3 Trading Horizons Of Options Trading

Have you ever lost money trading stock options?

Chances are good that you tried to apply the 3 trading horizons of stock trading to options trading and then got yourself hurt real bad.

There are 3 time horizons or what we call trading horizons in stock trading and they are; Long Term, Mid Term and Short Term. Long term horizon in stock trading means the buying and holding of stocks for 3 to 5 years, or sometimes longer. This is ideal for value investing in the long term prospects of a company. Mid term investing in stock trading is the buying and holding of stocks for 6 months to a year or two. Most stock investors use a mid term view to invest in new growth stocks which are expected to perform well in the immediate year. Short term investing in stock trading is the buying and holding of stocks for 3 to 6 months. These are stocks of companies that are expected to make a breakthrough in their industries. However, do these notions of investing apply in options trading? Not at all!

The truth is this: Stock Options are derivative instruments that have very short contractual lives! In fact, the longest expiration for exchange traded stock options rarely exceed 1 year! On top of that, the extrinsic value, or what we call time value, built into every stock options contract decays as expiration draws nearer, diminishing the value of your options even if the underlying stock remain stagnant. Due to these characteristics, stock options are trading instruments, not investing instruments, and have much shorter trading horizons than if you trade stocks. This is also why options trading is associated so closely with technical analysis these days because technical analysis is extremely useful in identifying short term trends or reversal of trends.

So, how is the long term, mid term and short term trading horizon defined for options trading?

In Options Trading, long term horizon is the buying of options with expiration of up to 1 year in order to speculate a long term rally or ditch in the underlying stock. Typically, long term charts on monthly time periods are used to identify such trends. Mid term horizon is the buying and holding of monthly options all the way to their expiration, each trade lasting no more than a month. Charts on weekly time periods are particularly useful for identifying mid term trading opportunities. Short term horizon lasts from 3 to 15 days in order to speculate a quick short term surge or ditch in the underlying stock and typically uses short term daily time period charts to identify trading opportunities.

From the above definitions, it is clear that stock options, as a short term trading or hedging instrument, is useless for anyone who is investing in the long term horizon defined for stock trading. Therefore, before you decide to completely replace your stock investing with options trading, first decide if trading stock options allow you to trade the way you always have with stocks. If it doesn’t, it is time for you to either stick with stock investing or learn a trading system which is perfectly suited for options trading.



By Jason Ng


Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

3 Reasons Why Stocks Move

For years, I have been asked this same question over and over again, “Why does stocks move?”.

For most people, the reason why stocks move has been a mystery. In fact, there are people who believed that someone is controlling these movements behind the scene playing against them! There are even people who believe that stocks move mainly due to good fundamentals. Well, look at it this way, if there is this big institution playing against you and taking all your money away from you, why aren’t all the financial institutions making money year after year? Why are so many funds closed down every year? If stocks move just because the business fundamentals are good and that the business makes sense, then why do good stocks fall at all?

The truth is this; stocks do not move based on what is happening in the world right now but based on expectations of future events! These expectations create a temporary imbalance in the number of buyers and sellers, moving prices. When there are more buyers and fewer sellers, sellers will hold off selling until prices have been bid up higher. When there are more sellers than buyers, sellers will continuously lower their asking price in order to entice buyers to pick up their stocks. Those dynamics create the ups and downs in the stock market.

What do “expectations” in the stock market really mean? To put it simply, you would avoid driving along a road that is expected to be congested, right? You wouldn’t go all the way down the road and see the congestion before deciding what to do, will you? That is the same decision making dynamic in the stock markets. The real issue here is what kind of expectations drives that temporary imbalance in the number of buyers and sellers which moves stock prices? That brings us to the 3 reasons why stock prices move at all.

Reason 1: Earnings Expectation

Have you ever wondered why a lot of stocks actually fall after releasing good earnings? Well, that’s because along with every earnings release comes earnings guidance! Earnings guidance is the estimated earnings for the following quarter. If the next quarter is guided lower and the stock is expected to fall when the time comes, wouldn’t you start selling today while prices are still high? That’s the same theory behind the congested road scenario mentioned above. Similarly, if earnings guidance is great, the stock continues to move higher. This is what the stock market call “pricing in” the future earnings.

Reason 2: Dividends Expectation

Dividends are an extremely important reason to own stocks. For stocks that never pay a dividend, this is not really a concern but for stocks which have been paying a steady dividend, changes in the expected dividends yield can cast doubts on the future profitability of the company, thus resulting in a sell off today. Similarly, if expectations of future dividends are raised, future profitability of the company can be expected to be better, resulting in a rally today.

Reason 3: How Much Investor Are Willing To Pay For Those Earnings & Dividends

Yes, now that you know that earnings expectations and dividends expectations creates the conditions by which stock prices might change, the only question which remains is how much would such a change be? Just as you might wish to pay a different price for your burger down the street under different economic conditions, the amount of money investors are willing to pay for future earnings and dividends also differ under different economic conditions. When the economy is looking upbeat and everyone’s optimistic, you might be willing to pay a higher price for the same expected future earnings. Conversely, when the economy is looking sour and everyone’s pessimistic, you might want to pay a lower price for that same earnings outlook. All these are reflected in what the stock market call “multiples” or the full name being “Price Earnings Multiples” or “PE ratio”. The PE ratio tells you how many times above earnings is the current stock price and represents the amount of money investors are willing to pay for that earnings outlook. Under good economic conditions, investors may be willing to pay up to 100 times earnings while bad economic conditions may justify only a 50 times earnings.

When times are good and higher prices are justified for the same earnings, the stock market is in a period of “Multiples Expansion”. Conversely, when times are bad and lower prices are warranted for those same earnings, we call it a period of “Multiples Contraction”. Understanding which period the stock market is in will result in tremendous profitability trading stock options which can profit both ways.

These 3 factors interact in the minds of traders and investors all the time. Sometimes when earnings guidance is higher for the next quarter in a poor economic condition, stock prices might still fall as investors may be willing to pay only a much lesser price for that earnings. So, next time you try to make sense of why stocks are moving the way they are, think in terms of these 3 factors and you will definitely see the light.




by Jason Ng

Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management ( MastersoEquity.com ) and author of a free Options Trading education site . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

5 Golden Qualities of A Millionaire Option Trader

After more than a decade as a professional option trader and hedge fund manager, I’ve had the honor of knowing many great option traders all over the world as well as the opportunity to learn from the mistakes of thousands of broke option traders.

From these great and brave option traders who dared go where no men has before, and from my personal option trading experience, I am quite awed to realize that there really isn’t much difference in the methods used by both profitable millionaire option traders and completely broke option traders. Both kinds of option traders used the appropriate option strategies corresponding to their opinion on the direction of the underlying asset. Most of these option traders even have the same opinion on the same underlying asset but ended up in dramatically different results.

I slowly understood that it takes more than just correct analysis and perfect option strategy execution to make it as a millionaire option trader. It takes a different breed of man! It takes a breed of man with qualities not naturally found in most people and who behaves and thinks very differently from an average person.

I have consolidated and listed here 5 outstanding qualities of real Millionaire Option Traders :

1. Cool Headed

While amplifying profits, option trading even greatly amplifies the effects of every tiny whipsaw on the underlying asset. What looks like a small, harmless whipsaw in the price of a stock will look like an earthquake on the price of its options. In the face of losing a lot of money very quickly due to whipsaws, a millionaire option trader remains cool headed and calm no matter what the trading value says. Too many option traders bail out and lose 50 to 60% of their money instantly due to such whipsaws, all due to their inability to stay cool in the face of such pressure. I was trading in the call options of a stock along with one of my option trading students in mid 2006. That particular stock went into a quick and deep whipsaw that took 50% from the value of our positions instantly. That option trading student of mine almost went crazy and then sold that position incurring a loss even though our stop loss point has yet to be hit (it was very close then). That position went on to make a profit of about 40% for me right after that whipsaw. Same trade, same opinion, different results.

2. Patient

The stock market is not an auto-teller machine where you simply go to withdraw money at will. No. The Stock market is like an ocean and all of us option traders are seafarers. All veteran seafarers know that there are seasons where one should not go out to sea at all. These are the seasons where the veterans seat back and watch the amateurs perish in the storms. A Millionaire Option Trader knows such seasons and is patient in waiting for the harvest season to come before making a move. Most amateurs option traders (yes, broke too) are more interested in making a lot of trades than to make profitable trades. Many of them will rush in and just trade something even if market conditions are too turbulent to result in a profitable trade. As we have mentioned before, option trading greatly amplifies every whipsaws made by the underlying asset. When you enter the market during very turbulent times, the whipsaws are enough to scare every option trader into making the wrong moves or to result in unnecessary tripping of stop loss points. A Millionaire Option Trader is like an eagle; He soars and glides peacefully and patiently, only when a clear opportunity turns up does he soar down mercilessly for the kill.

3. Systematic

A Millionaire Option Trader is systematic in identifying trading opportunities, systematic in trade and portfolio management, systematic in the execution of every trade, systematic in the stop loss of every trade, systematic in the profit taking of every trade, systematic with his or her lifestyle (in order to maintain a sound mind during trading hours), systematic in loss recovery, etc… Nothing is left to last minute decisions. Nobody can be trusted to make perfect decisions under pressure. A Millionaire Option Trader leaves no decision to be made during those times as every possibility and their corresponding action has been planned before hand. Unsystematic option traders, especially in the area of trade management, will often find themselves making huge losses and very small profits all the time.

4. Disciplined

Millionaire Option Traders are not only systematic, they are also highly disciplined traders. They stick to their trading plan, stop loss points and profit taking system with an iron clad discipline no matter how good or bad their position is doing. Being disciplined also mean that millionaire option traders are not driven by fear of loss or greed for profit. They have only one mission and that is to carry their trading methods to their ends. Unlike trading in stocks, the huge volatility in option trading often scare undisciplined traders into insensibly closing their positions at great losses before their stop loss points are hit and to greedily take profits off the table the very moment it is made even if their profit taking criteria are not fulfilled. This creates a situation again where option traders with the same opinion on the same stocks, executing the same option strategies end up with very different results.


5. Focused

Most amateur and often broke option traders jump from one method of trading to another like a lost bunny. They often go from long term option strategies into short term speculative trading just because they feel that there are money to be made there. It is like the man who ordered steak one minute, changed his order to pasta 5 minutes later and then changed his order to burger before the pasta arrived and then complained why his orders never came. All option trading strategies take time to produce results. A millionaire option trader is focused on the trading and investment objectives of his account and sticks to sensible strategies that fulfill those objectives.


There are many more differences in the qualities between a millionaire option trader and a mauled option trader but these are the main ones that I feel really make a difference. May this list help you reflect upon your own success or failures so that you can make internal changes that will show up as long term option trading success. For a free online trader psychometric test to help find out your suitable trading style, please visit http://psychometric.mastersoequity.com and for free option trading education, please visit http://www.optiontradingpedia.com .

Good luck on your journey to becoming the next Millionaire Option Trader.

Option Trading Explained In Layman Terms

Option Trading Explained - Introduction

Robert Kiyosaki says that Option Trading is the investment of the rich.

Indeed, option trading is the most versatile form of investment in the world today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.

Option Trading Explained - Simply put, it is the trading of option contracts on a particular stock.

Options Explained – A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.

There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!

Option Trading Explained - What Can Stock Options Do?

Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.
(You can join a weekend seminar for thousands of dollars to learn about options or simply go to http://www.mastersoequity.com/OptionUni.htm and learn the same and more for just a small fraction of that investment.)

Stock Options are:

Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.

Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.

Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.

Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.

Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.

And the Negative Effects are:

No value beyond expiration. You can potentially lose all your money along with the expiration of the option.

Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.

Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.

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Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.

Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.

Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.

(The Star Trading System at http://www.mastersoequity.com/MOE_startradingsystem.htm is the most objective and proven system in the world today that uses options for leverage.)

Using options creatively even allows us to structure investment positions to reap a fixed monthly return that beats the market regardless of which way the market goes! Just like in the Ride the Flow System offered at http://www.mastersoequity.com/MOE_ridetheflow.htm . Where your capital can be fully protected no even if the market enters a severe drop. Sounds amazing?

Option Trading Explained - Conclusion

I hope this “Option Trading Explained” has given you a good overview of the effects of options.

For a full and complete education in option trading, please visit http://www.mastersoequity.com/OptionUni.htm