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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... More
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Getting Started in Stock Investing and Trading
  • 5 Ideas For A Swing Trading Program 1 comment
    Mar 19, 2012 2:27 PM
    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 is quite real, and second you miss half of the swing opportunities by avoiding going short.

    There is a solution, and it enables you to trade with control of 100-share lots for much less cost than 100 shares. It also reduces market risk. Using options to swing trade is the perfect answer. Every option controls 100 shares of stock, so these are great ways to swing trade -- and if you don't like going short, you never have to with long options.

    Here are five ways to swing trade with options:

    1. Long positions only. Buy long calls at the bottom and sell them at the top. Then buy long puts at the top and sell them at the bottom.

    2. Use calls only. Buy calls at the bottom and sell at the top, and then open a short call and close it at the bottom.

    3. Use puts only. Same idea, but in reverse. Buy long puts at the top of the swing and sell at the bottom. Then sell short at the bottom and close at the top.

    4. Use both calls and put. You can double up the swing by opening both bullish and bearish positions. This consists of a long call and short put at the bottom, and a long put and short call at the top. These positions, also called "synthetic stock" if using the same strike, double your potential income (but also exposes you to more risk). The advantage is that with both a long and a short, you have little or no net cost.

    5. Short options only. Finally, use only short positions. The big advantage here is that you always receive money and never pay to open a position. The disadvantage is that this is a high-risk approach. In the short-only method, you open a short call at the top of the swing and then close at the bottom; and you open a short put at the bottom and close it at the top.

    The key to successful swing trading is in your ability to recognize reversal signals, from price patterns, volume, candlesticks, and momentum oscillators. However, even the best signal should be acted on only when you also find confirmation. Even then, there is no such thing as 100% success, but the confirmation method vastly improves your timing for both entry and exit.

    If you want to add your own thoughts to this idea, I welcome direct responses at thomsett@conservativetrade.com ...

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    Author’s reply » Swing trading comes in many shapes, sizes and risk levels.
    19 Mar 2012, 02:28 PM Reply Like
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