How can you make money when the market moves sideways?
1. How can you make money when
the market moves sideways?
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Options Trading
2. The starting point
The starting point is that you own 100 AAPL shares.
For some reason, you bought it and hold it, thatโs your business.
Meanwhile, you use the well-established, but mostly pretty weak, stock
market risk management method: the stop loss. You hold the paper and
expect a price increase, because you still believe in the Buy and Hold
strategy ...
Let's suppose that this is the starting point. In the meantime, one of your
friends told you that the options market provides revenue strategies
in addition to holding existing shares. This sufficiently aroused your
interest and you want to try it, but you do not know how to get started.
Well, you are looking in the right place, because that's what we will discuss
here. Or at least weโll outline itโฆ
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3. 3-4 weeks passed and
nothing really happened
Let's suppose you bought 100 AAPL shares at a price of 189.27
yesterday.
To do this, you spent a pretty hefty amount, 18,927 dollars.
Weeks have passed and the paper has not made a very
significant move.
Let's suppose that 3-4 weeks passed and nothing really happened, the
paper moved in a channel.
At this point, the stock trader is becoming increasingly impatient, and
he may want to sell the the paper and look for another.
What can you do if you can handle options?
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4. What can you do if you can
handle options?
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Let's suppose you decided at the beginning - when you bought the 100
AAPL shares - to add an an option structure to your strategy.
You do not want to be involved in anything too difficult, so you just
plan to write out a simple call option. You know that writing out a Call
is profitable, if the movement of the underlying product is
balanced until maturity, and it is not called against you before
maturity.
Let's suppose you decide on the basis of technical analysis, that the
price will not increase up to the level of 200 within a month, but if it
does, you are willing to sell it at that level.
It is assumed that the price touches the 200 level within a month. In
that case, the profit of a simple stock trader is: 20000-18927 = 1073
dollars.
5. A significant difference
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A trader who is familiar with options trading has a very different profit.
We assumed that he has written out a 200 Call for November and
received 520 dollars for it. If the call option is executed in a couple of
days before maturity at the 200 level, the majority of the time value
has disappeared, ie. he earned approx. $500 on the transaction.
Since it has been called against him, he had to sell the 100 AAPL
shares, so his total profit is: 20,000 - 18,927 + 500 = 1573 dollars.
In other words, he earned 50% more than the stock
trader, although both played for the same target price.
50% - that is quite a significant difference for simple stock
trading, isn't it?
6. Covered Call
This certainly has downsides as well - like everything. Eg. if
the rise is too fast, but you have written out a call option,
that can significantly reduce the potential profit. The above
idea works best on a sideways moving or volatile oscillating
market.
The above strategy is
called Covered Call.
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7. Feel free to ask me!
Email: gery@optionsrules.com
My webpage: http://www.optionsrules.com/
You can find me:
Facebook: https://www.facebook.com/OptionsRules1
YouTube: https://www.youtube.com/user/optionsrules
Twitter: https://twitter.com/optionsrules
LinkedIn: http://hu.linkedin.com/pub/gery-nagy/6a/513/261
Skype: opcioguru
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