subject: How you can Profitably Combine Stock Option Trading With Momentum Stocks [print this page] How you can Profitably Combine Stock Option Trading With Momentum Stocks
Momentum stocks have been proven to function as strongest stocks contributing trading stocks to new highs while proving themselves to solid growth stocks in different investment portfolio. It's now uncommon to own 50% to 500% gains in different given stock that proves this is a market leader. Stock option trading has additionally proven itself a profitable investment in a portfolio that allows even the average investor superior leverage and risk control. In this post Let me show you the way to scan for the strongest momentum stocks, the way to spot momentum stocks with the possibility to explode into huge bull runs, why should you consider stock option trading when going for a position in a momentum stock making an up move, and what advantages you've got when trading stock options on a stock as opposed to the stock itself.
Using any stock scanning feature on MSN or Yahoo Finance you are able to scan the universe of stocks for viable momentum stocks. You must select stocks depending on consecutive earnings development of 25% or greater, ROE (return on equity) of 17% or greater, annual earnings development of 25% during the last several years, minimum daily volume of 100,000, price trading at or near a 52 week high, along with a leadership role on the market. While many of these fundamentals might be quantified by data a final characteristic of getting a leadership role on the market needs to be clarified and expanded on. A potential stock investment for momentum based trading needs a particular product, solve a complex problem for business or perhaps the public, or have a "unique selling position". For example, Baidu.Com solved the internet demand for China, Microsoft in its heyday served public need for programs, and Apple Computer positioned itself to be an upscale boutique computer company with huge inroads towards the online music market.
Determining which stocks will explode in stock price is performed by using simple price pattern recognition within the stock's price movement. For instance , searching for price gaps towards the buzz, new highs in price, strong closes within the daily price bars where price closes in the upper 25% in the day's range, and watching for thrusts or wide selection bars that are twice the stove from the previous five day's range. Many of these patterns show strength in the direction of the trend so pay attention to offer you locate these price patterns during a period of weeks and they'll offer you a sign of your potential breakout towards the upside.
When you have created a list of potential momentum stock candidates then it's a good time to consider stock option trading if the stocks set out to breakout towards the upside. As stocks start to explode forward usually out of your price base pattern you'll be able to take positions in call options while they surge with a new high. Through the use of options over stocks it is possible to take advantage of the huge leverage that options offer. Each stock option controls 100 shares of stock versus buying the stock you might be then restricted to simply how much capital you are able to spare. By way of example, if you purchase the stock on ABC company which can be trading at $70 and also you buy 100 shares you'll want $3500 and buying the balance on margin to get a total investment of $7,000. When the shares explode upwards to $80 a share and also you sell at that price you net around $700 for any 20% gain on capital invested.
However, if buy call choices on ABC while it is trading at $70 a share, you make payment for a small premium say around $700 to regulate 100 shares of stock. If ABC also explodes in price to $80 a share and also you sell your option then you might conceivable net around $700 for any return of 100%! Now, options possess a limited period of time before they expire as well as your timing has to be excellent and that's why momentum stocks work most effectively choice i think. Once they make a move it will always be rapid and could be exploited at a lower price risk with investment as the most you are able to lose may be the original premium ($700).
You can also "roll-over" your option position because stock starts to move on your behalf to lock in profits minimizing your risk even more. Investment come in at different strike prices where they are bid upon. If you decide to purchase the $70 call option within the above example proper the stock reaches $80 a share you might sell it off after which it buy rolling over to a higher strike price with the $80 call option. This can be allows you to lock a part of your gains but still keep with the excitement while controlling your risk the entire way since the most it is possible to lose with stock options is the original expense of buying the premium.
By combining these two strategies I think you will can understand a few of the raw potential of potential superior returns. It will take some skill and knowledge however, if you take the time mastering many of these concepts and create a good trading strategy then using a small part of your risk capital you can conceivable increase your returns. Spend time selecting strong stocks, watching their price action for a number of the patterns in this post, and discover ways to time your entries with stock options and also you reach the career to bag a huge winner through the next high-flying bull run!
Copyright 2007 Billy WilliamsMore info of option trading strategies
