The IPO market has been very busy in 2011. But how would you know which companies are doing good and which are performing bad? So I put together the Best and Worst new stock IPOs in 2011. And judging by the number of companies that have lined up to file initial public offering (IPO) in coming weeks and months (Facebook and others) we may be looking at a strong year.

Best New Stock IPO – LinkedIn Corp (LNKD)

Worst New Stock IPO – Boingo Wireless (WIFI)

Invested In Any IPOs Lately?

Have you picked up any of these IPOs this past year? If so how has the performance been for you? Clearly the “Offer Price” is what the major institutional players get but you could have gotten LNKD when it trade all the way down to $43.26!

Diagonal spreads are a great long term way to both invest with options and produce some monthly cash flow at the same time. Many traders actually don’t know much about how powerful and flexible these diagonal spreads can be for an option trader.

Diagonal option spreads are established by entering both a long and short position in two options of the same type (so either two call options or two put options) but with different strike prices and expiration dates. Again take a second to digest that and read it again if you need to. In effect, the strategy is similar to a covered call, except that a long call is substituted for the stock.

Spreading Time And Strikes

This strategy gets the name “diagonal” because it combines a horizontal spread, which represents differences in expiration dates, with a vertical spread, which represents differences in strike prices. You could even think of it as the off-spring of a calendar spread and a vertical spread.

Simply put once again to drive home the point, you buy an option that will not expire for many months and then sell options that will expire in the front month against the current long option. Thus you get exposure both in difference contract months and strike prices. Starting to make a little more sense now?

“Love Your Diagonal” – thinkMoney

Thinkorswim recently just ran a great article in their recent quarterly publication thinkMoney that I urge you all to check out if you haven’t already.

AAPL Diagonal Call Spread Example

Using a current example with AAPL stock, let’s say that you have determined using your awesome technical analysis skills that AAPL will rise gradually for the next four months. You enter a diagonal call spread by buying a NOV 425 call for $300 and at the same time sell an OCT 450 call for $100. The net investment required to put on the spread is a debit of $200.

Just like a vertical spread, you have both limited upside profit potential and limited risk. The ideal situation is for the position would be that AAPL either remains flat and or closes in between the two strike prices (say $435). In this scenario, as soon as the near month 450 call expires worthless, the options trader can sell another call and repeat the entire process every month until expiration of the longer term call. Now you can see why it’s similar to a covered call strategy right?

On the downside, the maximum risk of the diagonal spread is limited to the initial debit it cost you to enter the position of $200. If AAPL all of a sudden starts falling hard, then your losses are capped at $200 and no more.

Although it’s a great strategy to add to your toolbox, it still is possible to lose money with a diagonal spreads if you are not somewhat correct on the underlying direction of the market. Hopefully you didn’t think it was a one way ticket to riches! As always, being proactive and using stop losses, risk management, and hedging greatly increase your odds of success.

A Quick Word On Volatility…

Lots of books and other websites talk about various trading strategies that are designed to benefit from changes in volatility. All of that is good and well, but sometimes as an investor in options, my interest is in gaining leverage and managing risk on a some-what directional basis.

There is no arguing that volatility needs to be watched closely, but when the premiums make the diagonal spread unattractive, it’s a good idea to do your homework first before entering a position for the next couple months.

I have been trading and writing this blog for the past 5+ years now. Really an unheard of thing online as most websites are dead after just 12 months. I have met and talked with a lot of great people and learned a lot of lessons that I wanted to share…

Some of these ‘lessons’ relate to options trading while others are just things I’ve come to learn slowly. And by all means, please let me know about your lessons and of course whether you agree or not with my lessons in the comments below.

1. Be ethical.
2. Learn what you don’t know.
3. Greed will bury even the lucky eventually. (Ahem penny stock chasers)
4. Marry your best friend. (I did and couldn’t be happier!)
5. Money in the bank is the Report Card – “Warren Buffett”
6. You can’t outsource your passion.
7. You can’t do everything yourself, delegate anything someone else can do. (I’m still learning this one haha)
8. Bad things do happen to good people.
9. Some people just can’t be helped no matter what you do, so don’t try.
10. What you pay for, is what you get! (We all learn this the hard way unfortunately)
11. The truth isn’t slander.
12. The best competition is your own competition.
13. Spend outside your means, you will have to work harder, make more money and become more successful.
14. Mac is 150% better than Windows. (Loving my new MacBook Pro I got last year!)
15. Complaining about people is time wasted.
16. Have a reason why you do something.
17. Write to do lists, lot’s of them! (Mine never seem to be complete though?)
18. If you can’t do, don’t teach. (Hence my Video Proof)
19. Surround yourself with great people.
20. If you want something from someone, do something for them first.
21. Network at events.
22. Don’t speak business at the bar. I hate when people do this!
23. Good people will support you because of who you are and what you represent.
24. Stay healthy, eat well, exercise as often as possible.
25. Your lifestyle heavily effects your businesses performance. (Stress will kill you!)
26. There is only one way to learn, and that is through action.
27. Forgive, forget, move on.
28. People who rip you off, never amount to anything.
29. Build a legacy based on the things you have done that are good, not bad.
30. Spend time with your family, they are the only one you have.
31. There is nothing to hold you back, except yourself. (Beginning traders!)
32. You don’t know everything, learn. (I also point out that I’m still learning too)
33. Have business partners, success comes quicker.
34. When you do go into business with someone, have a long term agreement. (Not there yet…but maybe soon)
35. If something is working, keep doing it.
36. Don’t keep all your eggs in one basket.
37. Taking ownership of failure builds the foundation for success.
38. Have an exit strategy, always be working towards something.
39. Success often comes to those who don’t give up.

Let’s face it, paper trading is a necessity for any trader these days to be successful.

The term Paper Trading simply means that you are pretending to trade financial instruments such as stocks, options, and futures using their current prices as would-be buy and sell prices. No real money is put at risk, instead “Monopoly Money” or “Paper Money” is used, hence the name.

Clearly, I believe that paper trading is not only beneficial, but is an absolute requirement of successful trading. This is where most traders start their trading career anyways. It allows you to make trading decisions on paper only, so you can explore and try out different strategies and technical indicators.

Why Do I Need To Paper Trade?

Everyone can read about trading or take a course about trading but until you actual open up a paper trading account with a broker and start placing orders; you will never learn exactly how it works. As the old saying goes, “There is no substitute for seat time.” The more experience and education you have the more profitable you will be as a trader.

Fortunately enough for you, these days paper trading or virtual trading can offer the “seat time” you need without risking capital right away. If used correctly, this could be just the ticket you need to get yourself up to speed.

My 2 Problems With Paper Trading

I have two really big problems with paper trading in general. First, it teaches you (through no fault of your own though) ‘things’ that you would not necessarily do had you been trading real hard money. Subconsciously you see it as a game instead of a learning tool.

I have seen too many students when coaching knowingly over trade with trading sizes that are greater than what they could afford with real money. What’s the point I then! Sure we can all make $10,000 a week trading $3 Million but is that a reality? No way. Therefore, it is critical that you paper trader only trades you would and could trade with real money.

Second, paper traders always seem to focus more on trading profitability, instead of consistency as the guideline of whether they are ready to begin trading real money. Use the different broker platforms to test basic trading setups, make necessary adjustments sample trades and master entry-exit points. Once you start making consistent gains with a proven trading plan, then you can venture off into the real market.

You Have To Transition Over At Some Point!

No matter how many trades you do on paper, the harsh reality is that it will often give slightly false and misleading results. This is because nothing comes close to real-life trading with real money. The emotions and mindset are completely different when real money is being staked, which is why overall I think paper trading is only worthwhile up to a certain point.

For one thing, you tend to make more-aggressive moves when no real money is at stake right? I mean you have nothing to lose so why not. But again you try your best to treat paper trading as if real money were at stake. I know this is hard to do, but the more closely you relate your paper trading strategies to the real world, the more profitable you will be in the long run.

It’s just a verifiable fact that human beings learn best from suffering the consequences of their mistakes. Yet with no real money lost when paper trading, the lessons you should be learning aren’t fully burned into your mind the way a real loss would be.

Who Do You Think Has The Best Paper Trading Platform?

From thinkorswim, TradeKing and TradeMonster to everything in between; which broker has the best paper trading platform and why? Focus on the education you gain when adding your insightful comment below!

Fibonacci retracements, fans, arcs, and time series are some of the best technical analysis tools for traders. They are not a perfect indicator (what is right) but they are very helpful if you know the basics.

Many years ago an Italian gentleman named Leonardo Fibonacci discovered ratios that exist throughout all of nature. These ratios are used to describe the proportions found in atoms as well as patterns found among stars and planets. These proportions help keep balance in the natural world and it also appears that stock markets exhibit a similar proportion.

Bees Can Teach Us About Trading

One example of this ratio is found in bees. If you know the number of female and male bees in a hive, you can divide the number of females by the number of males and find the number will be 1.618. Another example that is easier to measure is the human body. First, measure the distance from the shoulder to the fingertip. Next, measure the length from the elbow to the fingertip. Divide the larger number by the smaller number and you will get a number close to 1.618.

This quotient is referred to many times as the golden mean, the golden ratio or the divine proportion. Most everything contains measurable properties that will conform to this ratio. Even financial markets follow this same pattern.

How Does This Relate To Trading?

In the world of stock analyzing, the golden ratio is normally expressed in three different percentages – 61.8%, 50% and 38.2%. When applying the Fibonacci ratios to stock trading, there are four main methods: fans, arcs, retracements and time series.

Fans

The fans, like the name suggests, are made from diagonal lines. The high price and the low price is first determined and then a vertical line is placed through the point furthest to the right. This line is divided to show 61.8%, 50% and 38.2%. From the point furthest to the left, three lines are drawn to the new percentage markers.

Arcs

Once again, the high price and the low price are identified. From the desired point, lines resembling mathematical compass curves are drawn to represent 61.8%, 50% and 38.2% distance from the point. These lines represent the resistance and support area as well as the range.

Retracements

Horizontal lines are used to show the points of resistance or support. After identifying the high and low prices on the chart, five lines are marked. The first line will be at 100% or the high point. The second line appears at 61.8%. The third line appears at 50%. The fourth line appears at 38.2%. The fifth and final line will be at 0% which is also the low point. Whenever a noticeable price fluctuation occurs, the new support and resistance areas will be within these lines.

Time Series

This method is different from the previous ones due to the use of vertical lines drawn in series. The chart is divided into segments and the vertical lines are placed according to the Fibonacci sequence. The lines represent the expected area for price fluctuations.

History has a way of repeating itself, which is the foundation of stock analysis. The Fibonacci ratio and its application to stock markets is a wonderful tool in identifying the support and resistance for stock prices.

We all start trading for 1 reason – to make money. And usually when we start you will ask yourself “What can I realistically make my 1st year trading?” Pretty normal question to ask when you just start out I would say.

I often find that most wannabe traders don’t have a clue as to what to expect in terms of profit from the market. Yet there they go, investing their hard earned money day in and day out. Unfortunately most of you are going to learn the hard way – hell I did.

To be blunt, I have no idea in the world what you can expect to make in your 1st year of trading. And you can never really command or assume to much when trading. What I can tell you is that without proper education and a solid trading plan you are probably going to lose a couple years worth of income.

Setting Realistic Expectations

Every trader, especially beginning traders, opens their account with unrealistic expectations what their possible future performance might be. How much they will make in profit or return right. But where are they getting these numbers from? Just because someone traded 1 penny stock 5 years ago does not mean that a 454% return is normal, or even expected.

This goes for options trading as well. I see sales pages all the time that show you 200%+ returns on some cheap options they bought. But what they don’t tell you is that those trades happen once in a while and are not consistent. Maybe they did make 200%+ on a trade, but that doesn’t happen all the time and to set your expectations that high would be very ignorant.

Starting off your trading career with unrealistic expectations inevitably will lead to failure. It’s better to face reality now than to be blindsided later. Set manageable goals that are thought out. Have a trading plan in place. Learn about technical analysis and trading psychology now. Trust me, it will make things much easier down the road.

Why I Don’t Advertise On This Blog

I personally feel that the trading expectations most beginners have now were subconsciously formed by all the advertisements and “over-night millionaire” type sales literature found online. When I started out building this blog I knew that I never wanted to put big flashy advertisements on it.

I hate them on other sites so why would I subject my readers to it? Plus, it distracts from the purpose of providing educational content that you can actually learn from! Sure I put some hard work into my website’s design and functionality, but you’ll never catch me selling advertising space here. And isn’t it refreshing not to see those annoying ads? I think so.

Need Help Making Realistic Goals?

Here’s a quick list of some things to consider as you write down your expectations and goals.

1. More traders lose more money than they make. The figures are a little off depending on who you talk to, but it is 80% to 90% (maybe more) who end up losers and leave the business altogether. So figure out why they fail and learn to avoid the common mistakes early.

2. Only a small percentage of retail traders are profitable. The numbers get even smaller if you look at a 3-5 year average which measures consistency. Don’t get discouraged, we all fell off the bike before we learned to ride it right? If you are just starting out, you should expect to incur some losses as you climb the learning curve.

3. Paper trade first with a small amount of money. I always tell my beginning coaching students to paper trade everything first. This way you learn how to enter orders, adjust trades, and more importantly learn you’re your mistakes without losing real money. Then when you are ready to invest real money, keep it small. If you can’t trade profitably with $1,000 how in the world are you going to make it with $100,000.

4. You will have losing trades. Again, I see too many people quitting after a streak of 4-5 losing trades. What, you didn’t think this would be a walk in the park did you? Come on people, losing money is part of the game. It’s how you manage your losses that make all the difference. Besides, it is impossible to predict price movements consistently (which is why our strategies don’t need the requirement for success). Listen to the technical indicators, control your emotions, and above all…preserve your capital!

5. Don’t expect to become financially independent. Don’t you think it’s completely unrealistic to expect a small account, say under $5,000, to generate consistent income to replace your regular job? I sure do and anyone who has done it in a year wouldn’t be reading this blog. Rather, concentrate on low-risk, low-frequency trading with income-oriented trading systems. Hit singles instead of home runs.

What Were Your Expectations When You Started?

Don’t be shy on this one. I’m sure we all had some pretty crazy expectations before the market knocked some reality into us. Add your comments below and share your “beginner” expectations, however crazy they might have been!

Writing covered calls is a popular and generally conservative strategy that many investors use to generate a relatively consistent stream of income from their portfolios. In a nutshell, an investor who owns 100 shares of an optionable stock may elect to sell someone else the right to buy those shares from the investor at a certain price (strike price) by a certain date (expiration date).

While the strategy typically works best with stocks that are flat or trending slightly higher, covered call writing is a flexible enough strategy that it can be profitable under most market conditions. And that includes bear markets, too. Remember that in volatile markets, increased volatility equals increased premium income.

Still, you will need to take certain precautions to be successful writing covered calls during a bear market. Here are 4 rules for doing so…

1) Write In The Money Calls Only

Writing in the money calls is a good idea in any market, but it’s essential when the market is falling. Writing a call at a strike price below the current share price may reduce your income potential and prevent you from participating in any capital gains if the stock moves higher, but it will give you much greater downside protection than if you write the call at the money (roughly equal to the current share price) or out of the money (at a strike price higher than the current share price). Added protection is essential during bear markets.

2) Be Extra Diligent In Your Trade Selection

When everything is rosy and the stock market does nothing but chug a little higher every day, trade selection for covered calls may not be that crucial. In the good times, you can sometimes get by without doing your homework. But you simply can’t afford to wing it during a bear market. It’s essential that you only write covered calls on technically and fundamentally sound companies. Investing in some low-cost online tools and resources to help you identify those kind of stocks is probably worth considering.

3) Add a Protective Put To Your Covered Call Position

I know of one covered call subscription service that promotes a customized strategy involving the purchase of a longer term put to be used in conjunction with the covered call position. The advantages of the longer term put is that it can provide multiple months’ protection, and it also retain its value better than a short term put (the time value of a longer term option decays much more slowly than that of near term options).

4) Be Patient And Flexible

Sometimes the best course of action is to do nothing. A bear market is one thing, but a complete market meltdown is something else. In the market mayhem of October 2008, when the Dow experienced its first ever 1000 point intraday swing, the best trade for covered call writers was to be on the sidelines. You can make money writing covered calls in choppy waters, but in case of a hurricane, you definitely want to be inland. There is no rule that says you must always have an open position. Many conservative call writers, for example, won’t even consider writing a call on a stock that’s trading below its 50 day moving average.

Writing covered calls during bear markets can be a viable strategy for income and profits, provided you do your homework (or get help doing it) and take proper precautions.

June was a fun month to trade and again very profitable. We finally saw some volatility towards the later half which helped swell option premiums. This made things a lot easier actually when the market sold off hard. In late May when we completed building the June portfolio, it was clear that the market was heading lower and all we had to do was sell options below known areas of support.

In fact, here’s a chart I posted to members back on May 18th, and right before the sell-off in June. Notice that I knew it was coming and positioned our options below key support levels.

Then again in late June we finally made it down to those support levels which were strong enough for a bounce. Again, here is the chart I posted right before the rally took place. Even if I would have been wrong in my analysis, our positions left room for a big margin of error.

Credit Spread Strategy: 3.87%

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 720/725 PUT SPREAD – $20/$480 = 4.17% Return

SPX 1,205/1,200 PUT SPREAD – $20/$480 = 4.17% Return

RUT 695/690 PUT SPREAD – $20/$480 = 4.17% Return

With regard to TOTAL INCOME and RETURN, the portfolio produced $60 of income after investing just $1,440 in margin. That means we saw a total portfolio return of 3.87% this month based on our model allocation.

Naked Puts/Calls Strategy: 2.19%

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 115 PUT – $20/$1,150 = 1.74% Return

IWM 70 PUT – $20/$700 = 2.86% Return

USO 28 PUT – $9/$280 = 3.21% Return

USO 32 PUT – $5/$290 = 1.72% Return

With regard to TOTAL INCOME and RETURN, the portfolio produced $54 of income after investing just $2,420 in margin. That means we saw a total portfolio return of 2.19% this month based on our model portfolio allocation.

Iron Condors Strategy: 6.16%

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 74/73/90/89 Iron Condor – $13/$195 = 6.84% Return

With regard to TOTAL INCOME and RETURN, the portfolio produced $13 of income after investing just $195 in margin. That means we saw a total portfolio return of 6.16% this month based on our model portfolio allocation.