1) Stock options are appropriate for: small companies where growth is anticipated, and publicly-owned companies that want to provide company ownership to its employees.
2) Stock options are still popular. This is according to the National Center for Employee Ownership who reported that there are 9 million employees who participate in approximately 4,000 plans. This is in comparison to the 1 million participants a decade ago.
3) More and more companies are offering stock options to rank and file employees in addition to the executive suite. In the current environment where top talents matter a lot, offering stock options have become an effective way of luring efficient employees.
4) When implementing stock options, consider the following:
?How much stock a company will be willing to sell
?Who will receive the options
?The number of options available to be sold in the future
?If it is a permanent part of the benefit plan or merely an incentive
5) Employee stock options have two basic types. They are called the nonqualified stock options and qualified, or incentive, stock options, or the ISOs. The nonqualified stock options are usually offered to employees, while the ISOs, which are eligible for special tax treatment, go mainly to the upper management.
6) Stock options can be exercised in three different ways by: paying cash, swapping employer stock that you already own, or borrowing money from a stockbroker while at the same time selling the necessary shares to cover the costs you incur.
7) Stock options need to be exercised prudently. Otherwise, these can cause financial troubles, especially when you're paying taxes on your profits. It's true that you still have to pay taxes even though you decide to keep the stock you bought. The trick is not to overreach to enjoy the benefits that stock options offer.
8) Even though the ISOs are for the privileged, it doesn't mean that nonqualified plans are regular plans. Fact is, nonqualified stock options, unlike ISOs, can be offered at a discount to the stock's market value. The nonqualified options are also transferable to children and charity, but with the employer's permission.
9) You can maximize your profits by holding on to your stock options until they are about to expire. This allows for appreciation for your stock options and therefore, higher gains.
10) However, there may be times when you need to exercise your stock options earlier. You may do so if you are overweight on your company stock and you want diversification to ensure safety in your investments.
I have been an avid student of the markets for almost 17 years now and every year I see aspiring traders come into the market to seek fame and fortune but end up broke and embittered. Why is this is so? This new century presents more tools for success (real-time data feed, instant news reports, expert opinion by the greatest financial minds in the world, neural networks, trading systems, etc.) yet traders tend to struggle more now than when I started out. Successful stock option trading doesn't come packaged in newly made CDs or computer hard-drives but comes from the disciplined implementation of effective trading methods.
For example, for spotting trend reversals, I'll look at a stock that has been moving in a given direction, let's say upwards, and graph that stock's price action with a 2 period Relative Strength Index Indicator also called an RSI. I'll draw an upward trendline on the stock and watch for distribution on higher volume in the general market. If distribution days begin to add up to more than 4 or 5 then I'll watch the RSI on this stock for divergence and once spotted will watch for a break of that upward trendline. As soon as I have my trigger I use my method of entering the position for a short. Downward moves are twice as fast to the downside as they are to the upside so when the market sells off I am in a position to catch a rapid decline in price with a put position while limiting my risk.
I also look for pullbacks in stocks that have strong fundamental and technical factors that suggest they are going to have a rapid move to the upside or downside. For upward moves, I'll watch for stocks that are above their 200 day simple moving average that have a Relative Strength rating of 90 or higher. I also watch to see if they have been in a flat based trading range for two months or so. If they make a move to an all time high out of a two month price base I'll watch the stock's price action compared to its 10 day and 20 day simple moving average and wait for a pullback. If the stock's price begins to pull back evenly to its 10 day simple moving average without violating its 20 day simple moving average(which acts as a stop for a position once entered) I wait for price to trade over the high of the previous day's price high to enter. This allows me to play momentum stocks at the beginning of a possible big run with options while always controlling my risk with a dynamic stop in place (the 20 day simple moving average).
Seasonal patterns in the general market help me determine which strategy to use at different times of the year. Many funds will begin to run the market up starting around September in order to improve there funds year end returns. This gives me the potential to make huge gains with stock option trading and taking positions in the strongest momentum stocks all the way into the end of December. It also shows me that the market tends to cool off and sell down near the beginning of the year so I know to sell my longs and look for short candidates to use with put option trades.
Gap explosions in either direction are also very powerful moves to take advantage of with a combination of call or put option strategies. A gap explosion is where a given stock is trending in a given direction or is range bound but then suddenly the stock gaps significantly higher than the previous day's closing price in the opposite direction. You can measure the reaction by using a variety of indicators like moving averages, price channels, or my preferred method which is to use Bollinger Bands. When using this method you can catch incredible moves as you are getting in on the beginning of a new trend. I have made incredible gains on Goldman Sachs, Apple Computer, Chicago Mercantile Exchange, and others using a combination of stock investing and option trading with this trading technique.
After 17 years as a veteran stock option trader, I have come to the conclusion that while indicators, computer programs, and trading systems have there place in the marketplace I have also come to the conclusion that it does more harm than good for many traders. The reason is that many apiring traders miss the point as to what actually effects trading success in the markets. And, in my opinion, having a strong sense of the markets and stock option trading combined with the disciplined implementation of effective trading techniques will do more to produce successful trading results and consistent profits than the latest fads in the marketplace.
Both Allen Bohart & Billy Williams are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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