should not write covered calls on the stock yourself. A high quality company (one that’s consistently profitable, not overburdened with debt, and isn’t overpriced from a valuation perspective) will protect you in important ways: it will drop in price less steeply (and hopefully less often) and it will most likely rebound more quickly from declines in share price than will a mediocre company that struggles to be profitable.

Tip #2 – Write In the Money Calls. Writing in the money calls, as opposed to writing out of the money calls, will drastically improve the consistency of your covered call returns. True, you may give up some potential gains, but you’ll gain much more downside protection.

Say you own 100 shares of stock trading at $32.50/share. You look at the option chains and perhaps you see see the following: you could write a $35 call for $1 in premium, a $32.50 call for $2 in premium, or a $30 call for $3.50 in premium.

Your maximum possible gains on the $35 call is $350 ($250 capital gains + $100 premium). On the $32.50 call it’s $200 (all premium). And on the $30 call it’s $100 ($250 capital loss as you sell the $32.50 stock for $30/share + $350 premium = $100 net returns).

But look at how much downside protection each option gives you. With the $35 call, you lose money if the stock closes below $31.50/share. With the $32.50 call, you lose money if the stock closes below $30.50/share. But with the $30 call, you don’t actually lose any money until the stock trades below $29.00/share.

Tip #3 – Use Basic Technical Analysis. Covered call writing is an extremely effective strategy for stocks that are either flat or trending slightly higher. By utilizing basic technical analysis, you can greatly improve your selection process of identifying stocks that meet your criteria.

You don’t need to spend thousands of dollars on software and seminars becoming an expert on technical analysis, but the ability to draw trend lines, identify important support and resistance levels, and develop an awareness of where the stock is in relation to its 50 and 200 day moving averages will go a long way to improving your selection process.

As the market falls, many stocks are experience large amounts of unusually high short interest.  The shorts have made there money in a few select stocks, which are bound to recover as the institutions start buying back stock to cover previous shorts.

Short interest for the contrarian

Short interest is one of the best tools a contrarian investor has. Short interest is usually stated in a large number, which is the amount of shares that are sold short, as well as a smaller number, indicating the amount of days of average volume needed to recover all shares short. The higher the ratio of number of shares sold to average volume means that the investors holding short shares will have to force volume up – and ultimately price to rid themselves of their shares.

In heavily beaten down stocks, there is likely to be a huge amount of short interest. Case in point: Bear Stearns fell from the $90s to $4 within a few days as the JP Morgan buy out emerged. Prior to the news and a share price of $4 per share, there was plenty of short interest. Institutions were weary of Bear Sterns from the get-go and had huge amounts of shares shorted. On January 31, the stock had 3.4 million shares sold short, or 10 days worth of average volume.

Short sellers have to buy back in

As the buyout hit the newswire, the price of Bear Sterns fell to just $3 per share. The short sellers were still holding on for the $2 per share promised by JP Morgan, which would amount to another rung on the profit ladder. As news emerged that JP Morgan revised their bid to $10 per share, the price readily moved as high as $14 per share, – not because investors wanted more, but because buyers were everywhere.

In this scenario, the price should have moved to $10 per share, as JP Morgan released their final bid of that amount. But because of the large amount of short interest at the time, now 3.5 million shares, the market had to absorb 3.5 million in share purchases. This pushed the buy price up as short sellers wanted to ditch the stock at any price. Now the stock trades back at $10.11 per share, short sellers are out, and the only people holding on are those waiting for a complete buyout by JP Morgan.

As you can see, short interest forced investors to buy stock to cover their shorts. This creates a huge demand for the stock and pumps up the value. After market swings like we’ve seen in the last month, there are plenty more stocks that have large short interest beyond what they should. When stocks are sold short at high daily volume ratios, they are said to be in a short squeeze; even with modest news the sellers will have to buy as the company gains ground.

Current short squeeze

One example of a short squeeze in the making is a company known as Thompson Corp. Currently, there are 35 million shares sold short, which is 105 times the daily volume to cover. The stock trades with a low PE ratio of 5, but has a very slow growth rate at 4%. This stock might have slow growth, but any future news can easily push the price up. It would be very difficult for any future shorters to obtain this stock and very easy for the market to turn on them.

Small issue with short stocks

One problem with the short squeeze is the catalyst variable. Many stocks held in a short squeeze need some type of catalyst to push up the price. This usually comes from better earnings outlook as people don’t want to sell short a growing company. Boring, slow moving companies will have a hard time breaking out of a short squeeze and usually require a buyout or great news to send them upward.

Look for big companies

The best short squeezes are found on high volume, profitable companies. Corporations that have advanced at breakneck rates are often exposed to a short squeeze as institutions sell short to lock in short term profits. Afterwards, the price rebounds, as all the shorts have to buy back shares to cover within a matter of days. This can send the price moving up as bid prices rise to coerce shareholders to sell their shares.

The short squeeze is best played with an options strategy to minimize the risk of a stock dropping and maximize the gains in a huge run-up. Options near the price trade at very small premiums, but offer the same upside potential as the stock itself. For this reason, buying options is the best way to make the most out of a short squeeze, while protecting yourself from any large falls in stock price or any future selling.

Obtaining a margin account with your broker can be difficult. Credit checks, minimum balances and paperwork can make obtaining a moderate leverage of 2:1 nearly impossible for most investors. Brokerage firms are a tough sell for leverage, especially in today’s volatile markets and restrictions on day traders.

Deep in the money options

Luckily, deep in the money options provide a way to leverage equity positions. By purchasing deep in the money options, an investor can avoid the hefty premium of options not yet in the money and lower the amount necessary to make an investment.

A deep in the money option is like any ordinary option, but the price of the stock is already well above the strike price, or the price at which you are able to exercise your options.

Stock Options are usually considered very speculative investments, and generally they are, but through proper money management techniques, the use of options can increase your market exposure and put less money on the line.

Less at stake

With deep in the money options, only the amount of what you pay for the option is at stake – which might just be a small portion of what the actual stock price happens to be.

For equities, it is possible to watch your stock fall to $0 per share. With options, you can never lose more than your premium because you have the choice to exercise the option or just let them expire. You do not have to exercise your options when the stock price is lower than your option price. And for that matter, you do not have to exercise them when the stock price is higher than the option price, but why wouldn’t you?

As of this writing, Exxon Mobil trades for $86.81 per share. To purchase 100 shares of Exxon, you would need $8,681. However, for the same exposure to Exxon Mobil, you would only put up $3,710 for 100 Exxon options with a strike price of $50 per share set to expire in January 2009.

If the price of Exxon Mobil’s stock moves to $100 per share…

…the value of your stock would now be $10,000 from an investment of $8,681. Your options, on the other hand, would be worth $5000, up from an investment of $3710. You would earn a profit of 15% on your stock purchase, while your options would rise by 34%. A total profit of $1,319 would be generated on your stock investment and $1,290 on the option purchase.

This calculation is lacking one minor detail – the difference of $4,971 between buying stock and buying stock options. If you were instead to deposit the $4,971 in a money market account, you earn an extra $200 in interest. The interest added to your option returns leaves you with a $1,490 total gain, with less money at risk.

Less capital at risk

Deep in the money options allow investors to make much safer investments. Stock Options are only riskier if the full amount is invested in options. As we can see from this scenario, it would have been possible to buy twice as many calls as shares. Deep in the money options are a great way to pay a little bit extra for a much better return. Remember, options are not inherently risky – it’s what you do with the option that makes it risky.

To Learn More About Stock Options, Click Here to Receive a Free PDF Report on Understand Stock Options and How to Bank Huge Profits

When I called my broker, TradeKing, asking for more information on options trading, the TradeKing representative pointed me to options tutorials at CBOE.

The Chicago Board Options Exchange (aka CBOE), founded in 1973 as the first US options exchange, is the most comprehensive stock options resource on the web. CBOE options trading tutorials start off with a basic comparsion of each topic/strategy, followed up by a short quiz on each section.

CBOE does a great job of dispelling myths and misconceptions about options trading. Please bookmark CBOE for further reference on options. If you’re serious about mastering options, the Chicago Board Options Exchange will become a familiar destination.

Since my goal is to slowly integrate options trading into my investment portfolio, I will continue to talk more about options trading in the future.

Remember Robert Kiyosaki says, “Option Trading is the investment of the rich.” Considering the amount of leverage and risk protection options give the average investor, Kiyosaki hits the nail on the head.

Let me know if CBOE’s tutorials helped!

My next post in the Stock Options Trading Series will focus on put options tips. There is a lot of discuss about long calls & puts, so we will ignore the more advanced options trades for a while. Here are 4 tips on buying using my recent purchase of Amazon Inc. (AMZN) put options at a strike price of $47.5 as an example.

1. Safeguard Your Holdings, and Invest Your Spare Money

In order to fund this investment, free up some cash from another account other than your stock portfolio, mutual fund portfolio, or IRA account. I funded the ZQN SW (AMZN 47.5 Puts) with spare cash from my checking account. Buying puts places a lot of risk on your investment because options prices tend to move extremely fast.

While you may only lose your initial investment, you still may endure a financial loss (or as I call it, a business expense). Therefore, investing your discretionary funds is a good idea. Risk your screw around money, and leave your existing investments alone.

2. Put Stocks With Aggressive Price Movement

Note: This is one of many put options methods available at your disposal.

Amazon posted a strong Q1, and AMZN stock rallied on April 24th by gaining 16 points since the earnings release. Now, Amazon shares are overvalued in my opinion.

The company still copes with a negative retained earnings deficit, and the P/E ratio stands at 102. Along with the current bull market, AMZN stock ignited, but I believe Wall Street will extinguish the fire once the bears take control.

Amazon looks like the perfect short play. One of my newly adopted put strategies is to bet against overvalued stocks with aggressive price movement. If the price moves up quickly, then the downward may follow close suit.

3. Give Your Options At Least 3 Months Until Expiration

My Amazon puts had 75 days until expiration when I purchased them. 75 days was the perfect time frame in terms of my analysis and cost, however, 3 months gives you an extra 15 days to profit from the market. Timing, along with at least 3 months of cushion days until expiration, greatly affects your profit earnings potential.

To serve as an example, I bought AMZN puts set to expire in July because the month of July serves as the middle month between the beginning of the summer and the end. Since Amazon will surely experience strong sales during the Back to School scramble, July appears to be the optimal month for sluggish retail sales. As long as Amazon stock depreciates in value before the end of July, I will make some money on the puts.

Unless you’re an expert at day-trading stock options, giving your options time to move towards In-The-Money will save you pain and agony in the future, and accelerate your gains.

4. Think Objectively!

My first put trade was a disgraceful decision made with zero reasoning or sanity. I was emotional. And I lost money.

What’s the moral?

Eliminate your emotions, and either make or cancel the trade. Letting your emotions dictate your course of action is like handing your wallet to Wall Street and running in the other direction. Another trader will take your money, and never offer it back. So make it easy on yourself, and think objectively, not subjectively. The Amazon trade made sense, so I placed it. If every options trade turns into a game of 20 questions, just stop altogether.

Important Bonus Video! Click Here to Watch A Free Video Tutorial on the Basics of Stock Options Trading

In the last part of options trading series, we talked about long call options, and how investors buy them to profit from bullish stock trends. Now, we’ll take a look at the inverse of call options, put options.

What Are Put Options

You make money on puts when the underlying stock price falls. The easiest way to define puts is to compare them to shorting stocks, except the risk is a lot less. So in a nutshell, put options allow you to profit from depreciating stock prices for a fraction of the shorting costs.

Long Put Options Diagram

Much like call options, there are 3 keys characteristics to understand:

• Break-Even Point
• Strike Price
• Movement in Underlying Stock

These concepts were quoted and altered to match put option characteristics.

1. Options Strike Price

I defined options strike prices in my last post, but so I won’t spend too much time on this concept. It’s simply a fixed price level on the underlying stock, comparable to a watermark in a bucket.

2. Options Break Even Point

This refers to the point where the value of your options depreciates in equal value to your purchase premium and may become profitable (i.e. ITM or in-the-money options). When your options reach the break even point, you’ve placed a profitable options trade. Unless the underlying stock moves downwards rather quickly, your trade is out-of-the money, meaning the trade has no intrinsic value and negative value. Another way to view the break even point is simply the strike price minus the premium you paid for the options.

3. Relationship between Stock and its put options

This concept may confuse you at first, but there are Greek options concepts which determine the relationship between a stock’s value and the value of its stock options. I won’t dig into the Greeks yet, because that’s a whole different blog post. But it’s important to grasp that your put options become more profitable as the underlying stock decreases in value.

Although time value, the days between the options expiration date and the current date, degrade an options value over time, it’s best to buy long put options at least 3 months in advance to avoid time-value losses. As the expiration date nears, and especially within 30 days, the value of your call options depreciates rapidly.

Benefits of Long Put Options

Limited Risk, Limited to Zero Reward

Maximum Risk: Limited to Premium Paid
Maximum Profit: Limited to gap between Strike Price and Zero

Whenever you buy long puts, your risk is limited to the premium paid for the options. You will maximize your gains if the stock price falls to zero because then your options possess a lot of intrinsic value that may be redeemed once you sell. As long as you buy puts, your risk-taking is protected.

Selling puts is different. Your upside is limited to the premium received, but your downside equals the dollar gap between the strike price and zero. I wouldn’t advise selling puts unless you’re desperate for income or want to open a long position. No speculation here! It’s really dangerous, and has ruined families and lives time after time.

The Signapore student who lost $300k in 3 months was an options gambler. He sold puts and bought volatile stocks, but the puts really hurt him.

Profit From Overvalued Stocks

Put options is how corporate executives and hedge fund managers make so much money when stocks dive in value. They buy put options to protect their profits, and make money once a stock’s bullish run is over.

Now is the perfect time to get familiar with stock options. The Dow Jones Industrial Average is peaking at an all-time high. So many stocks on my watchlist are grossly overvalued; it’s disgusting.

This is your opportunity to make some real money once the Dow correction hits. If you play your cards right, put options could make you a lot of easy money because you anticipated the stock market fall. On May 4th, I watched Yahoo! options soar 1400% in 3 hours. Just as quickly as shares rise, they can fall as well.

Closing Thoughts on Put Options

Put options are so vital to the average investor/trader. There is no other way to gain favorable returns from bearish stock moves unless you short a stock and risk the full assessed share value in the process. Now, we’ve discovered another way to make money in the market. Put options will change the way you think about common shares.

Instead of searching for winners all the time, you will begin to search for losing stocks, too. Because of put options, you can make money in the stock market no matter which direction it heads. Once you internalize this key piece of information, you will unlock another powerful key in your life.

You owe yourself extensive education on put options even though I may not explain the exact specifications in the best manner. Heck, I’m still learning about them, too. So here’s some additional reading on put options. Get educated, and get active!

Important Bonus Video! Click Here to Watch A Free Video Tutorial on the Basics of Stock Options Trading

Additional Reading on Put Options

• Yahoo! Put Options Review
• Writing Put Options to Acquire Stock – This is a must read!
• Wikipedia Put Options Definition – With Mathematical Equations included!

Purchasing or selling long call options is the simplest form of options trading to comprehend. It’s similar to buying long stock in a company, except that you either buy the right or sell the right to purchase the underlying shares in a company. Since call options are bullish to very bullish in terms of strategy, trading call options gives you leverage on a long stock position as well.

Long Call Options Diagram

At first, options trading seems intimidating, which is why I recommend looking at graphs to build a visual conception of how long call function in the options market. There are 3 characteristics to understand:

• Strike Price
• Break Even Point
• the relationship between options and the underlying stock

1. Options Strike Price

I defined options strike prices in my last post, but so I won’t spend too much time on this concept. It’s simply a fixed price level on the underlying stock, comparable to a watermark in a bucket.

2. Options Break Even Point

This refers to the point where the value of your options appreciates in equal value to your purchase premium and may become profitable (i.e. ITM or in-the-money options). When your options reach the break even point, you’ve placed a profitable options trade.

Unless the underlying stock moves upwards rather quickly, your trade is out-of-the money, meaning the trade has no intrinsic value and negative value. Another way to view the break even point is simply the strike price plus the premium you paid for the options.

3. Relationship between Stock and its call options

This concept may confuse you at first, but there are Greek options concepts which determine the relationship between a stock’s value and the value of its stock options. I won’t dig into the Greeks yet, because that’s a whole different blog post. But it’s important to grasp that your options become more profitable as the underlying stock gains in value.

Although time value, the days between the options expiration date and the current date, degrade an options value over time, it’s best to buy long call options at least 3 months in advance to avoid time-value losses. As the expiration date nears, and especially within 30 days, the value of your call options depreciates rapidly.

Benefits of Long Call Options

1. Minimum Risk, Unlimited Reward

Maximum Risk: Premium Paid for Options
Maximum Profit: Unlimited – depends on how much your options appreciate in value

When trading long call options, your risk-taking is limited to the value paid for the options, period. That’s why so many traders and investors refer to options trading as “the investment of the rich.”

If you’re bullish on a stock, buying long call options give you full control over your investment, and present a vast amount of liquidity since you may exercise your options, do nothing and let them expire, or resell your options back into the options market.

2. Options are a form of insurance

Do you own home, auto, or life insurance? If so, then you already have some understanding of options trading, since options were introduced to provide investors with a significant amount of insurance. You pay a small amount to protect or hedge your investment in case of an emergency, much like one purchases auto insurance in case of an accident.

If your car remains unharmed, then you lose the premium paid for the auto insurance, right? Well, the same principle applies in call options, except that you may sell your options back into the market place before they expire. 60% of all options contracts are sold back into the marketplace, mainly because the owner felt no reason to exercise and purchase the underlying stock or let the options expire worthless.

3. Utilize your long stock picking strategies for a fraction of the cost

I follow Google Inc. shares (GOOG) daily, yet never accumulate enough funds to open a realistic position in the stock. Google Shares cost $470 a pop, so I could only purchase 1 share at most. Sound familiar? You want to open a position in a stock, but the shares either are too expensive or trade at extreme levels.

The Solution: Google Stock Options

If you’re bullish on Google Stock (I sure am), then the perfect solution is long call options. Below is a snapshot of a typical options chain from my TradeKing brokerage account:

You can purchase long options on shares of Google Inc. for only $10.30 at a strike price of $470, giving you the right to control 100 Shares of GOOG. While your initial call options investment requires at least $1030 to open ($10.30 per options call x 100 = $1030), you could only purchase 2 shares of Google for the same price! Yes, option trading is a very good deal.

Closing Thoughts on Long Call Options

Long call options are my favorite type of options because they mesh well with my long-term stock picking methods. Call Options come in various formats – 1 month, 3 month, 6 month, 1 year, and 2 years from expiration, so there is lots of versatility in stock option chains. You may consider trading call options on paper before risking your money in the live options market.

Important Bonus Video! Click Here to Watch A Free Video Tutorial on the Basics of Stock Options Trading

I’m happy to announce a new series here on Investor Trip that’s dedicated to stock option trading. What inspired me to learn more about option trading was the recent characteristics of the US stock market.

As the Dow Jones passed 13,000 points, I spent more time researching ways to make money from losses in the stock market (aka bearish trends). Investors can profit from downtrends in the stock market using two techniques: shorting stocks and trading put options. Borrowing shares is risky business; stocks options provide ample insurance on your long (or short) term investments.

So throughout the week, we’ll discuss the basic of stock options, bullish and bearish strategies, and techniques that you use on a daily basis. To start off the series, here’s the very basics on the two basic types of options and how they are purchased.

What Are Stock Options

Trading stock options gives you control over a vast amount of shares for a fraction of the cost. Each option is called a contract, and entitles the buyer to 100 shares of the underlying stock. So for every 1 contract, you have the right, but not the obligation, to purchase 100 shares of the underlying stock.

Options trade as related symbols to the stocks they control. For example, Countrywide Financial trades under CFC, and Countrywide Financial $30 strike puts trade under CFC QF. Most options incorporate the symbol of the underlying stock, along with additional letters for identification purchases.

Types of Options: Calls and Puts

There are two types of stock options:

• calls
• puts

Calls are bullish trading options that you can buy or sell (write) in the options market. You purchase calls when you believe the underlying stock is rising in value.

Puts are bearish trading options that you buy or sell in the options market. You purchase puts when you feel the underlying stock is declining in value.

What Are Strike Prices

A strike price is like a water market in a bucket. It’s a fixed price level on the underlying stock. So if you bought 1 option contract of MSFT at a strike price of $30, you have the option to purchase shares of MSFT at $30 a share. The strike price also determines the value of the stock option. Depending on whether you trade calls or puts, the strike price determines whether your options are ITM (In-The-Money), ATM (at-the money), or OTM (out-the money).

Important Bonus Video! Click Here to Watch A Free Video Tutorial on the Basics of Stock Options Trading