Before you begin researching various trading ideas, it’s important to research and decide on what type of trading you’ll be doing.
When most people think about trading, they think about trading stocks. But stocks aren’t the only type of investment vehicle that can be traded. Trading can include various currencies, commodities, and options.
Within those different options, in order to generate a trading idea, you’ll need to choose the type of trading methodology that you’ll be following. Then you can begin scouring for various trading ideas.
Even if you’ve decided you’ll be day trading small capitalization stocks, there are a variety of different stock trading methodologies you can follow, each one providing you different trading ideas.
For day trading stocks, it could be momentum trading, or certain chart patterns, or maybe trading volume. Some traders combine different trading styles to generate trading ideas. While the profit potential is high, there is also a lot of risks.
Another factor that comes into play is risk management. How much risk do you want to take on while trading? Or maybe you want to minimize the risk even if this lowers the potential profit you could make from your trades.
If you’re looking for ideas that have lower risk, you may want to consider options trading. More specifically, covered call options.
Buying an option gives you the right to buy a stock at a certain price on a specific date in the future. However, you don’t have to buy the stock.
An option is 100 shares of stock. For example, if you buy the August ABC $30 option, you have the right to buy 100 shares of ABC stock at $30, even if the stock is trading above $30.
Let’s say the stock expires with the stock price of ABC company at $35. You get to buy it for $30. You can then sell it for the market value of $35, making $5 per share, or $500 total profit. This would be minus what you paid for the option itself.
So what have covered call options? With covered calls, you become the options seller. You sell the rights of the option to someone else. Now, this could be very risky. After all, in the scenario above you would have to sell them 100 shares at $30 per share.
If you don’t own the stock, you would have to buy 100 shares at the market value of $35 and then sell them to the option buyer for only $30.
However, with covered calls, you sell options of stock you already own. Let’s say you owned 100 shares of ABC company that you had purchased a while back at $25 a share.
By selling options, you have two potential outcomes. The option expires worthless, like if the stock was trading below $30 when the option expires. You would keep the stock you own and you would keep the money you earned selling the option.
If the buyer cashes in the option, they buy the stock from you for $30 per share, $5 above the price for which you purchased the stock.
In other words, by selling covered calls, you generate an income each time the option expires worthless. You also make a profit if a buyer cashes in on the option. The downside, of course, is that you limit the upside potential.
If the stock soars to $45 per share, you must sell it for $30. Sure you’ve locked in a profit but you’ve limited that profit. The good news is if the stock goes lower, you can continue to sell options and make income.
There are a lot of trading ideas out there. Some are extremely risky and some are very complicated. Consider getting started with options for your trading ideas before exploring other ideas.