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Strategies & Market Trends : Advanced Option Strategies -- Ignore unavailable to you. Want to Upgrade?

To: Joe Waynick who wrote (116)	8/15/1998 10:50:00 AM
From: Joe Waynick	Read Replies (2) \| Respond to of 355

Reduced-Risk Trading The following is from the book Options Essential Concepts and Trading Strategies, second edition. It's published by The Options Institute: The Educational Division of the CBOE. The book can be found in most bookstores. I got my copy at Amazon for a 30% discount. The author of this chapter, Harrison Roth, also wrote LEAPS, another excellent book. Greg Higgins recommended both books on post #1 of this thread. Here's the quote: *Reduced-Risk Trading* For the scalpers and market pinpoint-timers, there is a wonderful option strategy available. Start by buying a combination - equal quantities of puts and calls on the same underlying stock, with the same expiration month, but with different strikes. These will usually consist of a call strike above the market price of the stock and a put with a strike price below it. This technique is well known: traders use it to profit from a large stock move in either direction. The strategy can also be employed in a slightly different fashion. Assume that after your double purchase, the stock moves down to below the put strike and then hesitates. If you believe it is about to turn up, you could buy stock at that point. If your assumption is correct, you could sell the stock at a point when you thought it would again reverse its trend. If you were wrong, the risk was limited because you could always exercise the put. Similarly, if the stock first rose, you could short it, then buy it back while being protected by the long call. If you are able to get off a couple of good trades, you will probably recover the original cost of the combination. Once that has happened you will be in the stance of having no money invested, and being able to trade back and forth while always being protected. The above is a repeat from a previous message from me. I want to use this post as a starting base for each RR trade I enter so anyone following the trade can refer back to the basic strategy and understand how the play works. The idea is to buy the stock at the bottom of its channel and short the stock at the top of its channel, making a profit when the price fluctuates either up or down. To protect both sides of the trade I will purchase option combinations, straddles, or strangles as insurance. I will normally establish the positions all at one time. However, depending on the stock, I may "step in" to keep my insurance costs low. I'm totally fascinated by the idea of playing a trading range, pulling my option insurance money off the table in two or three trades, and enjoying the luxury of trading risk free for as long as the channel holds. The potential for extraordinary profits is just too great to ignore. I'm going to continue to perfect this technique and make it my primary strategy. All my trades will be with real money. I will always post my trade before actually making it. That way everyone can follow the play as it happens and there will be no opportunity to "fudge" the numbers. THESE POSTS ARE FOR INFORMATIONAL PURPOSES ONLY. THEY ARE NOT A RECOMMENDATION TO BUY OR SELL SPECIFIC SECURITIES. I AM NOT A STOCK BROKER OR FINANCIAL ADVISOR. I'M A PRIVATE INVESTOR AND I'M MERELY LOOKING TO EXCHANGE INFORMATION WITH OTHERS ABOUT STOCK MARKET INVESTING. ANY INVESTMENTS YOU MAKE ARE AT YOUR OWN RISK! ANY CONTRIBUTIONS TO THIS EFFORT, PRO OR CON, ARE GREATLY APPRECIATED.