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
_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/

Telegraph.co.uk

CIC Head Wary of Investing in Western Banks Wall Street Journal - Dec 2, 2008 Lou Jiwei, who head's China Investment Corp., said the uncertainty surrounding Western banks and the policy decisions that may determine their fate makes it ... CIC weary of Western banks Thomson Merger News (registration) China's sovereign wealth fund to avoid western financial firms: report AFP CIC Now Very Wary of Investment in Foreign Financial Firms ChinaStakes.com Reuters - In-Forum all 268 news articles

Dividend Investing for Monthly Income Seeking Alpha, NY - 4 hours ago After you have selected the dividend growth stocks that fit your selection criteria, it is time to research their payment dates. Most dividend investors try ...

Is Real Estate Investing Our Best Shot at Wealth? Seeking Alpha, NY - 9 hours ago 91 percent of homeowners surveyed by real-estate-services firm Realogy Corp. thought that owning a home was the best long-term investment they could make, ...

ETF Investing: 5 Pitfalls to Avoid U.S. News & World Report, DC - 21 hours ago By Kirk Shinkle Security, transparency, low costs: It's the mantra of the exchange-traded fund industry, and by and large, most ETFs do live up to the ... Invesco PowerShares Announces Zero Capital Gains Distributions for ... MarketWatch Managing a Portfolio in a Bear Market Seeking Alpha Building a Portfolio Using ETFs U.S. News & World Report all 16 news articles

Boston Globe

Global Investing Roundups Money Morning - 12 hours ago The world’s biggest nuclear utility company, ElectricitĂ© de France SA will offer as much as $6.5 billion for assets of Constellation Energy Group, ... Delayed quote data MarketWatch all 695 news articles

Criterion Investments Scoops Canadian Investment Marketing Award ... MarketWatch - 3 hours ago The same applies to investing in long-term growth themes, and Criterion built the case for why now is time to get ahead of the curve by investing in water ... Making a bet in a free-fall market BusinessWorld Online all 10 news articles

Chinese Government to Stop Investing in Western Banks Technocrat.net, MA - 17 hours ago Saying there is too much uncertainty with failing banks and bailouts in the western world, the head of the Chinese Sovereign Investment fund has indicated ...

PureWave Networks Completes a $12 Million Series B Funding Round MarketWatch - 1 hour ago The firm consists of experienced individuals with extensive operating and investing experience, and takes an active role in helping its portfolio companies ...

Washington Post

Fidelity to Roll out New Home Page Providing Real-Time Financial ... MarketWatch - 7 hours ago "Investors today need timely and reliable financial information to make smart investing decisions, especially in times of market and economic uncertainty," ... Online Money: Fidelity expands online news focus The Associated Press all 104 news articles

Your Once-in-a-Lifetime Investing Opportunity Motley Fool - Dec 3, 2008 But it was investment banks and financial institutions -- the largest and fiercest players on Wall Street -- that were literally ground zero for this ...