Choosing the right strike price when trading options is just as important as the direction of the market. The right strike price can mean the difference between trading success and trading failure. The more often you pick the right strike prices, the higher your odds of success over the long term will be.

High delta for quick market moves

When buying options you should choose 1 of 2 types of strike prices.

Buying closer-to-the-money options gives you a higher delta, which means your options will respond to every dollar movement of underlying stock sooner and stronger. Likewise, buying at-the-money options (or options that are lower/higher than the actual stock prices) reduces your risk that the stock has to make a small move for your options to be in-the-money.

Can you guess both the direction and timing?

As an option buyer you have to not only predict the direction of the market (put/call) but also the magnitude of the move. How fast will the market get to your target? Will it take 3 months or 6 months?

In the world of options trading just 1 day can make the difference between profits and losses. If you buy an option at the strike that you think the underlying security will move to, you’re likely to lose money because you paid premium for the options time value. If your right about the direction but dead wrong about the timing – you lose.

Deep OTM options are like lottery tickets

Deep-out-of-the-money strikes appear attractive for the “novice” options trader because of the low absolute dollar value of the options. But remember that these options have a low dollar value because it’s highly unlikely they’ll ever be in-the-money.

I relate this to buying a lottery ticket. Sure it’s only $1 but how likely are you to ever make money on that lottery ticket? Last time I checked you were more likely to get hit by lightning TWICE in the SAME day!

Crazy week for the markets wouldn’t you say? But with Friday’s huge break of the most recent 2 month trend and the 25% spike in the VIX, I think we are just starting what could be a very painful February for stocks.

But how could we have seen this coming?

With my coaching students I continuously preach how important it is to use and rely on simple, consistent indicators for technical analysis. Sentiment, momentum, support/resistance are all very easy tools to use if you just FOLLOW THE SIGNS! Most traders see the early signs but they sucked in by their emotions and the news.

What’s next after Friday’s 2% drop?

In this video I’m going to show you how I used simple technical analysis to see this recent sell-off coming a mile away. Plus, I’ll show you AGAIN why I thought the VIX was setting up for a huge spike. At the end of the video I’ll go over the targets for the next levels of support in February.

Just last week I warned that Bullish Sentiment was signaling top is close to forming. Here’s the post and video I did showing how Bullish Sentiment signaled at Top close.

With the market down today nearly 2.0% or more across the board today and breaking major support lines, do you think we are starting a correction phase?

I want to hear your thoughts and comments below!

Candlestick charting has become highly popular with stock and options traders. Almost every trading platform has candlestick patterns available. If you want to take your trading to the next level, you need to master candlestick charts as they provide so much valuable information about the market sentiment that the other charts simply can't.

These patterns are highly effective and efficient

The problem is mastering how to identify them when looking at charts. Many traders are content with the one stick and the two stick patterns. However, if you want to take your trading with candlestick charts to the next level, you should master these three stick candlestick patterns. These can be an accurate trading signal for a trend reversal or the trend continuation!

Mastering these three stick candlestick patterns might not be easy and sometimes frustrating as they might not appear quite frequently so you may not be able to use them more often in your trading. But if you spot them correctly these can be highly effective and profitable buy or sell signals for you!

What candlestick patterns do you really like to use?

Options trading has only recently become a viable investment vehicle for people. Five to seven years ago it was on the fringe. Ten years ago it was considered an alternative investment for wealthy individuals. Now trading options daily in the markets has become the ultimate wealth creation tool.

Quick Penny Stock Myth Busted

Myths in the world of finance and investing are hard to bust. Some myths are easy to spot - like the penny stock riches myth. It's completely a rigged game in favor of the penny stock services. Here's how they make money and you don't...

They gather up a huge list of subscribers via their website. Then then buy up a cheap penny stock in their own accounts. Send out an email to their subscribers telling them to buy the penny stock. Meanwhile they are making huge profits, only to dump the stock at it's height when most investors actually buy in. Leaving you with a worthless penny stock once again. See the light yet?

Myth #1: It's only for pros with years of experience

How ridiculous. Although it has long been held that trading options should be left to only the most-experienced traders. But with the vast trading systems and internet connections these days options trading can easily be done by beginner traders.

On this blog alone we have done over 1,500 posts and articles you can read through that will give you a solid and strong understanding of options trading. Moreover, the thousands of online tools and software that is available really levels the playing field for today's at home option trader. You can use the exact same tools and charts that professional traders are using on Wall Street right now.

Options trading just for the pros? Myth busted!

Myth #2: You have to have thousands of dollars

Again, this is a big misconception. You can and SHOULD start trading option with a small amount of money first. I see traders all the time start with $20-50K and lose most of it in the first month. Start small and master the strategies first - then increase your account size once you have a solid understanding of how to trade like a professional.

The focus on investor strategy is the real difference in today's options education market. Teaching and coaching traders on strategies first helps them understand where and when to make trades in any market condition. Then we focus on increasing and exponentially growing their account.

Rarely if ever have I seen a guy with a lot of money start trading options and never see a major account draw. But I have seen a lot of small traders slowly and consistently grow their account after they mastered some simple strategies.

Spending thousands to start trading options? Myth busted!

Myth #3: Options trading is a fad and won't last

When the internet first came out some people called it a FAD. That it didn't really help solve problems and/or wasn't worth the time and effort to understand. How stupid those people probably feel now right? Clearly the internet was a "game changer."

Currently only 2% or 3% of all brokerage accounts are approved for trading options. So, 97%-98% of people who have brokerage accounts in this country are not even approved for options trading. Just like the internet, options trading is still fairly young and growing by leaps and bounds.

Taking the time now to understand and learn how options trading can help protect and grow you portfolio will be invaluable in the coming years. Rarely if ever have you had such a great opportunity to get in on the ground floor and grow with an industry. I consider myself lucky to have been trading options as long as I have already and have seen some vast changes for the better.

A fad you can ignore? Myth busted!

Myth #4...

As professionals and beginners who read this blog, what are some of the myths you have busted about options trading and options strategies along the way?

Personal finance is one of the most important aspects of professional trading. When your trading is your sole source of income, or even part of your "side income," you need to make sure you are keeping tabs on every penny you spend elsewhere. Sure your spouse may have a job to bring in money - that's great - but your income is going to fluctuate.

For the stock/option trader, a firm understanding of your own personal finance is extremely important. Some traders simply dismiss this aspect when trading. They blindly assume that if they make a profit on a trade then they are doing just fine. They never consider commissions, Internet costs, newsletter service fees, margin interest, etc.

Are You Leaking Money?

I probably made you think twice with this statement right? It's a great question to ask yourself...

Am I tracking all my money each month; inflows and outflows. Are there any leaks I need to plug up?

The fact is that just like an unseen pipe leaking water - most people do not see or understand how their current trading system is leaking money. But as always, it's important to start now by looking over everything one more time to check for leaks.

I've Personally Seen Thousands of Dollars Wasted

Over the last 4 years I've probably coached over 150 students off and on. Sometimes I get to help walk them through a new system for trading. In the process I have seen hundreds, or even thousands of dollars being poorly spent and wasted. Most of the time they just don't see it happening or don't realize that it is easy to fix.

People are leaking money when they are not controlling where it goes. They just accept fees they assume they can't change instead of actively looking for lower commissions or newsletter services. Leaking money also includes being manipulated into buying $900 programs online or going to pointless day long "guru seminars." It's just plain stupid and you probably already knew that if your still reading.

How Do We Fix Our Finances?

The simplest way to plug your money leaks is to follow an organized system and budget. Yes a budget! Use whatever software you like, Mint.com, Excel, or Quicken. Whatever you use, just figure out where money is going each money and how it's coming in. Understanding and then managing the difference between these two totals are the first steps in plugging money leaks. Sounds simple but people rarely do it.

Here are a couple areas to consider and target for your new found financial budget:

1. Commissions - Trading commissions are your #1 consideration and cost. You can't make money without incurring some sort of commission so you had better look at every broker. Each broker is different and you have to consider your account size and the number of trades you make each month into consideration.
2. Margin Interest - Some stock traders naturally think that buying on margin is free money. How crazy! Margin costs you interest that the broker will charge for the use of their money. Figure out how much margin will cost you based on your account size and make sure your profits cover the spread.
3. Newsletter Costs - The growth of trading advisory services over the last 2-3 years is huge. I consider our service to be one of the earlier sites in the area. Regardless, the cost of some of these services is astounding! We have a flat rate (and have always had a flat rate) of just $20 per strategy. Some sites out there charge $99 or higher per month and have less profitable track records than we do. Either way, it's something you should consider.
4. Knick-Knack Spending- This is danger area #2 for most people. This is all of the things you DON'T need but continue to spend your money on. Everything from new cars and clothes to pointless magazine and newspaper articles. My wife and I drive 10 year old cars, we still live in a small place that we bought, and we don't eat out. Again, I'm not telling you how to live your life by any means. But these are the sacrifices that we decided to make so that we could do what we love and not work typical day jobs.

What are some tips/tricks/advice you can offer on your own personal finance?

Well congrats to the Packers and Steelers for making it to the BIG SHOW. I'm a Denver Bronco fan but my wife is a die-hard Steelers fan - naturally I'll support them for her but with disgust for my Broncos for not making it.

Anyhow, we are in a fresh new month for options which means opportunities are all around us. Generally I would be hesitant to look at any new company specific stock trades until earnings come out for them. So remember to check earnings dates and times before you consider any option trade.

Fibonacci Retracement In Oil

Oil has been a big winner for the markets over the last 6 months. Naturally the expectation is that when the global economy expands, demand for crude oil will rise. This has been the main driver for crude's big surge of late.

However, the is a very real threat that oil prices could get too high and undercut any economic growth. Last week the OPEC meeting of leaders mentioned that the "global economy could handle oil prices of $100." So there's our upper limit as option traders right now. On the lower side we think that a move back down near the $80 or high $70's is very likely before February Expiration.

Use Fibonacci Levels For Spreads, Condors

Fibonacci retracement levels are one of my favorite tools to use. Stocks don't always hit the levels exactly but they do serve as a very consistent and reliable target for traders. As an option trader you should use these to set new boundaries for your spreads and condors.

The first month of 2011 is now in the books for options trading. Generally is was an "OK" month for our three portfolios. Typically most people think that volatile months are dangerous for our trading system. However it seems more often that when the market is marching higher - slowly day by day - it becomes just a little more challenging...still great strategies, but require more analysis.

Credit Spread Strategy: -5.79%

As always, we present our trading results completely open and honest. This month we did have to close out 1 of our spreads at a loss. While in hindsight we could have left it open and made money, we just didn't want to take on that kind of risk into expiration. This is however, just the very 1st losing trade we have had for this strategy.

To re-cap this month’s income, let’s look at what we made in premium vs. our required investments (in margin). Here are the positions we had with corresponding PROFIT/INVESTMENT and RETURN:

RUT 830/835 CALL SPREAD – $40/$460 = 8.69% Return

SPX 1,300/1,310 CALL SPREAD – Loss $120/$920 = -13.04% Return

With regard to TOTAL INCOME and RETURN, the January portfolio produced a loss of $80 after investing just $1,380 in margin. That means we saw a total portfolio return of -5.79% this month. As we mentioned before, this of course is not a great way to start the year but every strategy will have losing months (we are not immune to losses). However, our strategies still force the market to make major, sustained moves - which it did this month.

Naked Puts/Calls Strategy: 1.90%

Our naked puts/calls strategy continued to do very well this month. We remain profitable with this "bread and butter" strategy for over a year now. Not always the flashy return, but it sure is consistent.

To re-cap this month’s income, let’s look at what we made in premium vs. our required investments (in margin). Here are the positions we had with corresponding PROFIT/INVESTMENT and RETURN:

IWM 85 PUT – $14/$580 = 2.41% Return

QQQQ 58 CALL – $14/$706 = 1.98% Return

DIA 102 PUT – $20/$1,020 = 1.96% Return

IWM 84 CALL – $16/$1,070 = 1.51% Return

With regard to TOTAL INCOME and RETURN, the January portfolio produced $64 of income after investing just $3,376 in margin. That means we saw a total portfolio return of 1.90% this month.

Iron Condors Strategy: 1.24%

As with our Credit Spread strategy we exited the upper half of the SPY Condor early at a small loss which really dropped our returns this month from the 5-6% range to below 2%. Again not always the flashy return, but it sure is consistent. Condors naturally require more adjusting each month.

To re-cap this month’s income, let’s look at what we made in premium vs. our required investments (in margin). Here are the positions we had with corresponding PROFIT/INVESTMENT and RETURN:

SPY 112/110-130/132 Condor – Loss $3/$375 = -0.08% Return

IWM 69/70-84/85 Condor – $10/$190 = 5.26% Return

With regard to TOTAL INCOME and RETURN, the January portfolio produced $7 of income after investing just $565 in margin. That means we saw a total portfolio return of 1.24% this month.

As we usually point out, our calculations assume that you enter just 1 (ONE) position for each trading alert. Those members with a higher capital base should be entering multiple contract positions each week to fill their respective portfolios.

If you want honest and straight-forward trading then please keep us in mind. Hey, you might even want to join in on all the fun by signing up for a 30 Day FREE Trial!

Your sick and tired of your old, stone-age broker and platform and it's time to move right? Now your stomach drops..."How do you move your brokerage account with minial pain and hassle right?"

For most people transferring money from one brokerage account to another case seem a little intimidating. But if you are in an unhappy (or pissed off) with your current broker than why stick around any longer? Dump your broker just as you would a relationship you don't enjoy being in. Frankly these days it's so easy to make the switch you'll be amazed at the end of the process.

Why I Made The Switch To thinkorswim?

Back in early 2005 I decided I had enough with my old Fidelity account. It was complicated and time consuming to enter trades. Moreover, I had stopped working for the investment banks and needed something more sustainable to keep my alive trading on my own. I was referred to thinkorswim through a friend and have never looked back!

As many of you already know, I'm a complete thinkorswim fan. They continue to update their platform with the best tools and charts around these days. Sure they are a little pricey but you get what you pay for in this industry. And when you have money working day and night, the platform had better be top notch.

The Paperwork Is Easier Today

Most people fail to leave their current broker because they fear the paperwork. However, these days they have made the whole process so easy and streamline, you may end up only signing 1-2 pages at most. Either way, if you are unhappy with the services or tools your broker offers, the commissions they charge, or justwant access to every product type out there, then paperwork should not stop you.

3 Quick Tips To Help You Start

Whatever your reasons for leaving, here are some tips to make the transition smooth.

1. Let your new broker handle most of the work. They want your business and are willing to do most of the paper work for you in advance. They might also waive their wire transfer fee to get you up and running.
2. Duplicate your new account to match your old account. It is important to make sure your new account looks exactly like the old one. That means that if it is a joint account your old account must be a joint account. This will make the paperwork much easier and the whole process smooth.
3. The transfer process can take several days. Plan this out in advance. Don't decide to move your account over 1 night and assume it will get done. Know now that it could take 3-4 days. So plan your new trades accordingly and/or close out any trades in advance of the move.

Finally, don’t be afraid to ask for questions and talk to your broker often. Get your hands dirty, make the switch and it will all be for the better.

What's Worked For You?

Have you made a switch recently? What has worked for you or what didn't work? Any gems of knowledge you can share with everyone...

I probably can't preach this enough but fully understanding the Time Value of Options is one of the most important factors when trying to determine your trading strategy. With stocks it's fairly easy. If you think the stock is going higher then buy the stock. You could hold the stock for 2 days or 2 months before it gets to your target but you don't care with regular stocks.

With options we have another question to ask: How long will it take to get to our target? Now we not only have to be right in our directional analysis but also on the timing. Virtually impossible which is why we favor option selling strategies.

Time Decay Refresher

Time decay is the amount by which the price of a stock option exceeds its intrinsic value. Generally time decay is represented by the Greek Theta. The greater the time until expiration, the greater the time value (see the graph below). What some people don't understand is that Theta also takes into account interest rates, dividends, the price of the stock and the expected volatility of the stock. All of these are factors you have to consider when making your next trade.

OTM Option vs. ITM Option Time Decay

For OTM options (out of the money options), the entire value of the options the the time decay premium. But for ITM options (in the money options), once the stock is ITM it starts picking up intrinsic value and the time value component decreases. Beginning traders often view at the money stock options as being expensive because they blindly assume that they have high levels of time decay or Theta. This is not accurate.

Yesterday was the first day in nearly 2 months that the markets declined more than 1%. The 37-day streak that just came to an end yesterday was the longest since May 2007 - right before the S&P 500 dropped more than 150 points in just 2 months.

Each Streak Is Followed With Pain

Going back the last 10 years, each consecutive stream of 35-40 days without a 1% decline is swiftly followed by a 1-2 month sell-off driving the indexes down more than 7% on average.

Similarities With April Top Showing

Discounting the fact that this current run is nearly twice a long as the Feb-Apr run last year (which should only make you even more risk adverse), the similarities between the tops are very bold. Notice in April of last year how the 1st day with a 1% decline sticks out like a sore thumb on the chart. This was followed by a week of sideways trading and then 2 months of major selling.

Now we are showing the same signs of weakness. Although, in this case, a strong level of support is much closer than it was in May-Jun last year. Keep your stops tight and start buying cheap out of the money puts to hedge.