I think every traders will agree that setting Stop Lost is one the most important thing to do in trading. In fact, this is the first thing that all traders should do right after execute the trade. For me, Stop Lost is my golden rule that I always practice in all of my trades. 

Just look at what happen to my latest portfolio, ASF. I bought ASF JAN07 40.00 CALL at $3.50 on 15-Dec-2006 after monitored it for about an hour. On that day, I locked my Stop Lost at $41.00 (base on underlying stock).

When the market open on Monday (18-Dec-2006), I readjusted my Stop Lost from $41.00 to  $42.20. Unfortunately, the market did not move in my favour. I was traded out at $2.90 as ASF drop to $42.20 with 17% lost. Do I feel bad? No! Being involved in stocks & options trading for more than 2 years, I would say this is normal. It is impossible for us to win 100% in all our trades. But we can’t lose most of the time too! We need to find a good system or strategy that could produce more winners than losers. I’m glad that I’ve found a great strategy & great guru with Star Trading System. I need to confess here that Jason’s system is the only one strategy that I use in my option trading. With 90% success rate, what else can I say.

Now, back to ASF. Let see what happen next after I closed my position automatically as the price hit my Stop Lost. Before I went to bed about one hour after I closed my position, not much changes in ASF price. But when checked the price on the next morning, ASF dropped $1.09 (2.57%) and closed at $41.30. Want to know what the price of ASF JAN07 40.00 CALL? It’s $2.30.

Do you see the beauty of the Stop Lost now? If I didn’t set & activate my Stop Lost, I’ll be losing 34% in that trade alone.   
Click on the thumbnail below to view the full size chart.

Want to know the secret of my trade?
Check out the Star Trading System at masteroequity.com

By Jason Ng

Robert Kiyosaki says that Option Trading is the investment of the rich.

Indeed, option trading is the most versatile form of investment in the world today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.

Option Trading Explained - Simply put, it is the trading of option contracts on a particular stock.

Options Explained – A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.

There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!

Option Trading Explained - What Can Stock Options Do?

Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.

Stock Options are:

Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.

Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.

Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.

Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.

Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.

And the Negative Effects are:

No value beyond expiration. You can potentially lose all your money along with the expiration of the option.

Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.

Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.

Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.

Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.

Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.

Using options creatively even allows us to structure investment positions to reap a fixed monthly return that beats the market regardless of which way the market goes! Just like in the Ride the Flow System offered at http://www.mastersoequity.com/MOE_ridetheflow.htm . Where your capital can be fully protected no even if the market enters a severe drop. Sounds amazing?

Option Trading Explained - Conclusion

I hope this “Option Trading Explained” has given you a good overview of the effects of options.

Jason Ng is the Founder of Masters ‘O’ Equity international. He is a fund manager specialising in options trading and his Star Trading System has helped thousands of traders worldwide achieve financial freedom. Please visit Masters ‘O’ Equity’s website at mastersoequity.com.

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