Go to http://ExpertOptionTrading.com/videos for more free videos on Option Contract You had an immediate loss on your position. Your stop loss was ineffective. It did not limit your downside protection to $17.40. That's why I don't use stop-loss orders. Overnight news, other events - especially when they come out with the earnings announcement, or some other announcement - can dramatically affect the price of the stock. Stop-loss orders will not help you if the stock gaps down. That's why I generally do not use stop losses. Instead, I like to use put options for insurance. Yes, it does cost something. It's not free insurance like a stop-loss order would be. However, how much did that stop-loss order really protect you, and cost you? It cost you a lot more, if you bought 1000 shares of stock at $17.80, and you got stopped out at $16, on 1000 shares of stock - that stop-loss order could have cost you $1780. A put position, on the other hand - if I had limited my loss, if I had initiated the position on this day, my maximum loss on the position would have been $440. In fact, what I will do is show you the reason I can enter a trade for $14,000, and turn it into $75,000 in 8 months. It's because when I initiated this position, it was for the long term. If I was to initiate this position, I would put a put option in place as insurance, with a very tight loss of only $400, like I analyzed here. I would have purchased an in the money put option, just slightly above the current price of the stock. Once this stock dropped, and I would have made $1780, that $1780 would have allowed me to purchase additional shares of the stock. This is where the majority of investors who simply use covered positions - this is technically called covered stock, because you're buying the stock, and protecting it with a put option. At this point, I would have purchased additional shares of the stock, at $17.80. I would have cashed in my insurance policy. My put, which I purchased when I initiated this position, would have given me approximately a $1700 profit. $1780 profit, divided by a share price of $15.90, would have allowed me to purchase an additional 110 shares of stock. However, I probably would have purchased an additional 100 shares of stock and cashed in my insurance policy. At this point, I would have had 1100 shares of stock. Then I would have used the additional cash - another 11 shares, or possibly $300 now - to purchase another put option. Instead of buying the $18 put option here, which would have given me a $1780 profit - I cash that in. I buy an additional 100 shares of stock. Now I have 1100 shares of stock. I would have purchased an additional put option as protection, at the $16 level, which was right at the money, as insurance. Let's see what a $16 put option would have cost me, on this particular day. This was April 24, 2008. With the stock trading at $15.99, I would have purchased an additional 100 shares of stock, at $15.99. I could have purchased the $15 or the $16 strike price, put option, and I could have paid approximately 67 cents for the $15 strike price, or $16 strike price, at 1.07. Here's a good analysis. Now I have 1100 shares of stock. At 1100 shares of stock, now I need to purchase 11 contracts in order to protect those shares, of 100 shares per stock. I'm not happy with either of these options. Stock is trading for $15.99. If I purchase the $16 strike price, it would have cost me approximately $1000, almost $1100. If we go up to 11 contracts, that would have cost me approximately $1166. I would rather have purchased the $15.50 strike price. For more videos on Option Contract be sure to check out our channel: http://www.youtube.com/user/howtotradeoptions To learn more about the Expert Option Trading course go to: http://ExpertOptionTrading.com Additional Tags ================ vertical spreads, options greeks, what is options trading, option volatility, option spreads, options volatility, how to trade in options, option strategies, index options, equity options, virtual trading, options spreads, virtual options trading, options trading tutorial, option trading strategy, options trading course, how to trade stock options, options trading systems, options training, learning options, learn to trade options, option trading tutorial, options trading strategy, option trading course, option trading systems, options trading basics, option trading basics, option trading system, options trading courses, options trading training, trade options, what is a stock option, options strategies
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Duration: 10m 49s
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