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options trading

Best Options to Buy This Week

More people than ever are learning how to trade options. But knowing the basics of options trading is only half the battle: You need to know how to find the best options trades to make money.

That's exactly what you'll find here.

We'll show you the simple steps you can take to find profitable options trades.

Plus, we'll also show you the best options trades you can make right now, courtesy of the options experts here at Money Morning.

Speaking of experts, here's Money Morning's options trading specialist, Tom Gentile, with a brief overview on what makes options trading so phenomenal, plus why this is one of the best places to learn the ropes:



Why Options Trading?

Options are exploding in popularity because retail traders have seen their profit potential.

Stock options give you the right to buy or sell shares of a stock by a certain date. Since you don't actually own the stock, just the right to buy or sell it, you can control many more shares of the stock for a fraction of the price of owning them outright. That's called leverage. And it lets you amplify the profit potential of stock trades far beyond what you would see from simply buying and selling shares.

For even more detail on how this works, make sure you check out our guide on how to trade options.

What many new traders have found out the hard way is that there's more to making money with options than buying a call on a stock you like and waiting.

You need to find the right combination of a stock, the strike price of the option, the expiration date, and the cost of the contract to consistently find profitable options trades.

Here's how you can do it.

Finding the Best Options Trades

While there are a nearly limitless combination of options traders can use to create a strategy for any situation, we want to focus on finding trades using simple calls and puts.

There are three elements to key in on to take your trading to the next level.

Find the Right Strikes and Expirations
There are many variations of strike prices and expiration dates for every stock with options. A one-sized rule is nearly impossible.

But a few guidelines can help you find the best options.

First, look for strike prices just out of the money.

Options already in the money will be very expensive and that will cut into your potential gain.

Options far out of the money will be much cheaper, but the stock will have to move dramatically in order for you to make any money.

The best idea is to look for options one or two strikes out from the stock's trading price. This will give you the best combination of affordability and potential to hit.

Second, look for expiration dates three to six months out.

This is a broad rule since six months can be a lot of time, but you likely don't want to tie up your money any longer than that. And plenty of traders make good money with weekly options, but you'll want expert help before you dive in.

Similar to finding the right strike price, expiration dates nearer the current date will be cheaper if the options are out of the money. But you have little time for the stock to move, raising your chances of losing money. And if the option is in the money, close expiration dates will be very expensive.

Options with expiration dates far away will be more expensive since the stock has more time to get in the money too.

But an expiration date three to six months out is the sweet spot between giving the trade time to work – the stock moving into the money – and affordability, lowering your risk and maximizing your upside.

Trade Liquid Options
One of the most important factors new options traders overlook is liquidity in the options market. Liquidity simply means there are many buyers and sellers for a particular options contract. That means prices are accurate, and most importantly, you'll be able to sell your options contract when the time comes.

When the market for the specific options you're looking at isn't liquid enough, it means the price you see on you trading screen might not be the price you end up paying. It may even mean there are no sellers at all for the contract, meaning you can't enter the trade.

It also means that when you buy the contract, you may not be able to sell it. Imagine buying a call option on a stock that soars higher, seeing a profit on your trading screen, and not being able to sell the option for a profit.

The way to find options with liquidity is to look at the bid-ask spread. Options with close spreads are typically liquid enough to trade. If you see a wide range, or a range that includes $0, then the option is unlikely to be liquid.

That may eliminate little-known stocks from your plans, but that's all for the better. As Money Morning's options trading specialist, Tom Gentile, says, "98% of stocks and ETFs out there simply aren't worth a single penny."

But "the big banks and brokerage firms want you to gamble your money on all of them," says Tom.

That's why looking for liquid trades can go a long way toward making your moves more profitable.

Manage Your Risk
Options are great at helping you trade while lowering your risk, but that can go out the window if you aren't careful.

First, make sure you use limit orders when buying and selling options.

The options market can be fast-moving, and using a market order could mean you end up paying more for a trade than you initially expected. It may also mean you sell your contracts for less than you hoped. But using a limit order can make sure you get into and out of trades at the price you want.

Second, don't chase trades.

You may be dying to open a position on a particular option and see that your limit order isn't filling. Stay disciplined, and don't change your entry point just because the market isn't cooperating.

"If you do, you could end up buying at the high or near the high of the day only to see the markets calm down and the option prices start coming down," Tom tells us.

Third, stick with your plan.

Set aside a percentage of your portfolio you'd like to use for options trading and stick to it. It's tempting for traders, especially new traders, to make a ton of trades and chase bad money with good. That's only increasing your risk.

Tom tells us a simple strategy to managing your risk is to keep your risk the same on each trade. Even if you feel like the trade is going to be a home run, don't be tempted to increase the money you're putting in. Stick to your plan.

And never trade with money you can't afford to lose.

Best Options to Buy Right Now

Options trading is fast-paced, so you'll need to act quickly when you find the right trade. Not only do options change price as the expiration date nears, but changes in the underlying stock price can cause options prices to shoot higher or lower.

That means if you're looking for options trading recommendations, you can't rely on an idea that's out of date, even if it's just a few weeks.

Here at Money Morning, we publish options trade ideas multiple times a week.

You can find our latest trades right here…

Options Trading: Three Ways to Win Big with a Bearish Calendar Spread

By , Contributing Writer, Money Morning -

Think some of Wall Street's higher flyers look vulnerable to a broad market pullback?

If so, they could be perfect candidates for a low-cost, low-risk options trading strategy that could pay off big time if we get another move like last Friday's 169-point Dow plunge.

The strategy is called a "calendar put spread," and it works like this:

  • You sell a slightly out-of-the-money put option with a strike price just below the current market price of the underlying stock - with a near-term expiration date.
  • You then simultaneously buy a put option with the same strike price but with a more distant expiration date.
The cost - and the maximum risk - is the difference between the two option premiums, referred to as the "debit" on the spread. But because the longer-term put you buy "covers" the shorter-term put you sell, there's no added margin requirement.

It may sound complicated, but it's not once you understand how to employ this bearish options trading strategy.

Options Trading Primer: A Potential 900% Gain in Six Weeks

Here's how a bearish calendar spread might work with Exxon Mobil Corp. (NYSE: XOM), which has held up better than many other oil stocks in recent weeks, closing last Friday at $84.57, barely $3.00 off its 52-week high:

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An Options Strategy That Will Save You Some Money

By , Contributing Writer, Money Morning -

Whether you credit a Santa Claus rally, an early January Effect, or some other driving market force, there's no disputing the strong finish posted by stocks in 2011 - or the healthy 2012 opening advance added in the first week of January.

To be specific, stocks - as measured by the Standard & Poor's 500 Index - rose from 1,204.00 at the close on Monday, Dec. 19, to 1,257.60 on Friday, Dec. 30, then jumped to 1,280.15 at midday yesterday (Monday), a gain of 6.32% in just three weeks. The Dow Jones Industrial Average did almost as well, climbing from 11,751.96 on Dec. 19 to 12,398.29 in Monday trading, a 21-day gain of 5.50%.

While those short-term moves are certainly impressive, they're hardly unique in today's volatile market environment. Three similar advances have occurred in the past five months alone - in late August, early October and late November - but each was followed by a sharp short-term pullback that wiped out much of the value gained in the rallies.

And, while few things in the market are certain, there's a strong probability this current market advance will also be followed by a sizeable retracement in the very near future.

So, how do you protect your most recent gains?

One answer is to turn to the options market.

A Defensive Options Play

As veteran Money Morning readers know, two of the most effective and often-used strategies involving options are writing covered calls to bring in added income and buying put options as "insurance" against possible price pullbacks.

As such, investors would typically look to the latter strategy - buying puts - for protection in the present market situation. However, there are times when unusual conditions can force investors to take an alternative approach to option strategies - and that has certainly been the case recently, thanks to the market's extreme short-term volatility.



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Don't Get Duped by Derivatives

By , Global Investing Specialist, Money Morning -

It recently came out that a $1.2 billion derivatives portfolio that Goldman Sachs Group Inc. (NYSE: GS) managed for the Libyan government lost 98.5% of its value between 2004 and June 2010.

If a firm like Goldman will sit idly by while a client eats about $1 billion on a single investment, where do you think you and your portfolio land on Wall Street's list of priorities?

The message here is simple: You can't trust Wall Street - not with a $10,000 investment, a $100,000 investment, a $1 million investment, and especially not with $1 billion investment.

Goldman Sachs claims that the Libyans were picking the derivatives trades themselves. But that's exactly what they would say.

After all, if it got around that Goldman's ace traders were capable of losing virtually all of their clients' money, bonuses would fly out of the window along with most of the business. I'm sure the Libyan government would have offered a rebuttal if it weren't being toppled in a civil war.

The Libyans no doubt did much of the investment decision-making themselves, but the real problem is that there was no basis of comparison for the prices of the derivatives products they were being given.

And that's where there's a lesson to be learned. As a retail investor, you have to be able to determine a two-way price quote for whatever investment you buy.

The investment landscape is littered with the wreckage of failed structured investments.

Between 2008 and 2010 already-strapped cities and states had to pay Wall Street $4 billion in termination fees to get out of various interest rate products that had gone wrong.

For example, there's the exciting 2007 "Abacus" deal by Goldman Sachs trader "Fabulous Fab" Tourre, which lost European banks a total of $1 billion.

The investors in Fabulous Fab's Abacus deal had no independent means of assessing the value of the subprime mortgages in the pool. These were large, "sophisticated" banks, but they deluded themselves with the risk/reward tradeoff they were taking on.

Losses are not confined to the notoriously murky derivatives investments, either. I would bet that the special Goldman clients who earlier this year bought privately offered shares of Facebook Inc. at a $60 billion valuation will end up losing big on their investment as well.

As investors, most of us are not rich enough to get Wall Street's attention, but we should stay informed about how these firms are luring their clients into spectacularly bad deals.

That way we'll all know what to avoid.



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Two Options Strategies That Can Turn Short-Term Price Gyrations Into Big-Time Profits

By , Contributing Writer, Money Morning -

Everyone acknowledges that at its most basic level the stock market is driven by fear and greed. And, in the past, the immediate impact of fear has been far more dramatic than the short-term effect of greed.

In other words, stock prices have historically tended to fall faster - and further - when investors are running scared than they rise when investors get a pleasant surprise.

Lately, however, with Treasury yields still near all-time lows, commodity prices hovering near record highs, and little else offering significant potential, there's a lot of money out there in mutual funds, exchange-traded funds (ETFs), retirement accounts and other institutional portfolios that's looking for a place to go.

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Hedging Strategies: At a Time of Record Gold Prices, This Simple Option Play Will Protect Your Profits

By , Contributing Writer, Money Morning -

If you bought gold at any time during the first 10 months of 2010, you're sitting on some pretty healthy profits.

And thanks to renewed inflation fears and the growing unrest in Egypt, Libya and other Middle Eastern nations, most forecasters believe the "yellow metal" still has lots of room to run.

But if you watched gold struggle during January 2011, you may also be worried about keeping those hard-won profits - even with the rebound and run to record highs that gold prices have made.

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