Day Traders and Swing Traders and Options? Maybe!

Typical day traders and swing traders look for stocks with quick,
short term movements, and are not in the business of holding
positions overnight let alone a week or two. So the use of
options has not usually been a component of their trading
strategies.

Now however, some new opportunities for profit are available
since many day trading firms are allowing their traders to trade
options. Unfortunately, many option strategies do not apply to
the quick in and out nature of day trading. Neither day traders
nor swing traders are typically in a single stock long enough for
the strategy of selling options for premium collection to be
viable.

Since these traders often look for break-outs, and sometimes go
bottom fishing to find opportunities for profit, a premium paying
option might work well for them. Why? Because the trader would
be buying protection from catastrophic losses. Bottom fishing
and breakouts are associated with volatility, which means
uncertainty and risk. However, there is a strategy that will
provide the necessary protection for these traders to carry
positions through overnight risk, while remaining fully
protected. This would still allow also them to take advantage of
the large potential upswing that was the original goal of
identifying the bottom and the break-out. This strategy is
called the protective put.

THE PROTECTIVE PUT

The Protective Put Strategy involves the purchase of put options
in combination with the purchase of stock and works well in
situations where a stock is prone to rapid, volatile movements.

A put option gives an owner the right, but not the obligation, to
sell a certain stock, at a certain price, by a specified date.
For this right, the owner pays a premium. The buyer, who
receives the premium, is obligated to take delivery of the stock
should the owner wish to sell at the strike price by the
specified date. A strategically used put option offers
protection against substantial loss.

The protective put strategy is a strategy that is ideal for a
trader who wants full hedging coverage. This strategy is very
effective in stocks that normally trade under high volatility, or
in stocks that normally do not trade under such high volatility
but may be involved in an event driven, highly volatile
situation.

When an investor purchases a stock, they can buy the put
(protective put) to provide a proper hedge. The construction of
this position is actually quite simple. You buy the stock and
you buy the put in a one to one ratio meaning one put for every
one hundred shares. Remember, one option contract is worth 100
shares. So, if you buy 400 shares of IBM then you need to
purchase exactly four puts.

From a premium standpoint, you must keep in mind that by
purchasing an option, you are paying out money as opposed to
collecting money. This means that your position must
"outperform" the amount of money that you paid for the put. If
you were to pay $1.00 for a put and you owned stock against it,
the stock would have to increase in price $1.00 just to break
even. The protective put strategy has time premium working
against it, thus the stock needs to move to a greater degree, and
more quickly, to offset the cost of the put.

When we buy a stock, three potential outcomes exist. The stock
can go up, go down or it can remain stagnant. If we were to
analyze the three scenarios, we would find that only one
scenario, the up scenario, can produce a positive return and
that's only when the stock increases more than the amount you
paid for the puts. The other scenarios produce losses. If the
stock is stagnant, you lose the amount you paid for the put. If
the stock goes down, you lose again- but the loss is limited. It
is the limiting of loss in highly volatile situations that makes
the protective put an attractive and useful strategy.

This is how it works! Imagine you buy stock for $31.00 and buy
the 30 strike put for $1.00. If the stock goes down, the
position will produce a loss. For example, if the stock is down
to $30.00 (down $1.00) at expiration of the option, you have a
$1.00 capital loss. With the stock at $30.00, the 30 strike puts
will be worthless, thus you incur a $1.00 loss because that is
what you paid for the put. Your total loss will be $2.00. Using
the protective put strategy set a cap on your losses. The put
strategy's attractiveness is that it will allow you to set loss
limits!

Let's see how that works. We'll set the stock price down to
$28.00. Since you purchased the stock at $31.00, there will be a
capital loss of $3.00. The puts, however, are now in the money
with the stock below $30.00. With the stock at $28.00, the 30
strike puts are worth $2.00. You paid $1.00 for them so you have
a $1.00 profit in the puts. Combine the put profit ($1.00) with
the capital loss ($3.00) and you have an overall loss of $2.00.
The $2.00 loss is the maximum you can lose no matter how low the
stock goes because the buyer of your put must take the stock at
the strike price. This is the protection the put provides.

_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
Amazing Options Trading Strategies For Safer Investing
and Explosive Profits. Discover how to protect your
investments with the leveraged power of options. Step
by step video tutorials show you how. Click here now:
http://www.options-university.com
_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/

In The News:

---

How To Find An Investment Advisor

Do you think you need an Investment Advisor? Hold on... Read More

Out-Of-State Investors Check List of Questions

The following lists of questions are suggested questions to ask... Read More

Effective Advice For A New Generation of Investors

CATCHING A FALLING KNIFEOne of the most common mistakes made... Read More

Hedge Fund 101 - Make Money with Hedge Funds

Investors are always looking for the best investments that will... Read More

The High Price of Oil

In less than four years, the price of oil has... Read More

Why You Need To Buy and Sell Gold Coins (Part 3)

Putting Rare Coin Market Cycles to Work for You...Until recently... Read More

Discipline in Trading and Investing

The one thing I can think of that most affects... Read More

Can Using Sales Leaseback Method of Investment Property Acquisition Reduce Risk?

Sales Leaseback compared to traditional property investmentCan a Sales Leaseback... Read More

It?s Never too Early to Start Investing!

Remember the old saying, "never too late to start"? Well,... Read More

Trading Expert Discovers Ways To Beat Stock Market Odds With Money Management

The first point to mastering money management is that you... Read More

Preholiday Trading

The Light Crude Continuous Contract closed at $66.13 a barrel... Read More

Trend Following

Trend following also called momentum trading is the simplest and... Read More

Sell Discipline for Investors: Importance and Execution

Investors usually don't have an aversion to buying an asset.... Read More

Critical Options Investing Tip When Trading Naked Calls and Puts

An option is a derivative trading product that is best... Read More

The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs

Online trading is so seductive - just sit, click, and... Read More

Straddle Strategies in Option Trading

The straddle strategy is an option strategy that's based on... Read More

Asset Allocation Lessons: The 70% Inflation Solution

For investors only... and for speculators who need to invest... Read More

The Truth About Real Estate Investing - Is It Right For You?

You have probably been hearing, seeing and reading that real... Read More

Reasons For Joining An Investment Club

Whether you're a novice investor or an experienced stock picker... Read More

Which IRA Is Best For You?

An Ira is one of the greatest ways to save... Read More

Preparing to Invest: How to get started

Investments can be a source of great potential earnings. The... Read More

Exchange Traded Funds

They call 'em ETFs.There are hundreds of them.The mutual funds... Read More

Finding the Perfect Company

The perfect company - it's the holy grail of the... Read More

Can Your Annuity Do This?

Many people buy annuities according to their agent's recommendations. However,... Read More

Why the Rich Keep Getting Richer

Rich people: fortunate, lucky, selfish, and arrogant? Or highly educated,... Read More

Asset Location ? Increase Investing Returns & Reduce Your Taxes

Location ? Once the holy grail only for real estate... Read More

Investing in New Zealand - Learn how to Find Unique Investment Opportunities

Investing in New Zealand might be much easier than investing... Read More

Investing and Asset Allocation

Sometimes you spend sleepless nights worrying about which stocks to... Read More

Eight Questions to Ask Your Financial Advisor

You may like your financial advisor, but is he really... Read More

Why Should I Use Penny Shares to Build Wealth?

A strategic question. Why indeed?1. A penny share would usually... Read More

Numismatics are for Collectors, Not Investors

As a precious metals investor, you may heard much about... Read More

How to Calculate the Value of Your U.S. Savings Bonds

If you're like many Americans over the age of 55,... Read More

Seven Investment Terms Everyone Should Know

For those who have never given their financial future a... Read More