Options, call, put, strangle, straddle...

The following outlines some of the advantages of trading options versus relying solely on being a stock trader. Simply put, stock traders have the choice of going long or going short. The probability that one will be wrong with the decision is 66.6% because either way if one is long or short, the position could move into a loss.

However, with trading options, one is able to trade both long and short thereby minimizing risk!

The strategy we employ is to examine volatility very closely. Volatility is the rate of change in a market. It measures the amount by which an underlying asset is expected to fluctuate in a given period of time. While volatility plays an important part in our strategy, it has to be low to generate a signal. But the expectation is that it should rise when we have bought the positions.

We review about 5000 stocks for volatility and characteristic features like Bollinger bands. We analyze stocks for their potential to be in an "explosive position"; that is, the likelihood with which they are likely to move up or down in the near future.

Let’s examine Wendy’s International Inc (WEN) stock and how options can be used to advantage. The signal to buy a strangle position came on October 2007. We bought 10 calls with a strike at $40 and 10 puts with a strike at $20 expiration January 2009. As shown in the aforementioned example, we were able to make a good investment in WEN. We bought options rather than simply buying stock and we were able to go long and short to minimize our exposure.

In November stock quote moved down very quickly and quote of our put options rised from 0,10$ to 2,45$ in January 2008, call options fell to 0$. Our position has won 2350%.



The balance sheet:

We sold put options at quote of 2 $:

10 puts at 2$ = 2000$
10 calls at 0$ = 0$

We had invested 200$ and have 2000$ now.

Second example is BUD - Anheuser Busch.

Our strangle scanner generated a trading signal in April 2008, we bought 4 calls with strike 60$ at quote of 0,35$ and 6 puts with strike 30$ at 0,25$, whole investment is 290$.





Break out of trading range was not long in coming, quote of call options moved up to 5,40$, quote of put option fell to 0$.




The balance sheet:

We sold call options at quote of 5,40 $:


4 calls at 5,40$ = 2160$
6 puts at 0$ = 0$

Position started with 290$ and ended with 2160$.

hot signal:

MYL - Mylan Inc.

A trading signal was generated on February 10th 2010:




We recommended to buy call option with strike at 20$, expiration July 2010 and put option
with strike at 14$, same expiration date:

            

We bought the calls at 0,55$ and the put options at 0,35$.

Some days later the stock began to go up and reached the strike (red line) very soon:




Call climbed from 0,55$ to 3,50$: