Day 15, $20,365

Markets had a down day today which came as a result of heavy sell off in China. No change to current positions. My current position will most likely be in play until Sep. expiration day. Until then I will let time decay eat away at my short option positions. I would be interested in entering some more positions, however, taking into consideration my portfolio size as well as my current capital requirements, I would not be comfortable tying up more money because I might not then be able to follow through on any secondary exit points.

Chapter 2: Stock Options Trading 101: What exactly are stock options?

We are familiar with stock. We can buy it and we can sell it, you can be long and you can be short. Easy, but we want to expand our stock trading toolbox. We want to know more, we want to know about options, however, we don't know what a stock option is and how it relates to a stock. A simple definition for a stock option is it is a contract that gives you the right to buy a stock at a given price. The words for that definition were chosen very carefully and we will go into more detail after looking at an analogy to make a stock option look less abstract.

The easiest way to picture a stock option is to think of it like buying a house or a piece of land. Let's say you want to buy a house that costs $100,000. You have taken a look at the house and it is what you are looking for and from what saw, the house was worth the price and you want that house. You don't have $100,000 to buy the house right now, but you will in three months. The owner of the house doesn't want to just hold the house for three months just for you because he might have other buyers, so you make a deal. You tell the owner that you will give him $2,000 right now to hold the house for three months for you. You now have a contract that gives you the right to buy the house at a given price. Within the three-month contract, you can buy the house for $100,000 and if you don't buy the house, the owner still made $2,000 by selling you the contract. Now that you have your contract, let's consider several scenarios:

Three months go by you get the money together. The owner has held the house for you; you can buy the house for $100,000. The owner makes $100,000 for the house and $2,000 from the contract for a total of $102,000.

Three months go by, you still get your money together, but you change your mind, maybe you find a house you like better. The contract expires, you don't have to buy the house and the owner makes $2,000.

This house was actually the Beverly Hillbilly house and they found oil. That house is now worth $500,000 but with your contract, you still have the right, to buy the house for $100,000, which means that the contract that you had purchased for $2,000 is really now worth $400,000 ($500,000 - $100,000). That leaves you with two reasonable options: to use the contract to purchase the house for $100,000 or to sell your contract to somebody for $400,000, who would then be able to buy the house for $100,000. Either way, the owner makes $102,000. The one thing you wouldn't want to do in this scenario is to forget about your contract and have your right to buy the house expire after 3 months.

This house was right on the San Andreas Fault line and there was a big earthquake. There was $50,000 in damages. You still have your contract to give you the right to buy the house for $100,000, but why would you want to buy a house for $100,000 when it is now worth $50,000? The contract you spent $2,000 for is worthless, but on the bright side, you could have lost $50,000 had you initially purchased the house for $100,000. The owner has lost $48,000 ($100,000 - $50,000 + $2,000).

Bodda-Boom Bodda-Bing, you now have an understanding as to what a stock option is and how it works. Let’s discuss.

By thinking about and understanding the house analogy you will be able to better understand how stock options work. A stock option isn't the same as owning stock, but it is a contract that gives the buyer the right to buy (there are actually two types of stock options, calls and puts. For the sake of keeping things simple and easier to understand, we will just be referring to call options for now.) a stock for a determined price. The seller has the obligation to sell the stock at the determined price. No matter how much the value of the house went up, the owner was obligated to sell the house for $100,00 because of the contract, this is the same principle with stock options.

I think one of the biggest and more powerful points of the house analogy is to give you an idea as to how stock options can gain and lose value. You are able to have the rights to a large entity with a relatively small amount of investment capital. In the house analogy, the contract that was made cost only $2,000 and that gave the rights for a $100,000 house. In the scenario of the earthquake, the house lost $50,000, but by having the contract, you lost $2,000 because you didn't own the house, you just had the right to buy the house for $100,000. When the Beverly Hillbilly house struck oil and the house was then worth $500,000, that contract then became worth $400,000. Stock options provide more leverage with smaller amounts of capital than owning stock. Keep in mind that the house analogy was a series of very extreme circumstances to try and illustrate a point. In reality, if you don't know what you are doing and do not understand the risk, it is important to understand more leverage could mean that you can make more money much faster, but it also means that you can lose your money much faster. This story is to give you an idea how stock option values can change as well as some of the potential benefits of trading stock options versus regular stock, not a recommendation to go out and buy a bunch of stock options. There is more knowledge to be learned young grasshopper.

Another important aspect about the house analogy was the three-month contract. Stock options work in a similar way. All stock options are only good for a certain specified amount of time before they expire. In the house analogy the three-month contract cost $2000. Do you think it would cost more or less for a shorter, one-month contract? If you answered more, I would be happy to personally start selling you some stock options. The shorter the contract the smaller the cost and the longer the contract the higher the cost. This is because the shorter the contract the less time there is for the stock to move in a direction that would increase the value of the stock option.

We now understand some of the fundamentals of how stock options work. A stock option is a contract that gives you the right to buy a stock at a specified price. Remember they provide more leverage than owning a stock but their value is dependent on how the stock moves. Stock options also have a time element because they will expire after a certain amount of time, whereas stocks do not.

Day 14, $20,495

Markets started off low today, but picked up momentum at the end of the day to close with small gains for another day. Preliminary GDP numbers came in slightly better than expected. This trend still belongs to the bulls, but for the past few days they have been just barely able to make their way into the green. Will the trend continue? Who knows, but in the meantime I, the trend is your friend, so that is how I will trade. Am I fearful the market will take a dive after such a run up? Maybe a little, but I will try to be objectively cautious. A pull back is to be expected to some extent due to profit taking.

NYX - Down about 0.30 today. In the news because they spending $144 million to buy a software company that they say will help them provide better service to their customers. Acquisitions are a good sign. If NYX was worried about the economy and being able to make money, they probably wouldn't spend 144 million buying a company. No change to current positions.

DRYS - Had a nice move up thanks to an earnings report from China's COSCO. COSCO is China's largest shipping company. They announced a smaller than expected loss which sent all the dry shipping company's up higher. This is a nice move for my Jan 7.5 naked put. Maybe I will consider adding some calls? Is a continued uptrend warranted? I am not too sure. I will wait to see what happens in the next day or so.

NTES - Closed right above its 20 day ema, which will hopefully be good support for my 40/35 Sep Bull Put. No changes.

IBM - Still trading in a tight range. This is good for my iron condor. No changes

Day 13, $20,274

Markets were flat even though there was some good economic data that had come out. New home sales and Durable Goods came in better than expected. A few weeks ago this news would have shot the bulls into action. Is the bullish move over? Perhaps the market isn't sure which direction and until there is some fundamental catalyst, I think flat is likely. I will continue to trade flat to slightly bullish until the trend says otherwise.

No adjustments or comments to current positions.

Day 12, $19,998

Today markets moved up closing on new highs for the year. Consumer Confidence came in better than expected and was a major driver for market direction.

Below is a snapshot of new trades placed. In addition to my NYX call calendar, I have also added a NTES Bull Put and a IBM Iron Condor. I had a limit order for the IBM Iron Condor, but it wasn't getting filled. I changed the limit order price but in my rush to get this done before the market closed for the day, I ended up purchasing 10 contracts instead of 5. Silly mistake. I still believe it to be a good trade, however, for a $20,000 account, 10 contracts makes me a little uncomfortable. The maximum loss with 10 contracts would equal approximately 20% of this portfolio. I don't plan on any loss, however, the 10 contracts still limits my option buying power because of the option requirements for spread trades.

Chapter 1: How to Trade Stock 101: Introduction to Trading

Most people are familiar with the concept of trading stock. I could cover what is stock and how it works, but let's jump right into the million dollar question. Why would a person want to buy stock? I think the average person would be able to tell you that by owning stock, you own a piece of the company. The idea, or hope, is that if the company makes money, the company will be more valuable and in turn the stock would be more valuable. You buy a share of stock for $100 and the stock goes up to $110. You sell your share of stock and you just made $10.

The average person's knowledge of trading probably ends there. Not only does this sum up the average person's knowledge of trading, but also this sole concept of buying stock is what the majority of peoples' entire retirements and 401Ks are based on. With just this one concept, if stock goes down, so does your portfolio and your retirement. The only way to make money buying stock is if that stock goes up.

To make your trading more versatile, besides buying stock, you could also short stock. Shorting stock is a way to make money if the stock goes down. (I do not personally short stock, but I do think it is important to understand how it works because it will make later concepts seem more intuitive) To better understand this, it might be easier to first think of it as the opposite of buying stock. Buying stock is also known as being "long stock." When you go long stock, you first buy it to open the position and then you sell it to close the position. When you go short stock you are first selling the stock to open your position and then buying it back to close the position.

This concept is more difficult than being long stock, because the question should come up, how could you sell something you don't own? And my answer would be, well, because you can. Think of it like this: Let's say a company's stock currently costs $100 per share. For whatever reason, you think the stock is going to go down, maybe because of a bad product, or bad service or poor business decisions. So you short the stock. For example, you sell 1 share of stock at $100. You now owe your broker one share of that company's stock that you will have to buy back. If the stock goes up, the cost to recover that one share of stock goes up, if it goes down, your cost to cover that share goes down. The next day or week or whatever, the stock now costs $90 and you decide to buy back your share. Congratulations! You just shorted stock and made $10!

This is good news. We now understand how trading, whether stock goes up or down, can make money! No longer are we dependent on a stock's upward movement to find ways that can book profits! But is that enough? Would you like to have more weapons in your arsenal of trading? I think that might be a good idea because to make money if a stock goes up or down can still be limiting. Although we have partially solved our initial problem of only being able to make money if a stock goes up, there are other things to be thinking about:

• Stock doesn't just go up or down, but also sideways. I want a way that would allow me to be able to make money when a stock moves sideways.
• Owning stock is expensive and requires a lot of capital. I want a way that would give me more bang for my buck.
• Owning stock is risky. What if I go long a stock and the stock price goes to zero? I want a way to hedge my risk so that I can limit and control exactly how much of my money is at risk before I even open a trade.
• Owning a stock takes too long. Stocks can move slowly and if they do, whether you are long or short it takes a long time for profit to be made. I want a way to take advantage and to profit not only from stock movement, but also from time.

There are ways to accomplish each of those things and if you are interested, I can show you. I would like to welcome you to the World of Options.

Comments and Questions always welcome.

Day 11, $20,096

Stock market started higher and as the day continue lost its bullish momentum to finish close to where it started. I have started to get into more positions. I will be placing some limit orders for a NTES bull put and an IBM iron condor. My first NTES trade was made with very little time value left. The new trades will have almost a full month, so I will be bringing in more credit. If the trades get filled tomorrow I will go into more specifics. Economic data for tomorrow: Consumer Confidence report

Dow - 9,509

Nasdaq - 2,018

SP500 - 1,026

NYX - 27.68 (-0.25) - This has still not been very valuable position. I have been meaning to short a call, but I haven't really seen an options chain that I liked. I will continue looking for ways to jump start this position into profits.

DRYS - 5.94 (-0.08) - Still no changes. My expectation as this stock will be above 7.50 by Jan 2010

NTES - 42.28 (-0.22) - Looking to get into a bull put. Closed bear call for a profit last month. What was resistance I am now expecting to act as support.

IBM - 119.32 (-0.62) - This stock has been trading in a range for quite awhile. Will look to take advantage of this with an iron condor.

NTES 77/72 Aug Bear Call Closed!

Johnny Trader has closed its first trade at a profit.

My NTES 77/72 Bear Call was placed as a momentum trade to follow the less than expected earnings report that caused the stock to gap down on higher than average volume. My expectation was that the stock would stay below $72 through expiration for maximum reward of $0.95 per options contract. On Friday NTES traded above $42 dollars and closed at $42.50. My short option at the 42 strike price would now be worth $0.50. I was able to sell to close my short options for $0.45. This means that instead of booking the $0.95 maximum reward, I booked a $0.50 reward (0.95 - 0.45). I had considered rolling the bear call up and out a month, but decided I would prefer booking the $0.50 since the stock was trading above $42 prior to close, above resistance. (This resistance now that it has been crossed I will view as support and will consider a bull put for Sep, possible future trade, but more on that to come)

This $0.50 adds $250 to my account. Profit is profit, and although $250 may not sound that exciting, lets take a closer look at the trade details:

Date Opened	8/14/09
Ticker	NTES
Position	Aug 47/ 42 Bear Call
Number of Contracts	5
Cost Basis	0.95
Reward Potential	0.95
Risk	4.05
Date Closed	8/21/09
Closing Price	0.45
Reward	0.5
Total Value	250
ROI	12.35
Length of Trade (Days)	8

So far, as mentioned above, the stock price went above my trade target and because of that I had a smaller reward. This doesn't seem ideal, but let's look at some numbers. My reward was 0.50 with a risk of 4.05. That is over a %12 return on investment (ROI). What is even better is that the trade was only active for 8 days before it was closed (only 6 trading days). I will take 12% ROI in 8 days any day. With a smaller account, it is important to look at these numbers.

Day 10, $20,175

Markets had a big up move today based on better than expected Existing Home Sales.

Dow - 9,506 +1.67%

Nasdaq - 2,021 +1.59%

S&P 500 - 1,026 +1.86%

Why hasn't my account moved?

Well, let's take a look at my positions:

NYX - 27.93 +0.18% (Slightly bearish to stagnant since Day 1 and I own 200 shares- will consider adjusting to best match trend.)

DRYS - 6.02 +2.03% (Also no positive momentum, but no adjustment to Jan 2010 Naked Put - will let time decay do its thing.)

NTES - 42.50 +1.82% (Bearish momentum play based on earnings. Has found traction and moved above $42. Trade closed on expiration Friday for a profit. More to come on this trade.)

I will be doing my due diligence for upcoming trades.

Day 9, $20,165

Markets are still looking for reasons to buy, looking at positive data and ignoring negative data. Overall the markets had a nice bullish move.

Tomorrow is expiration Friday. I will be looking to close my NTES Aug 47/42 Bear call for Max reward. NTES did cross $42 during the trading day, but closed at$41.74. Will discuss the closing of this trade as well as the call calendar trade this weekend.

Day 8, $19,953

Markets opened lower but rose to book gains after a report that oil reserves are dropping, which suggests that there could be an increase in demand for energy which could indicate a recovery. I took a logic class in college once and I believe we would have classified this type of argument as being a slippery slope. Looks like the bullish trend is continuing, the markets are looking for reasons to buy.

No trade in current positions.

NTES closed at $41.44. Staying below 42 with only a few more days left until expiration.

NYX has been dropping but sits at resistance. If it breaks below I will look to be adding a collar position to my long stock to protect my invested capital.

I will be looking to get into more trades for the next expiration month to start bringing in more value to this account.

Day 7, $19,982

Markets moved back up today. Stagnant, slow bullish trend continues. I have initiated a NYX Dec/Sep 30 call Calendar for a debit of $1.29. Looking at more trades and more to come on the call calendar trade.

NTES - Bear call still looking good. The stock moved up to $41.38, which is still below the $42.00 strike. No changes, but will consider rolling bear call up and out if the stock continues to rise.

Day 6, $19,961

Market had a pull back today with the Dow down 2%, Nasdaq down as much as 2.75%. Pull back was based on global news, Japan reported having slower than expected growth. Stocks moved back and traded relatively flat the rest of the day. Bullish trend is not over, but nearing resistance levels.

NTES trade is looking good so far, no changes. Stock is at $40.21

NYX had over 5% drop today. Stock is at $27.11, down $1.50 from yesterday. Technically it is sitting right on its 50 day ema. The trend is still bullish, but if it breaks that level of support, I will be considering adding some protective puts. If the support holds I will probably be looking into getting into either a bull put or a call calendar position.

NTES 77/72 Aug Bear Call

Now more about the NTES trade I made a couple days ago:

I initiated a bear call because of the poor earnings report. I opened 5 Aug short calls at the $42 strike for a credit of $1.07 because it is my expectation that the stock will remain at or below $42 up through August expiration, which will be August 21. At that point the short call will expire and I will have earned my maximum reward.

I had also opened up 5 Aug Long calls at the $47 strike price for a cost of $0.12. The short option and the long option together form a spread trade. This reduces risk. Had I only shorted the Aug $42 call, I would have an unlimited risk potential to the upside. If NTES jumped up to 50, 70, or 100 dollars, with just a short option open, I would be obligated to cover my short position however many dollars the stock has risen above the strike price of $42. A short option alone has unlimited risk potential.

By adding the long call, it protects me from having the stock gap up.

My reward for this trade would be the credit of the short options minus the debit of the long option; $0.95. The risk would be the difference in the strike prices minus the credit, $5.00 - 0.95 = $4.05.

This means, if the stock stays at or below $42, which is my expectation, all the options will expire worthless, and I will have made $0.95. If the stock jumps up, which is not my expectation, the most that will be at risk is $4.05.

If the stock stays below $42 dollars and the options expire worthless, the 5 contracts at $0.95 would add: $0.95 x 5 x 100 = $475 (minus broker commissions) of value to my account.

If the stock goes above $42 I will adjust the trade by rolling the options up and out for a profit.

Day 5, $20,126

Markets closed down on Friday. Michigan Sentiment report came out lower than expected. When the rally first started it seemed like it was driven not by fundamental data but by consumer confidence and sentiment. Now that sentiment levels aren't seeing increases I wouldn't be surprised to find the bears back in control or at a minimum slow the bulls.

Day 4, $20,268

Overall markets went back and forth to finish the day slightly ahead. No change in current positions.

NTES released their earnings report today. They have been having a really nice move and I had been kicking myself for not getting into a position sooner. The game plan was to wait until they release their earnings report and then make a momentum trade.

NTES report disappointed. Their revenue was higher than ever, but a large chunk of that came from abandoned accounts that they had closed. Their advertising business had lost money again this quarter. Because of the poor report (and an analyst downgrade probably didn't help), the stock had a big gap down, over 10%, on 4 times the average volume.

With expiration just around the corner I am going to place a August bear call. I don't expect NTES to make up any ground from the gap because it is still within the bollinger bands, no technically it isn't over sold. All indicators are pointing bearish - MACD, RSI, OBV, crossed below its 20 day ema.

With time decay on my side, I am going to play the bear call a little more aggressive, looking to short my call right ATM. I am going to short the 42 strike for $1.15 and buy the 47 for 0.15, for a net credit of $1.

PE: Max reward,

SE: Roll the bear call out to Sept for a credit.

Day 2 - $20,117

Markets had a down day today. Economic data came in worse than expected with Wholesale Inventories and Unit Labor Costs missing their estimates and coming in worse than the previous month. Perhaps a pause in our "V" recovery? We have had such a run, I wouldn't be surprised to see the markets correct or move flat for awhile.

No changes to any positions and no new positions added yet.

Day 1 - $20,209

I am starting out with a $20,000 account.

I currently have two open positions:

Long 200 shares of NYX: $28.75. Stock seems to be holding up well.

DRYS Jan 2010 Naked Put: Cost Basis: $2.45. Looking for Maximum reward.

Markets have remained bullish. Small correction today. I will be looking to place a momentum trade for NTES who has earnings after the bell on Aug 12.