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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT Press); and "Options for... More
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  • Swing Trading With Long Options - The Basic Strategy 1 comment
    Mar 24, 2013 10:01 AM
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    A "swing trader" focuses on very short-term price movements, usually lasting between three and five sessions. During this period, prices tend to over-react to immediate news and to then correct. This presents an opportunity for those traders who are able to make trades against the prevailing sentiment.

    Swing traders want to open bullish positions at the bottom of the short-term price swing, and close these at the top; and then open bearish positions at the top and close them at the bottom. The "swing" itself is the emotional over-reaction typical of markets and based on earnings surprises, rumors, or unexpected volatility. Most traders follow these matters closely, which creates those exaggerated swings. And swing traders make their moves knowing that prices tend to reverse and offset exaggeration very quickly - generally within three to five trading sessions.

    The traditional swing trading method using stock requires purchasing shares at the bottom, waiting for price appreciation, and then closing the position. At the top, swing traders expect to sell short and wait for a price decline, then buy to close. The problem, though, is that shorting is high-risk and expensive. Consequently, many swing traders only play the long side of the swing.

    With options in place of stock, you expand and diversify and take advantage of leverage. At the same time, long option trading is much less risky than either side of the stock-based swing trade, and potentially more profitable as well.

    The options strategy involves buying calls at the bottom and selling at the top of the swing; and then buying puts at the top and closing them at the bottom. Risks are limited to the premium cost of the long options. It's true that if your timing is off (and it will be at times) you lose 100% of the premium, but remember the option premium is a small fraction of the cost for the 100 shares the option controls. If you rely on strong reversal and confirmation, this is one of the lowest-risk methods of swing trading you are going to find.

    Focusing on options expiring within a month or less, and buying at the strike or slightly in the money, the value is most likely to track close to the underlying; as the option moves further in the money, its value is going to closely track point for point. While out-of-the-money options will be cheaper, you fight an uphill battle to get into intrinsic territory, which you need in order to get those 3- to 5-day profits.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at to learn more.

    I also offer a weekly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. All it requires is your e-mail address. Join at Weekly Newsletter I look forward to having you as a subscriber.

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  • auinvestmentedu
    , contributor
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    There a number of swing trading strategies that have been used satisfactorily by forex. Swing trading is one of the most common ways of trading in the stock market, Swing trading has been popular among traders because it combines some of the advantages of two popular strategies, while avoiding a few of their unfavourable aspects.
    22 Apr 2013, 03:40 AM Reply Like
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