Covered calls – ITM or OTM?

by Michael Thomsett

Covered calls work well, assuming the right strike is selected. It is not enough to pick a strike just because the premium is rich; that can be an expensive mistake. What strike proximity works best for covered call writing? The answer depends on several mitigating factors: What is your basis in the underlying? If your… [READ MORE]

Cover short options with calendar spreads

by Michael Thomsett

You probably have heard that you cannot cover short options, but must roll forward, close, or allow exercise. But there is another choice. One way to cover a short position is to own 100 shares of the underlying stock. Another, more creative way is to sell a shorter-term expiration position and buy a longer-term position… [READ MORE]

The stigma of pattern day trading

by Michael Thomsett

Is there a pattern to your trades? Anyone trading options knows how little effort it takes to build up a healthy volume of transactions. But you should be aware of one rule that could inhibit your ability to trade too often in the same option and in the same stock. In the past, day trading… [READ MORE]

5 swing trading ideas

by Michael Thomsett

Most swing traders use long stock for expected upswings; and either short stock for downswings or just stay out because shorting is high-risk. Two things are problematical with this idea. First, the risk should not be ignored; and second, you miss half of the swing opportunities by avoiding going short. There is a solution, and… [READ MORE]

The Strip

by Michael Thomsett

When price signals are exceptionally strong and indicate likely movement in one direction, it makes sense to make use of an aggressive directional trade. Two of these are the strap and the strip. The strap combines two long calls and one long put, favoring advancing price. The long put sets up potential profits if price… [READ MORE]

Options reversal signals – soldiers and crows

by Michael Thomsett

Options traders rely on a variety of reversal signals to time entry and exit. These may include price, volume, moving average and momentum indicators. Two of the strongest candlestick signals are three white soldiers and three black crows. These imaginatively named signals each contain three consecutive days: The requirements for a legitimate signal are specific.… [READ MORE]

Options-Based Swing Trading With Variable Weighting 

by Michael Thomsett

Using options to focus more on either uptrend or downtrend is an effective method for augmenting the swing itself. The strategy assumes that you have an opinion about the prevailing direction of movement in the underlying, and that momentum confirms your opinion. So as a starting point, you can coordinate a weighting decision by checking… [READ MORE]

Covered Calls – Rolling Avoids Exercise But Invites Risk 

by Michael Thomsett

Covered call writers can avoid exercise by closing the call and replacing it with a later-expiring one. But some pitfalls may also occur along the way. The forward roll works because a later-expiring contract at the same strike is always worth more, due to higher time value. So you can always change out the short… [READ MORE]

The short gut spread

by Michael Thomsett

  The short “gut spread” combines the sale of an in-the-money call and an in-the-money put. They have the same underlying and expiration date. In comparison, a normal spread would combine out-of-the-money positions. This makes the short gut spread a high-risk strategy; but if time decay is used advantageously and the underlying price does not… [READ MORE]

The long gut spread

by Michael Thomsett

The long “gut spread” is a strategy involving the purchase of an in-the-money call and an in-the-money put. They have the same underlying and expiration date. In comparison, a normal spread would combine out-of-the-money positions. The gut spread is more expensive because both options are in the money. However, it combines limited risk with unlimited… [READ MORE]

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