Option Trading Tips - Covered Call Cashflow

Written by James Thomas


Continued from page 1

Don't get me wrong, it can also be good time to be a stockholder ifrepparttar earnings numbers are really great, but I'm a little more conservative and to me it's just not worthrepparttar 148748 risk. You can always buy back in afterwards anyway!

Always take a look at stock charts when choosing a stock to write covered calls on. There are 3 general patterns that I look for:

1) A moderate uptrend.

2) A sideways trend.

Howeverrepparttar 148749 most conservative/safe chart pattern for covered call writing (in my experience) appears after a stock has had a steep sell off and has begun to move sideways for a couple of months.

This is a type of 'bottoming' pattern where much ofrepparttar 148750 downside risk has already been 'sold' out ofrepparttar 148751 stock.

As covered call writers it's always important to remember that our risk lies ifrepparttar 148752 stock falls sharply, so we want to do our best to reducerepparttar 148753 risk as best we can. This is just one way that I have found to be effective.

If you go to http://www.stockcharts.com and pull uprepparttar 148754 chart forrepparttar 148755 QQQQ duringrepparttar 148756 early part of 2003, you'll see this exact pattern. I successfully wrote covered calls onrepparttar 148757 QQQQ for about 4 months during this time before I allowed myself to be assigned and moved onto another opportunity.

There you have it. Hopefully these tips help you on your way to consistent profits and monthly cashflow writing covered calls.

Oh, it also goes without saying but I'll say it anyway, "Don't put all your eggs in one basket!"

For more information on how to write covered calls go to: http://www.callwriter.com

Happy option trading and investing!

James Thomas is a successful private option trader and has created http://www.option-trading tips.com as an informative no-nonsense resource full of useful tips and information designed for option traders to improve their trading results.


Option Trading Tips - Credit Spread Magic

Written by James Thomas


Continued from page 1

Ifrepparttar QQQQ goes down a little bit to say $30.15,repparttar 148747 same will occur and we will keeprepparttar 148748 premium.

OK, so far so good!

The only way we can LOSE in this trade is ifrepparttar 148749 QQQQ goes down a lot to below $29.50 (which isrepparttar 148750 higher strike price minusrepparttar 148751 premium).

If it wererepparttar 148752 end ofrepparttar 148753 month of expiry andrepparttar 148754 QQQQ was trading below $30 (our sold option strike price) we would be exercised and our total loss would berepparttar 148755 difference betweenrepparttar 148756 sold option strike price andrepparttar 148757 current stock price lessrepparttar 148758 total credit we received.

Our maximum loss will be realized at any price at or below our bought option strike price.

$30 - $29 = $1, lessrepparttar 148759 premium of $0.50 cents = a maximum loss of $0.50 cents per contract or $1000 (20 contracts - 200 shares x $0.50 cents)

However, before it gets to this point, we would intervene. Ifrepparttar 148760 QQQQ is falling strongly then we were obviously wrong in our initial analysis.

Before we enteredrepparttar 148761 trade though, we decided that ifrepparttar 148762 QQQQ fell through support at $30 (which it does) we would move to plan B.

At this point we can do a little Ďmagicí.

Withrepparttar 148763 click of a mouse through our online broker, we can instantly jump fromrepparttar 148764 bullish camp torepparttar 148765 bearish camp!

We do this by buying backrepparttar 148766 options that we sold which in this case isrepparttar 148767 $30 puts, and this removes all of our obligation.

At this point though, we have taken a loss BUT, we are still longrepparttar 148768 $29 puts which would have already increased in value.

Ifrepparttar 148769 QQQQ wants to go down, then we are going to let it and just riderepparttar 148770 $29 puts as far as they will go.

The morerepparttar 148771 QQQQ falls in price,repparttar 148772 more our option will increase in value.

If it falls far enough, which in this case it does, (falling to $28.50) then we will not only make all our money back, we will start to move into a profitable position.

With credit spreads, we give ourselvesrepparttar 148773 flexibility to change our position mid stream, andrepparttar 148774 chance to not only recoup some of our losses (if we get it wrong), but to possibly move from a loss into a PROFIT!

And this is justrepparttar 148775 plan B if things go wrong. Plan A, on itís own, has statistically, a very high probability of success.

If onrepparttar 148776 other hand we hadrepparttar 148777 view thatrepparttar 148778 QQQQ would go down, we would simply construct a vertical spread with Out-of-the-money Calls.

We would sellrepparttar 148779 $31 Call and buyrepparttar 148780 $32 Call for an overall credit and shouldrepparttar 148781 QQQQ close below $31 byrepparttar 148782 end ofrepparttar 148783 month,repparttar 148784 spread would expire worthless and we would simply keeprepparttar 148785 premium.

For more information on how to profit by using credit spreads from someone who is a 'specialist' at credit spread option trading, click here.

James Thomas is a successful private option trader and has created http://www.option-trading tips.com as an informative no-nonsense resource full of useful tips and information designed for option traders to improve their trading results.


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