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Stock Option Trading Tips | How to Trade in Options | Tips and Tricks for Options Trading

PowerTip #2
Plan your Trading
Before making an investment write down:
  • your objective with the investment
  • what to do if it goes up, goes down, or stays the same
  • keep notes on your thoughts and events
  • review the notes quarterly to improve your process
  • use My Portfolio and the Notes & Alerts to manage and document these processes

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PowerTip #3
It's all in the strike price
Your choice of the strike price is how you control the risk in doing a covered call. For more information, see Learning Center, "The Best Covered Call Strike Price".
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PowerTip #4
Use of annualized returns
When considering covered calls that span several months, use the annualized returns to compare the different time frames on an equal footing.
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PowerTip #5
Be smart about searching
When you do a search with SmartSearchXL, change only one parameter at a time. In this way if no results are found you will know what parameter change was too restrictive.
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PowerTip #6
Highest Returns
Generally, the highest annual returns are obtained by writing calls every month rather than several months out in time.
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PowerTip #7
Managing your covered call positions
As the stock price moves up and down to a new strike price, consider taking some actions to take advantage of the move. See our Follow-up a Covered Call Position reference.
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PowerTip #8
These returns look fantastic??
Beware of very high returns for option income strategies. If the returns are too high to believe, they are probably high for a reason. There could be a data error or very high risk associated with the high return. If there is a 90%+ probability you will win, look out. If too good to be true, it is not true.
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PowerTip #9
Monitoring Stop Losses
Once you have analyzed a lower and upper stop limit for your position, record those values using the Alerts section. The Profit/Loss Portfolio will alert you when those stops have been hit. Stop orders can sometimes be unreliable consider using a married put as an alternative.
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PowerTip #10
Reviewing your returns on an individual position
From the Profit/Loss Portfolio you can analyze one position at a time. Just link your position into the Position Analysis tool using the "More Info" buttons. This will calculate your original position, current liquidation value, and possible future expiration value. And then show potential Roll Out opportunities for most strategies.
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PowerTip #11
Closed Positions...
You can add old positions into the Portfolio "Transactions" to enhance your overall accounting. Simply click "Transactions" then 'Add a Closed Transaction' and enter in the information. Use the same format of the other transactions.
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PowerTip #12
Searching Tip
Remember, Puts are typically priced lower than calls. If you expect to get a 3% return on moderate Covered Calls, you might only expect to make 2.5% trading moderate Naked Puts.
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PowerTip #13
Trading Tips for Naked (Cash Secured) Puts
Here are some useful guidelines:
  • Only trade Naked Puts on stocks you would like to own.
  • Use the Simple Moving Average filter to find stocks in an uptrend.
  • Use the Stock Lists feature to filter against popular Advisory Stock Lists (S&P 5 star, etc) or your own watchlist/stock lists.

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PowerTip #14
Management Techniques
If the stock drops you can:
  • Buy back the put and accept the loss on the position.
  • Buy back the put and sell a deeper OTM put to lessen the loss incurred.
  • If you are still bullish let the put be assigned, then sell a Covered Call.
  • Advanced - As the stock drops buy a put at a lower strike. This does not repair the Naked Put, but it stops major losses from occurring.

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PowerTip #15
Strike Price Selection
Deeper OTM (further below the stock price) Puts offer greater protection but less premium. An investor should not expect find trades 10% OTM with a 5% Naked Yield. Naked Put trades that are 10% OTM and offer a 5% yield carry a heavy risk (BioTech stocks). Due to pending events, like FDA approval, these stocks may drop 10, 20, or even 50% of their value causing large losses.
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PowerTip #16
Strategy Tips
Shorting stock should only be done by experienced investors. Make sure you are aware of the risks with shorting stock and selling puts before you trade this strategy.
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PowerTip #17
Strike Price Selection
When selling naked calls, deeper OTM (strike price further above the stock price) calls offer greater protection but less premium. An investor should not expect find trades 10% OTM with a 5% naked return. Naked call trades that are 10% OTM and offer a 5% yield carry a heavy risk (BioTech stocks). Due to pending events, like FDA approval, these stocks may rise suddenly causing large losses.
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PowerTip #18
Know Your Risks
Theoretically, Naked Calls are considered the riskiest options strategy as a stock could rise infinitely. Make sure you have researched the underlying security thoroughly before placing a Naked Call trade.
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PowerTip #19
Consider a Spread to Minimize Risk
If you are bearish on the stock you can greatly reduce potential risk by trading a Bear Call Credit Spread instead of trading a Naked Call.
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PowerTip #20
Management Techniques
If the stock rises you can:
  • Buy back the call and accept the loss on the position.
  • Buy back the call and sell a deeper OTM call to lessen the loss incurred.
  • If you are still bearish let the put be assigned, then sell a Covered Call.
  • Advanced - As the stock rises buy a call at a higher strike. This does not repair the Naked Call, but it stops major losses from occurring.

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PowerTip #21
Be free. Create as many Portfolios as you like...
Create as many Portfolios as you like to separately track different accounts or strategies. You can have a Portfolio just for Long Stocks, one for an IRA account, one for just your Covered Calls and one for strategies you are paper trading.
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PowerTip #22
The ability to sleep at night...
Collar spreads offer enhanced protection in the case of a large stock decline. Unlike a standard stop loss, if your stock gaps down after hours or pre-market you are still protected by the OTM put.
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PowerTip #23
Return vs. Protection...
Purchasing deeper OTM puts will cost you less and allow you to retain more of your initial premium from the sold call, but you will have less protection. When creating a Collar Spread, compare the different combinations to find the spread that matches your risk-reward tolerance.
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PowerTip #24
Long-Term Positions.
If you are planning on being in the position for several months, use the Option Chain to compare the value of the 4 month or 6 month put. Buying further out in time will lower the annualized cost of the put, but it will put you in a Debit Collar trade for the first couple of months.
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PowerTip #25
Searching for a strategy?
If you do not see your favorite strategy listed in the tab headings, simply click Other Strategies tab on the far right of the tab row and select the stock option strategies that you'd like to view. We generally show the 7 most popular option strategies of the 23 found on the site.
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PowerTip #26
Reverse your investment knowledge...
Covered Puts are the reverse of a Covered Call. The Covered Put trade will yield a profit when the stock drops.
  • In a 'moderate' Covered Put an investor will short the stock and sell a put strike right at the short put strike price.
  • In a 'conservative' Covered Put an investor will short the stock and sell a put that is one or more strikes above the short stock price (In-the-Money).
  • In an 'aggressive' Covered Put an investor will short the stock and sell a put that is one or more strikes below the short stock price (Out-of-the-Money).

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PowerTip #27
Stocks at a discount
Many investors are using Naked Puts as a means to purchase shares of stock at a discounted price.
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PowerTip #28
Return vs. Protection
When analyzing a credit spread be aware of your risk-reward tolerance. Deeper Out-of-the-money credit spreads will yield a lower return but have a higher protection and higher probability of being successful. At-the-Money credit spreads will offer a high return but a lower probability of success.
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PowerTip #29
Be wary of wide range spreads
You may be able to gain $0.10 or $0.20 cents of profit by changing a 5-point spread into a 10-point spread. Keep in mind that you will not only increase your reward but you will also double your risk.
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PowerTip #30
Be wary of wide bid-ask spreads
When you enter into a credit spread your market value will be slightly negative due to the bid-ask spread on the long and short option. Be wary of options with a wide bid-ask spread as your liquidation value may be low if you have to close the position early. Also, options with a higher bid-ask spread tend to have low volume or high implied volatility (higher risk).
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PowerTip #31
Management Techniques
If the underlying starts to go against you, buy back the short option to avoid a large loss. If you think the stock will continue to go the opposite direction hold the long option and let it appreciate.
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PowerTip #32
Advantage of Time...
Experienced long option investors know that it is best to purchase an option that is farther out in time. The 6-month out, 50 strike option on a $50.00 stock is not going to cost 6 times the price of the one-month out 50 strike option. Buying an option farther out in time lowers the annualized cost and allows more time for the stock to move in your desired direction.
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PowerTip #33
Advantage of Time...
Experienced long option investors know that it is best to purchase an option that is farther out in time. The 6-month out, 50 strike option on a $50.00 stock is not going to 6 times the price of the one-month out 50 strike option. Buying an option farther out in time lowers the annualized cost and allows more time for the stock to move in the desired direction.
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PowerTip #34
Optimize it...
Do you have a sentiment for the direction of a stock but do not know which option might be the best to purchase? Click Long Option Finder, enter in your stock symbol, your expected price, your desired investment amount and a target date for your expected price. The Long Option Finder will calculate which option would theoretically yield the best return if the stock hit your expected price on your selected target date! It can be used for long puts and calls.
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PowerTip #35
Optimize it...
Do you have a sentiment on the direction of a certain stock but do not know which option might be the best to purchase? Click on Long Option Finder, enter in your stock symbol, your expected price, your desired investment amount and a target date for your expected price. The Long Option Finder will calculate which option would theoretically yield the best return if the stock hit your expected price on your selected target date!
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PowerTip #36
Risk vs. Reward
When analyzing a credit spread be aware of your risk-reward tolerance. Deeper out-of-the-money credit spreads will yield a lower return but they will have a higher protection and better probability of being successful. At-the-money credit spreads will offer a higher return but a lower probability of success.
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PowerTip #37
Be wary of wide range spreads
You may be able to gain $0.10 or $0.20 of profit by changing a 5-point spread into a 10-point spread. Keep in mind that although you will increase the reward you will also be doubling your maximum risk.
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PowerTip #38
Be wary of wide bid-ask spreads
When you enter into a credit spread your market value will be negative due to the bid-ask spread on the short and long options. Credit spreads where both options have a wide bid-ask spread may result in a large potential loss if the investor has to close the position early.
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PowerTip #39
Management Techniques
If the underlying security starts to move against you, buy back the short option to avoid a large loss. If you think the stock will continue to move against the initial position you can hold the long option and let it appreciate in value, potentially countering any loss you incurred when buying to close the short option.
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PowerTip #40
Risk vs. Reward
When analyzing a debit spread be aware of your risk-reward tolerance. Deeper in-the-money debit spreads will yield a lower return but they will have a higher protection and better probability of being successful. At-the-money debit spreads will offer a lower net debit, a higher potential return, but a lower probability of earning that return.
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PowerTip #41
Married Puts vs. Long Calls
A Married Put profit loss profile is the same as buying a call, but with some important distinctions:

1. Calls do not collect dividends
2. Call buyers tend to over trade because of the high leverage. Owning the stock helps manage the investment size.
3. Owning the long call does not have as much flexibility to earn income
4. A long call cannot help in a declining market. The married put can be used to generate income by taking advantage of put appreciation.
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PowerTip #42
Hedge Tracking
A married put is the perfect hedge. It does not depend on the tracking ability of an index to your portfolio. It insures your stock investment directly. Put insurance is very powerful. Unlike home insurance your stock does not have to burn down. It will protect no matter what the reason for the price decline.
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PowerTip #43
Insurance Analogies:
There are some analogies of home insurance to the uses of Put option stock insurance:

1. the longer the term of the insurance, generally the cheaper it is per unit time
2. if you have a higher deductible or more at risk the insurance is cheaper
3. the cost of insurance decreases the amount of profit made on the appreciating asset.
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PowerTip #44
Married put insurance is better:
Married put insurance is more powerful than home insurance in many ways:

1. home insurance requires that you name the threat i.e. fire, water, earthquake ... Puts protect under any circumstance
2. home insurance does not insure loss in property value because of market circumstances, but puts insure a decline for any reason
3. puts on a stock even insure poor management or maintenance
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PowerTip #46
Married Put Timing:
Doing married puts takes much of the investment timing out of the investing process. It is not necessary to be exactly right when you place the order because the investment is hedged i.e. the stock movement is countered by the put movement in the short term.
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PowerTip #47
Philosophy
With married puts your risks are addressed first and rewards are worked out later. Most investors put the majority of time in evaluating return and timing. Married put investing puts the emphasis on risk and waits for the market direction to reveal itself before action is taken for income.
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PowerTip #48
Sleeping and Security:
Using married put insurance gives me security, confidence, and comfort to sleep at night even in these turbulent times.
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PowerTip #49
Down Market Performance:
With 1/2 of my capital in Mutual Funds and 1/2 in Married Puts during the 2008-2009 declines our record of performance is:

Mutual funds down 40-50%
Married puts worst case down 9% best case up 19%
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PowerTip #50
Sell Strategy:
One needs a sell strategy. Covered call investors are especially prone to this problem. They tend to get called out of good stocks and hold the declining ones. In time your entire portfolio can be under water.
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PowerTip #51
Managing your Investments
Using the My Portfolio tools is very powerful for managing your portfolio of stocks and options:
  • Monitor your positions, grouped by strategy
  • See position liquidation value and expiration value
  • See roll-out alternatives and trade management ideas
  • Simulate option-roll-out returns
  • Set alerts for stocks, options or positions
  • Notes track history for a position like a trading diary

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PowerTip #52
Post position analysis
So you have a position, now what? Post position analysis can be used to find alternative moves to make, which will enhance your income or profit. Once you have established a position in the Profit/Loss Portfolio click on the "more info" button to Position Actions and then Position Analysis.
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PowerTip #53
Analyze your Parity Trade
Before entering a Bull Call Debit Spread, check the risk-reward of the parity Bull Put Credit Spread trade. For example, if XYZ is trading at $20.00 per share and you were researching the 17.5 - 15 strike Bull Call Debit, compare that to the 17.5 - 15 strike Bull Put Credit spread.
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PowerTip #54
Standard Trading vs. Alternative Trading
Most investors will enter a Bull Call Debit spread that has less than 60 days to expiration and where both options are In-the-Money (ITM). However, some investors will trade spreads that are further out in time, sometimes as much as 6 months, where the short call is Out-of-the-Money (OTM) and the long call is At- or In-the-Money. This approach is much more bullish and will result in a lower Net Debit, but you may have to wait longer to realize a profit. You can adjust the settings in the Search screen to identify both types of spreads.
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PowerTip #55
Avoid Surprises
Most investors who are entering into new Debit or Credit spreads will avoid stocks that have an upcoming earnings event. This mitigates the chances of any unexpected surprises that can cause large losses for the leveraged positions. To identify stocks that do not have an earnings date between now and expiration, simply check the box in the Earnings Date field in the parameter field for 'Not Between now and Expiration.'
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PowerTip #56
Avoid Surprises
Most investors who are entering into new Debit or Credit spreads will avoid stocks that have an upcoming earnings event. This mitigates the chances of any unexpected surprises that can cause large losses for the leveraged positions. To identify stocks that do not have an earnings date between now and expiration, simply check the box in the Earnings Date field in the parameter field for 'Not Between now and Expiration.'
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PowerTip #57
Analyze your Parity Trade
Before entering a Bear Call Credit Spread, check the risk-reward of the parity Bear Put Debit Spread trade. For example, if XYZ is trading at $20.00 per share and you were researching the 22.5 - 25 strike Bear Call Credit Spread, compare that to the 22.5 - 25 strike Bear Put Debit spread
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PowerTip #58
Avoid Surprises
Most investors who are entering into new Debit or Credit spreads will avoid stocks that have an upcoming earnings event. This mitigates the chances of any unexpected surprises that can cause large losses for the leveraged positions. To identify stocks that do not have an earnings date between now and expiration, simply check the box in the Earnings Date field in the parameter field for 'Not Between now and Expiration.'
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PowerTip #59
Analyze your Parity Trade
Before entering a Bull Put Credit Spread, check the risk-reward of the parity Bull Call Debit Spread trade. For example, if XYZ is trading at $20.00 per share and you were researching the 17.5 - 15 strike Bull Put Credit, compare that to the 17.5 - 15 strike Bull Call Debit spread.
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PowerTip #60
Risk vs. Reward
When analyzing a debit spread be aware of your risk-reward tolerance. Deeper in-the-money debit spreads will yield a lower return but they will have a higher protection and better probability of being successful. At-the-money debit spreads will offer a lower net debit, a higher potential return, but a lower probability of earning that return.
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PowerTip #61
Analyze your Parity Trade
Before entering a Bear Put Debit Spread, check the risk-reward of the parity Bear Call Credit Spread trade. For example, if XYZ is trading at $20.00 per share and you were researching the 22.5 - 25 strike Bear Put Debit, compare that to the 22.5 - 25 strike Bear Call Credit spread.
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PowerTip #62
Standard vs. Alternative Trading
Most investors will enter a Bear Put Debit spread that has less than 60 days to expiration and where both options are In-the-Money (ITM). However, some investors will trade spreads that are further out in time, sometimes as much as 6 months, where the short out is Out-of-the-Money (OTM) and the long call is At- or In-the-Money. This approach is much more bearish and will result in a lower Net Debit, but you may have to wait longer to realize a profit. You can adjust the settings in the Search screen to identify both types of spreads.
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PowerTip #63
Avoid Surprises
Most investors who are entering into new Debit or Credit spreads will avoid stocks that have an upcoming earnings event. This mitigates the chances of any unexpected surprises that can cause large losses for the leveraged positions. To identify stocks that do not have an earnings date between now and expiration, simply check the box in the Earnings Date field in the parameter field for 'Not Between now and Expiration.'
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PowerTip #64
Return vs. Protection
When analyzing a potential Iron Condor be aware of your risk-reward tolerance. Deeper Out-of-the-money Iron Condors will yield a lower return but have a higher probability of being successful. Iron Condors where the short put and short call are closer to the underlying price will yield higher premiums, but will have a lower probability of success.
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PowerTip #65
Neutral Positions Tip #1
Iron Condors are a neutral investment strategy. Look for indexes, ETFs or stocks of very large companies that are channeling and do not have a history of large break outs or price spikes in either direction.
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PowerTip #66
Neutral Positions Tip #2 - Avoid Surprises
Most investors who are entering into new Debit or Credit spreads will avoid stocks that have an upcoming earnings event. This mitigates the chances of any unexpected surprises that can cause large losses for the leveraged positions. To identify stocks that do not have an earnings date between now and expiration, simply check the box in the Earnings Date field of the parameter field for 'Not Between now and Expiration.' This only applies if you are trading Iron Condors on stocks (see Neutral Positions tip #3).
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PowerTip #67
Neutral Positions Tip #3 - Indexes and ETFs
Most investors will prefer to trade Iron Condors on Indexes and ETFs rather than stocks. Stocks are more volatile and can have unexpected gaps more frequently. Indexes and ETFs as a whole are much less volatile and easier to manage. Also, trading iron condors on some indexes can have tax benefits, as well...
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PowerTip #68
Neutral Positions Tip #4 - Roll for Additional Income
The underlying index, ETF or stock will often increase or decrease in price after entering an Iron Condor. This enables investors to realize more potential income by rolling the Iron Condor. If the underlying increases in price, then the Bull-Put Credit Spread can be rolled. If the underlying decreases in price, then the Bear-Call Credit Spread can be rolled.
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PowerTip #69
Management - Choose your Exit Prior to Entry
An investor should have a pre-determined exit or management point when entering an Iron Condor, and when the threshold is crossed the position should be immediately modified. Neglecting or delaying action can result in additional and significant losses.
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PowerTip #70
Special Margin May Apply
Some brokers allow special margin for Iron Condors which can effectively double returns.
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PowerTip #71
Instantly search stock lists!
When you enter your stock symbols into the PowerWatch tool, a personal stock list will be created for you in the Search tool.

To filter by your lists in the Search tools, simply select Watch List #1, Watch List #2, etc. in the Recommended List drop-down menu, then submit your search. You can use lists to be included in the search or excluded from the search.

While PowerWatch List is limited to 5 lists, you can create an unlimited number of lists to use in the search tools - even combine separate lists you've created for even more flexibility.
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PowerTip #72
Have you ever heard that 80% or more of options expire worthless?
The popular idea that most options expire worthless is false. According to a comprehensive study from the ISE, with over thirty years of data, only 30% of options expire worthless. About 10% are exercised and the remaining 60% are closed through offsetting transactions (statistics presented in 2004 by Alex Jacobson, Vice President, International Securities Exchange.) So, it is much more likely that an option contract will be closed by an offsetting transaction than allowed to expire worthless at the expiration. Since 2004 the exercise rules for options have changed such that any option that is expiring in-the-money (ITM) will be automatically exercised. This may have caused an increase in the 10% statistic above as well.
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PowerTip #73
Weekly Options Search
If you are running a search on Thursday or Friday for new weekly options positions that expire the following week, you may want to use a 'Days to Expiration' filter of '2 to 10' days out in time. This will filter out any of the potential options that expire within a day or two.
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PowerTip #74
Look out for unusually high probabilities.
Mergers, acquitions, and distributions can distort a stocks volatility and therefore calculated probabilities. Always check for news events and be cautious of high probabilities. If it is too good to be true maybe it is not true.
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PowerTip #75
What are the Signature Tools?
The Signature Tools tab contains powerful tools that are unique to PowerOptions. These tools can help you maximize your returns in given strategies, help you repair a stock that has fallen in price, insure a stock that has risen in price, view volatility skew and more! Click on the Signature Tools tab to see a description of each of these unique tools and how they can help your investing.
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PowerTip #76
Optimize it...
Do you have a sentiment on the direction of a certain stock but do not know which option might be the best to purchase? Click Long Option Finder, enter your stock/index symbol, your expected future price, your desired investment amount and a target date for your expected price. The Long Option Finder will calculate which option would theoretically yield the best return if the stock hit your expected price on your selected target date! It can be used for long puts and calls.
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PowerTip #77
Do you want to compare risk and reward for multiple strategies?
By now you know you can use the PowerOptions Search tool to find positions in a given strategy that match your criteria, and use the Search By Symbol tool to view positions in a given strategy one stock at a time.

But, what if you want to compare Covered Call and Naked Put returns one stock at a time? What is the risk-reward of a Bull Put Credit Spread vs. a Calendar Call spread? The Search Summary tool is your solution. Simply enter in your stock symbol and select the strategies you wish to compare. The Search Summary tool will give you a few possible trades for each strategy so you can compare the risk and returns for multiple strategies on one page.
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PowerTip #78
Has your stock fallen in price?
The Stock Repair tool can help you repair your sunken stock. Simply enter in your stock symbol, cost per share and number of shares and the Repair tool will try to find ratio call spreads to lower the break-even of your stock position.

Yes, ratio call spreads by themselves have infinite risk to the upside, but by combining stock ownership + long call + twice as many short calls there are no naked calls. The stock ownership covers half of your short calls and the long call covers the remaining obligation. Check it out, and see if your fallen stock can be repaired!
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PowerTip #79
What is the Stock Repair tool showing me?
When you first enter your stock symbol, cost per share and number of shares into the Repair tool you will see a table of potential credit and debit repairs. If you see one that has a lowered break even and net credit that appeals to you, click on the Repair Details button to see the trade specifics. Use the Analyze Trade button to see the Profit and Loss chart of the potential Stock Repair.

If you see 'N/A' fields in the Break Even column or in the Trade Details fields, this means that the system tried to find a repair spread using the listed strike prices, but the position would not lower your break even or result in a profit.
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PowerTip #80
Potential Roll-Out Simulation
Roll out suggestions can be simulated to show before and after results if a roll out is implemented. Click the "more info" button and then "Simulate Trade" next to the roll out to be considered.
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PowerTip #81
Best Annualized Returns
Use the option chain to check out which month for the same strike price will give you the highest annual return (select and use the annualized return column)
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PowerTip #82
Best Annualized Naked Yield
Use the option chain to check out which month for the same strike price will give you the highest annual return (select and use the % Naked Yield column)
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