Trading Platforms

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Key factors to look for in a broker:

Trustworthiness - is this company that will be around? Do they have difficulties with the SEC?

Speedy execution - especially if you use Market Orders regularly.

Commissions - reasonable commissions are especially important if you make 30+ trades per month as I do.

Limits and Margin requirements - minimum account balances are required at many brokers.

The platform and ease of use - what do they offer as part of the service.

My main broker has a $2500 minimum balance, the interest is pennies per month, commissions are $2.50 per trade (stocks) and $0.50 per option contract.  They offer excellent execution time, usually 3 to five seconds and the platform allows me to see every trade that occurs as it occurs.

My secondary account offers no minimum, a pricey interest rate and they charge $4.50 per trade. Execution time is not that great, so I never use Market Orders.

One final difference is whether or not they allow a wide range of stocks to be shorted.  Both of my accounts allow shorting of very few stocks.

Option Chains & buy examples

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United Air Lines (UAUA) has recently hit a 52 week high of 14.07 per share.   I bought both put and call options highlighted below in the option chain.  Personally, I feel the stock will go to at least 9.00 per share by late February, but there is talk on the street about heavy "call volume", meaning that popular opinion says the stock will go to 20.00.

Below, I will talk about possible scenarios based on 1 option contract in either direction, referring to the the markings I have made on the option chain for UAUA - expiration Feb. 2010. ( my actual quantity will not be discussed ).

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Put Option: (right side in the purple box)

Current trading price of UAUA is $13.25

I selected UALNO, strike $8.00, for February 2010.

I paid $5.00 for control of 100 shares of UAUA until February 19, 2010 ($0.05 x 100 = $5.00)

This is how it would look in my portfolio:

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If the price of UAUA continues to rise, I will lose $5.00

If it falls, the value of my option will go up (which I can sell at any time)

If it falls to $7.95, I am even money (I paid $5.00, can buy 100 shares for $795 and sell them for $800)

If it falls to $7.00, I can exercise the option, buy 100 shares for $700, and sell them for $800.  The profit would be $95.00 (I paid $5.00 for the contract and made $100 on the trade - $100-$5=$95)


Call Option: (Left side in the blue box)

Current trading price of UAUA is $13.25

I selected UALBY, strike $17.00, for February 2010.

I paid $35.00 for control of 100 shares of UAUA until February 19, 2010 ($0.35 x 100 = $35.00)

This is how it would look in my portfolio:

click to enlarge

If the price of UAUA continues to fall, I will lose $35.00

If it rises, the value of my option will go up (which I can sell at any time)

If it rises to $17.35, I am even money (I paid $35.00, can buy 100 shares for $1700 and sell them for $1735)

If it rises to $18.00, I can exercise the option, buy 100 shares for $1700, and sell them for $1800.  The profit would be $65.00 (I paid $35.00 for the contract and made $100 on the trade - $100-$35=$65)

If I like I can keep the shares and hope it goes to $20.00 per share or even higher.  After exercising my option, I can treat UAUA like any other stock purchase.


Summary:

The worst thing that could happen is a situation where UAUA trades flat over the next 35 days.  Because I bought both, I would make nothing on either.   I could sell them both before expiration and would lose the commissions paid.

What will probably happen...
The stock will develop a trend in the next week or so, and I will will exit one of the option positions (or just let it expire worthless).

Note:
I would not recommend buying both Puts and Calls at the same time.  I have done it only because my belief is quite opposite than the consensus.

Options:

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Low risk Stocks and Options trading:

Many people say that options are risky, and that can be true depending on how a trader plays them. If you buy an options contract, you could potentially lose your entire investment. Sounds scary, but it is really no different than buying any stock, then deciding how much you are willing to tolerate regarding price drop.

I always have and idea of how much I am willing to lose when I buy a stock. Many times, I set a sell stop right after purchasing a stock. That protects capital and limits my risk.

When I buy an option, the entire cost of my options contracts could be lost. Therefore, I make sure that my total cost of the contracts is no more than I would normally tolerate when setting a sell stop.

Options explained:

I don't like to spend money before I have made it. For that reason, I will only cover the types of options trades that don't put large amounts of borrowed money at risk. Those being: Buying Calls, Buying Puts, and Selling Calls.

There are many complex explanations for options. Mine is basic and complete

For every option contract, there is a Seller and a Buyer (sellers are sometimes called writers)

Each contract covers control of 100 shares of stock.

When to buy

You buy Call options when you think the price of X stock will rise above Y dollars per share by Z date.

You buy Put options when you think the price of X stock will fall below Y dollars per share by Z date.

You sell/write Call options contracts when you already own 100 (or more) shares of X stock and you think the stock price will NOT rise above Y dollars per share by Z date.

If you are correct in your thinking, then you make money.

  X is a stock symbol such as GOOG

  Y is the price per share such as $624.00 – referred to as the “Strike” price.

  Z is the expiration date – options expire once per month.

The result:

After you buy an option, it will show up in your portfolio just like a stock does (the symbol will be different). The value of the option will move up or down during the course of each day, and you can sell the option any time you like via Market, Stop, Limit orders or any other orders allowed by your broker. (by USA rules)

Expiration:

If the stock price has not gone the way you thought, your option contracts will expire worthless. The option remains “out of the money” at expiration.

If you are showing a profit on your options, referred to as “in the money”, and you choose to keep the options until expiration, you must either sell or exercise the option before its expiration. This means...

If you bought call options, and the stock price is well above your strike price, you can purchase 100 shares of stock for each option you own at the strike price.

If you bought put options, and the stock price is well below your strike price, you can sell 100 shares of stock for each option you own at the strike price.

If you sold/wrote call options, and the stock price has not exceeded the strike price, then you keep your stock and keep the premium paid by the buyer.

A detailed explanation with examples of each to appear in later posts.

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Sell Short & BTC

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The word "short" has several meanings within stocks/options trading.  This post covers short selling stocks and buying to cover.   It's like a negative version of buying and selling stocks.

Entering a short position:

You can short a stock just as you can buy a stock but with the opposite intention. For simplicity, this example is a market order. I will explain the entry and exit of your position (stops and limits can also be used, but you should first understand the concept of shorting stocks).

Let's say you don't own a certain stock, but you think it will go down. The stock is currently at $10.00, but horrible news about the company just came out.

Enter the order as seen below:

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The stock will short at $10.00 (or reasonably close upon confirming the order)

What this means is the following:

You just sold 100 shares of the stock, though you never owned it.

It will show up in your portfolio as -$1000.00

If the stock price goes down to $9.00 and you close out the trade, you will have made $100.00

If the price goes up to $11.00 and you close out the trade, you will have lost $100.00

Closing out a short position:

To get that short position out of your portfolio, you will have to use “buy to cover” this might show on your interface as “cover” or “BTC”.

Let's say you shorted the stock when it was at $10.00 per share, and it's at $9.00 now.

Enter the order as seen below:

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You have now bought 100 shares to cover those you sold. Nothing will be in your portfolio after execution because you had sold stock that you didn't own (the short) and now, you are covering those shares (BTC).

Stop order: Selling

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This is sometimes called a stop/loss order.

You own 100 shares of a stock that is currently trading for $10.00 per share, and the price has been falling or you think it may fall.

You may set a stop to limit your loss in case it drops.

--or--

You may have considerable profit showing on this stock and you want to conserve a certain amount of that profit, yet allow the stock to fluctuate a bit.

You want to sell the stock automatically if the price hits $ 9.85

“Day” means the order is only good for today.

“GTC” means the order will be Good Till Canceled (in could execute 3 weeks from now or more).


Enter the Symbol, Quantity, Type (Stop), and enter 9.85 in the Stop field.  Click "Sell" and confirm the order.

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The stock will be sold when the price drops to $9.85

You will no longer own it if it hits $9.85 even if it dips and then rises again. Let's hope you picked the point at which the upside potential has been exhausted.

Note:  Some trading platforms execute Sell Stop / Stop-loss orders based on the "Last Traded Price" and other platforms use the stock's "Bid" price when executing this type of order.  Check with your broker to find out which execution method applies.


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Limit order: Selling

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You own 100 shares of a stock that is currently trading for $10.00 per share and the price has been rising or you think it will top out at $10.75

You want to sell the stock automatically if the price hits $10.75

“Day” means the order is only good for today.

“GTC” means the order will be Good Till Canceled (in could execute 3 weeks from now or more).

Enter the Symbol, Quantity, Type (Limit), and enter 10.75 in the Limit field. Click "Sell" and confirm the order.

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The stock will be sold when the price rises to $10.75

You will no longer own it if it hits $10.75 even if the stock continues to rise after execution. Let's hope you were right at picking the top.

Stop order: Buying

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There is a stock currently trading for $10.00 per share and the price has been rising or you are waiting for it to break out over a certain price.

You want to purchase 100 shares of the stock automatically if the price hits $10.75

“Day” means the order is only good for today.

“GTC” means the order will be Good Till Canceled (in could execute 3 weeks from now or more).

Enter the Symbol, Quantity, Type (stop), and enter 10.75 in the stop field. Click "Buy" and confirm the order.

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The stock will be bought when the price goes up to $10.75

You will own it at $10.75 even if the stock hits $10.75 and drops like a rock after that. Let's hope it continues up after execution.

Note:  Some trading platforms execute Buy / Stop orders based on the "Last Traded Price" and other platforms use the stock's "Ask" price when executing this type of order.  Check with your broker to find out which execution method applies.
buy stop ask

Limit order: Buying

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There is a stock currently trading for $10.00 per share and the price has been falling.

You want to purchase the stock automatically if the price hits $9.50

“Day” means the order is only good for today.

“GTC” means the order will be Good Till Canceled (in could execute 3 weeks from now or more).

Enter the Symbol, Quantity, Type (Limit), and enter 9.50 in the limit field. Click "Buy" and confirm the order.

click to enlarge

The stock will be bought when the price drops to $9.50

You will own it at $9.50 even if the stock continues to go down, lets hope it bottoms there and the price rises after that.

Market Orders

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Market orders allow you to buy or sell the stock or option at the current price without delay.

Buying:

There is a stock currently trading at $10.00 per share.

You want to buy 100 shares at $10.00 per share.

Enter the Symbol, Quantity, and Type (Market) - click "Buy" and confirm the order.

click to enlarge

The stock will be purchased within moments after sending the order.

Note: if the stock price is changing rapidly, it may not be purchased at exactly $10.00. If the stock is on the way up, it may execute at $10.03, $10.08, or any increment (depending on volume of trading and the speed of execution at the time you send the order). If the stock is going down, it could be executed at $9.99, $9.95, $9.92, etc.

Selling:

There is a stock currently trading at $10.00 per share.

You want to sell 100 shares at $10.00 per share.

Enter the Symbol, Quantity, and Type (Market) - click "Sell" and confirm the order.

The stock will be sold within moments after sending the order.

Note: if the stock price is changing rapidly, it may not be sold at exactly $10.00. If the stock is on the way up, it may execute at $10.03, $10.08, or any increment (depending on volume of trading and the speed of execution at the time you send the order). If the stock is going down, it could be executed at $9.99, $9.95, $9.92, etc.

Start at the beginning...

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I follow a few bloggers and have learned how to make the markets work for me over the years. So, I thought, "It's time to give something back". As with help files, many "Stocks 101" entries on the web tell you everything you (may) already know but skip the simplest aspects, assuming one would know them. My first posts will be short and complete regarding how to use different types of orders to buy and sell stocks.

When I started trading I had to read long explanations of strategies regarding order types, but all of those pages were missing simple information on how to use orders, how to enter orders and what will happen as a result of each. I already knew what I wanted to do, I had my own strategy, but key information was missing. I won't tell you how to trade, and I won't bother to tell you if it's risky or not. Those are your choices - consider that a disclaimer.

The following posts are simple examples of trades, how to enter them, and what the result will be. We'll use XYZ as the stock symbol and some basic round numbers of that non-existent stock.

Your trading interface may look different, but the fields should be similar.

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