Options Trading Tips

What Are we Trying to Achieve With Our Trading?

admin — Thu, 11 Mar 2010 20:52:51 +0000

I wanted to make a few comments today on the comparisons between different stock market strategies. First, let me say I am yet to come across a strategy that doesn’t work, given the right circumstances. They can all make money, some just require more skill, more time, or more luck than others. Everyone has their preferences, and I thought we’d compare a couple today.
I’m constantly intrigued by people who decide on an investment strategy without the faintest idea of ‘why’ they use that particular strategy, or without having a look at an alternative strategy, with other possible advantages, that achieves the same (or similar) thing.
Of course everyone invests to ‘make money’. The question of ‘why’ goes to the specific intention of a particular strategy – “why do you use one form of investing over another?”
The only way to answer that question is to first ask yourself another – “What am I trying to achieve?”
Are you hoping to get the maximum benefit out of the movement in the share price – to get the most profit from a stock rising (or falling) quickly? Are you willing to try and capture these profits on the big winners, knowing that most of the time you may pick losers, but keeping your losses small and your winners big (hopefully)? If so, are you happy to continue trading when you know you may only get 30, 40 or (if you are one of the brilliant few) 50% correct?
Or, are you trying to make money ‘regardless’ of the share price movement? Are you happy with steady and very high (if not spectacular) returns on a regular basis.
The question I will address in this article is simple: Would you prefer to be in a position where the share price MUST go up to make money, or would you prefer it if the share price doesn’t need to go up (it can stay the same, or even go down a little), yet you still make 100% of your profits?
I’d like to take this opportunity to explain the ‘rationale’ behind one particular investment strategy – the Credit Put Spread strategy (sometimes called “Selling Insurance”).
This article is an attempt to explain exactly WHY you may trade the Selling Insurance strategy, rather than any of the dozens (hundreds?) of other option strategies available.
This article does not attempt to explain the intricacies of any particular strategy, nor the various options available to the trader throughout the trade (rolling out/down, closing early etc), rather to explain in simple terms the ‘principles’ behind why you may choose this particular strategy over a multitude of other strategies.
Please be aware I have either traded or investigated just about every strategy using options that I know of, and the Selling Insurance strategy certainly has its place in a diversified portfolio, with many advantages over other strategies. More importantly, it satisfies several criteria that we look for in our trading.
Let’s look at why. As mentioned, we first need to understand the reasons why we would use a particular strategy, and determine what it is we are trying to achieve. Without that goal, finding the correct strategy for YOU is impossible.
When we first started out, we detailed 5 specific criteria that needed to be met with any investment strategy we use. All of these conditions had to be met, otherwise that type of investing was not appropriate for us.
Now, your criteria may be completely different to ours, and that’s fine. Only YOU can choose what is right for you. You may have a completely different set of criteria, but the point is the same: Before choosing any investment strategy, make sure you lay out what you want, then choose the strategy that suits your criteria.
Here’s the criteria we settled on, and how the Selling Insurance strategy fits the bill…
1) Trading doesn’t take up too much TIME.
Any investment must NOT consume too much of our time. The entire purpose in making money is not for money itself, but to create a lifestyle. Therefore as little time as possible must be spent on any strategy.
The time it takes you to read this article will be greater than the time we have spent in the last 2 months implementing this strategy, and was still able to earn some considerable profit.
Most other type of trading, especially any form of ‘directional’ trading, requires a considerably more active mindset, with positions being monitored consistently, stop-losses enforced etc. For the most part, they are not ’set and forget’ investments, and require considerably more time to apply, monitor and manage.
The Selling Insurance strategy enables us to live the lifestyle we want, without the need to be watching the market every second.
2) It must have a High Probability of Success.
There must be a high chance that our investment will return as expected, most of the time.
With the Stock Market, the way we view it is there are essentially 5 things that can happen in respect to the price of the stock…
1) The price can go up a lot
2) The price can go up a little
3) The price can stay the same
4) The price can go down a little
5) The price can go down a lot
With our Selling Insurance strategy, we format our investments so we make 100% of our expected profit if 1) to 4) above occur.
So that’s an 80% chance of success – without applying any skill at all!
It is only if 5) occurs that we need to take any action, and we then have several choices to either retain our profits or slightly reduce them. We can only lose a maximum set amount if we choose to close our position entirely.
With most other types of trading, you are essentially making a ‘bet’ as to which way the stock will go – commonly known as ‘directional trading’. Therefore, a profit is only realised when the share price goes up a lot if you are long (no 1), or down a lot (no 5) if you are short, giving a substantially less likelihood of a profit on any and every trade.
The flipside to this is that while there is much less chance of making a profit with directional trading, the profit achieved can be considerably higher if the price does go your way, as opposed to the Selling Insurance strategy where profits are capped.
That’s fine with us – we’re not trying to make millions with one trade – that is not our goal. We’re trying to earn a steady, consistent and recurring income on a monthly basis.
This is a point I can’t stress strongly enough, and is the reason for this entire strategy! We do NOT require the stock to move in a specific direction to make money. That means we make money more often than any other strategy I know of.
3) We are always PROTECTED on the downside.
With our Selling Insurance strategy, our losses are capped, and if a ‘worse case’ scenario happens, I am not wiped out. We know exactly what our possible losses are BEFORE entering the trade, and these are managed to be minimised as much as possible.
With good money management this can be comfortably achieved with most strategies, so while I can’t stress enough the importance of ‘loss prevention’ and ‘risk management’, because it can be achieved with most investment strategies it’s not really a deciding factor on choosing one strategy over another.
4) We make a ‘regular’ INCOME so we don’t have to work.
We need to be able to live our lives the way we want – day in and day out. That means we need income. I’ve got bills to pay. I’ve got a wife with a penchant for Italian shoes. Hell, I’ve got a penchant for Italian shoes!.
The whole point of being wealthy is to live a certain lifestyle, and that lifestyle costs money. So we need an ‘income’ to fund that lifestyle.
Investing just for ‘capital gains’ or ‘long term growth’ is all well and good, but in the meantime any investment strategy must supply enough income to live on, and live well!
The Selling Insurance strategy has only one goal – to provide income on a regular basis (generally monthly). That’s it. It’s important to understand this strategy is NOT for long term capital growth – although it can be achieved if you re-invest the profits – but was designed purely to replace income. Not too many other strategies can do that as effectively.
5) LOCATION is not important.
We need to be able to manage my investment from anywhere in the world.
Again, most strategies can be done with a laptop and an internet connection or a phone from anywhere in the world, but this point goes hand in hand with the ‘time’ factor.
The Selling Insurance has the advantage of being less time consuming, therefore if I’m travelling the world or relaxing somewhere, I don’t need to spend hours in front of my computer managing my trades. A few minutes a day is all I need, so this is a big advantage over most types of directional trading.
So, all in all, the main criteria that indicate a better investment strategy for us would be Selling Insurance over most other ‘active’ types of investment is 1) Time, 2) Income and 3) Probability of Success and 4) the fact it can be done easily no matter where I am or what I’m doing.
What I consider to be the biggest advantage, and the most important reason I use this particular strategy, is the high probability of success. That’s the clincher for me, and the deciding factor that means the Selling Insurance strategy is one strategy I put my money into time and time again.
In Part 2 of this article, we’ll examine this part of it in more detail, and compare the results of different strategies to highlight why this point is so important. Understanding that may help to ensure you make money from the markets over the long term. Until then…

What Is Forex Trading? Can You Make Money?

admin — Thu, 11 Mar 2010 08:47:14 +0000

As the stock market has been shaky and the U.S. dollar has lost almost unprecedented ground in the past several years, forex trading has reached record levels of popularity.

This is because the forex trading market is one that can never go down (or up, for that matter), and in which the decline of the U.S. dollar has created tremendous opportunities for savvy investors.

What is Forex Trading?

Forex is a term used to mean “foreign exchange.” Unlike other markets, the forex market doesn’t exist in any physical sense. While stock traders meet on the New York Stock Exchange floor, and bond traders in the Chicago Board of Trade’s trading pit, people engaged in trading use telephones and the internet to constitute their market.

Who Participates in Forex Trading?

The biggest money in the world engages in forex trading on a daily basis. This is because national governments and their central banks trade on the forex. You would never find Alan Greenspan trading on the American Stock Exchange floor, but you would find his subordinates in forex – it’s a central role for central banks.

In addition to governments and central banks, large commercial banks also engage in forex trading. Multi-national firms perform trading in order to hedge against fluctuations in currency rates. Individual investors try to spot trends in the forex to move in and out of trades at a quick profit.

There are even forex dealers, people and firms whose job it is to buy and sell currency in the forex in order to exchange it in the real world.

The main currencies for forex trading are the euro, the Japanese yen, the English pound sterling, and the U.S. dollar. The Australian dollar and the Swiss franc are also popular.

How Forex Trading Works

Normally, currency is traded for very short periods. A day is about the longest you would want an open currency trade, and most trades are for a few hours, or even a matter of minutes. This is because currency traders typically use massive amounts of financial leverage in their trades which amplifies both the potential rewards and the risks.

For example, to buy $100,000 worth of euros may require a deposit of as little as $1,000. If the euro goes up 1 percent vs. the U.S. dollar, you will have made $1,000 on your investment of just $1,000 – doubling your money.

But what if the euro went down by 3 percent against the U.S. dollar? Not only will you have lost the $1,000 that you risked, but you’ll be liable for an additional $2,000 as well.

Making even bigger bets, say $5,000 to control $500,000, could result in catastrophic financial losses. For this reason, it is normally best to make quick trades. In doing so, you will take your trading profits while you can and stop your losses before they become untenable.

The Financial Futures Market – Forex Trading Through Options Contracts

You can also buy options on foreign currency, also known as financial futures. For example, you could purchase a contract for 100,000 Swiss francs to be delivered in six months. During the six months until the contract matures, you have the option to sell the contract.

If the Swiss franc goes up versus the dollar, you could sell the contract to lock in your profits. If the franc declines against the dollar, you could sell your contract early and cut your losses.

Investor Alert – Beware Forex Trading Scams

As the popularity of the forex has increased, so have the number of forex trading scams. Between 2001 and 2006, approximately 23,000 American investors lost $300 million to forex trading scams.

Always be sure that your forex broker is legitimate, and never risk more than you can afford to lose.

What is the Traditional Type of Forex Option?

admin — Wed, 10 Mar 2010 08:22:11 +0000

Foreign Exchange trading or Forex trading can be a financially rewarding profession. It could pave the way for either tremendous wealth, if you are good at it, or bankruptcy, if you fail to use good judgment. Forex is currently the biggest financial market in the world with no less than $4,000,000,000 (4 billion) traded daily. It involves various types of transactions one of which is trading Forex options. There are two foremost types of Forex options, the traditional option and the SPOT or the Single Payment Options Trading. Below is the basic information regarding the former.

What the traders refer to as the traditional option is the one involving the “call/put” transaction. This type gives the buyer the right to buy from the option seller at a certain time and price. This however does not oblige him to make the purchase. This option is called the call/put option since currency trading deals with the buying and selling of currencies in pairs. This pair is called a “fx quote”. EUR/USD (euro/U.S. dollar) is an example of a Forex quote. Currencies are always in pairs because in every Fx transaction, when you buy one currency, you simultaneously sell another. Using the sample Fx quote EUR/USD, if a Fx trader decides to purchase an option of one lot of EUR/USD at 1.2000, the contract is called a “EUR call / USD put”. If this quote increases to 1.3000, the trader may exercise his option to gain a lot for only 1.2000 which he can in turn sell for profit. If the quote’s price moves below 1.2000, the trader’s option will expire without profit and he loses just the premium.

Forex Trading – This Proven Method Gives You a 90% Chance of Success!

admin — Tue, 09 Mar 2010 20:29:51 +0000

The method is selling option premium on currencies. Option buyers have a 10% success rate, so the option seller who grants the option has a 90% success rate. Many forex traders never consider selling options and this article is all about selling option premium… So if you can have a 90% chance of success selling forex options, why don’t more traders do it? The answer is – most traders prefer the idea of buying an option with unlimited gains and limited risk, and a low chance of success, to being on the other side of the option which offers a capped small gain and unlimited risk, with high odds of success. If you want to be an option seller you have great odds – but you must be mindful of the risk and the way to control it is as follows. – Sell option premium on high volatility up or down against the prevailing trend – Spread your risk across several positions- Use time decay to your advantage and sell near expiry when time is decay is killing valueSelling option premium is not for traders who are not confident, have a small account or don’t like risk – it’s a game for people who know what their doing. An option may have 90% odds of expiring worthless – but that’s at expiry and prices can of course move “in the money” for the buyer in that period, or move against you. If however, you don’t mind trading tops and bottoms and can calculate over bought and oversold scenarios, you are confident in, it’s one of the best ways to make money long term. Sure, you have a capped small gain but these mount up over time and can build serious wealth long term. There are not many opportunities to trade with 90% odds of success – but that’s what selling option premium gives you and for traders who are confident in their marketing timing, the rewards long term are huge.

3 Attractive Benefits You Can Get From Forex Options

admin — Tue, 09 Mar 2010 08:48:25 +0000

Forex options can offer numerous benefits whether you are a new or veteran Forex trader. There are no special skills required if you trade in options. However, you need special knowledge and skills in determining long term currency movements. That is because your transactions will rely primarily on how you analyze market movements. You will base your options trading according to your analysis of currency market trends. You should seriously consider Forex options trading especially if you want minimize your risks at the Forex market. Here are the top 3 attractive benefits you can get from options trading. 1. If you can predict market movements correctly, your profit potential would be unlimited. That is because for every fixed price you will buy in options trading, it could earn several folds once the currency prices move in your favor. 2. You can minimize losses in options trading. In case the market goes against you, then the only thing you can lose is the money you invested on options transactions. This means your primary Forex account will be shielded from great risks due to price fluctuations. This way, you will still have available money to invest on other options or to engage in spot cash trading. 3. You will have full control over the price of options and the time when to end the transaction. This gives you more flexibility and you can fully apply strategic projections and analysis on your Forex trading approaches. These are top benefits you can get from Forex options transactions. They can become very lucrative and could give you significant profits.

How to Make Money with Future Options Trading

admin — Mon, 08 Mar 2010 21:49:52 +0000

The future option trading has set a new trend that is drawing more and more investors to the stock market. The stock promoters and other parties involved play an efficient supportive role to the traders who are active participants in the stock market. It also allows you to trade in a number of items like cotton, gold, bond to name a few. Stock indexing is another concept that is gaining popularity and is today a much sought after practice.
With future option trading brokers can connect better with the realistic situations. Getting quotes is made easier. It provides the traders and the brokers access to a lot of information. The studies and predictions are based on several models and practices. They try to interpret with the help of models like “Black-Scholes” and also involve various calculations like gamma, delta, theta and vega. The traders before entering into future option trading should however have a thorough knowledge of how the market functions and a good idea of the related technical terms, the studies involved for making various decisions.
Stockholders and even the future option trading brokers would be aware of new and better schemes like Brokerage services that cater to all the requirements, charts that would be helpful, regular quotes and the like. With time the tools and methods used for analysis have undergone a major improvement. Brokers and even investors in the stock market and option trading have better tools of analysis as compared to what was available a few years back.
This seems to be just the right time to make an entry into the future option trading so that you could actually make use of your acquired knowledge. Take advantage of the market movements and work out your investment strategy in a such a way that you make a profit. There are several tools available for study and you could try understanding the various tools and how they can be used to make the most of the prevalent market conditions.
The strategies that are used today is also a highly developed version of what was being used a few years back. Equip yourself with knowledge and make an entry to put your theoretical knowledge into practice. Read up all the available material to improve your knowledge base. Any sort of market news or information would also make a difference to your investment strategy and how the market would react. It would be best to be updated about the latest happenings and make the most of the available opportunity and enter the world of future option trading.

Easy Ways To Make Money From Forex Options Trading

admin — Mon, 08 Mar 2010 09:26:49 +0000

Forex Options Trading is not new in the trading circles but interestingly, not all Forex traders and investors trade in options. There is this notion that such type of trading is too complicated for the veteran traders and even more so for complete beginners. What many investors fail to realize is that Forex Options is a must in every investment portfolio. Such financial instrument (i.e. currencies) should be given the same respect as stocks, commodities and mutual funds. If played right, investors can gain substantial profits without even have to do the guessing game. Traditional trading methods rely on predicting the market, but Forex Options rely on Non Directional Trading method wherein there is no need to keep guessing how the market price will behave at a specific time frame.It’s easy to be sceptical about such revolutionary trading method but it has been established that there are easy ways to make money from Forex Options Trading. You can stand to get a profit by buying an option and exercise your right when the difference between the strike price and the market price is favourable to you. On the other hand, if you are the seller, you can already earn by the premium paid to you by the buyer; that is on top of the profit you will get if you exercise your right to sell depending on the prevailing price. It is considered relatively less risky because you can hedge thus letting you have unlimited earning potential and limit your losses, which in turn give you more ways to make a profit.

Spot Trading in Forex

admin — Sun, 07 Mar 2010 08:50:53 +0000

This trading is one of the two options and the one which offers traders the flexibility. There are two styles within the spot trading too. They are the traditional option and then the SPOT option which stands for Single Payment Option Trading.
The traditional option let the buyer purchase a contract to buy the required number of lots at a time and price of mutual choice. This is slightly different from the stock market where the opted lots are always bought and sold on standard settlement cycles. This is follows the over-the-counter nature of trading of forex. When option expires and the set price is not attained, the buyer only pays the options seller the premium which equals the difference between the expiration and options price. If the price hits the set price, buyer gais the lots and can sell them off for profit in the cash market. The premiums payable to the options seller is a little higher here than that of the SPOT trading contract.
Single Payment Option Trading- SPOT
SPOT trading is pretty simple and straightforward. The seller offers a price scenario; say for example EURO/USD will cut through a particular price within a specified period and seeks price offers. If the price break comes through, the seller immediately gets cash deposited into his account.
SPOT trading is especially attractive to traders because of the advantages inherent within it.
1. You stand to get the cash if your call is right otherwise you loose only your premium.
2. SPOT offers a number of different choices and not just one fixed to opt for unlike in traditional options trading.
But Why Traders Prefer SPOT?
Out of the appealing reasons some of them are listed out here.
1. Your downslide is protected to the limit of your premium which is the paid up value of the lots.
2. Payment needed to make is lighter than the cash market.
3. The biggest advantage is the freedom to set the prie and expiration date.
4. Traders can hedge the SPOTs against cash positions and minimize risk
5. When you anticipate fundamental changes to a currency you need not put at stake your entire capital to enter into open positions.
There are certain downsides for SPOT trading in forex too without which I suspect everyone would be trading SPOT market rather than cash market.
1. Premium is a function of strike price and date so the risk /reward ratio is variable
2. You can’t change mind midway and trade the SPOT options unlike traditional options or cash market, so predicting exact price and date could be risky.
When entering into positions keep in mind the time function as longer periods load higher premiums.

Trading Observations and Evaluation (March/2009)

admin — Sat, 06 Mar 2010 20:55:13 +0000

Caught in the uncertain and volatile markets of the past couple of months, I was finding it extremely difficult to yield consistent returns in short-term trading. My options included:1. Getting out of trading (for now) and take a break.2. Go with buy and hold strategy (at least consider it).3. Go with equity options (to accommodate a dwindling capital base).4. Go with day trading.I stopped trading in my margin account for about 2 weeks until I realized that I need to finance my monetary needs. The risks and the losses were wiping me out monetarily and psychologically. Cash was safe but it guaranteed a zero return.I reviewed my trading methods and strategies and concluded they were sound. So why was I not succeeding? The basic answer is that I was caught on the wrong side of trends as well as being subjected to the stock market volatility. And when I got into trouble, I would not take my losses early enough; I wait and get bigger losses, then I am left with no choice but to rationalize a paper-loss and wait for recovery. Most of these things are within my own control, so I need to shape up. The one area that is not within my control is the volatility. That is the market sentiment at the moment – too much uncertainty where news and rumor would drive the markets to swing in the opposite direction. You can try to react to the volatility (flipping trends) by taking early losses but the fact remains that the markets are volatile.The thought of a buy and hold strategy lasted for a few minutes until I realized it just will not work. If I knew this is the market bottom and if I knew that we were entering into a long-term bull market, then sure, buy and hold and collect my profit a year from now. Nobody has a sufficient crystal ball.I started looking at equity options and realized that there is way too much uncertainty and risk associated with options trading. The leverage is there for a big percentage gain requiring a smaller capital outlay – that is an attraction for sure. But the underlying requirement is to get the stock trend direction right. Just as easily as you can make the 50% options gain, you can lose 50% if you are on the wrong side of the trend. Oh, options have an expiry date so the options trader has time. That time costs you in terms of the erosion of the options premium due to the time component. And doing combinations (spreads and straddles) is complex and I’ve never been able to see the light on making them work. I have not given up on using equity options for stock market trading gain; I simply have not been convinced it is my best choice.Then I got to looking at various sites offering services and systems for day trading as well as options trading. Both were inspiring with claims of 15% per month gains. That got me thinking about day trading since I was already staring at the real-time candlestick minute charts for my short-term inter-day trading. The only difference was to take as many gains as the market would give me with the view of taking $0.05 to $0.10 per position. On a 1000 share trade, that translates to $50 to $100 gain less the $14 commission to open and close a position.Without getting into the nuances of day trading along with strategies and methods, I ended up making 15% net gain in my margin account from March 11 (after my 2-week break from trading) to March 26 (I was away from trading on March 27). I continue to crank the day trading machine to see if I get continued success in this volatile and uncertain market.StockTradersPlace (http://stocktradersplace.com) provides a trend following system based on candlestick technical analysis. http://stocktradersplace.blogspot.com provides a “Stock Trading with StockTradersPlace” companion guide. Empower yourself and show that you can repeatedly execute winning trades using StockTradersPlace as an element of your trading tool box. StockTradersPlace provides viewable demo stocks for guest users and a 14-day free trial for sign-up to view all supported stocks.Copyright © Mar 2009 StockTradersPlace.com

Forex Options Trading – What is Forex? (part 1 of 2)

admin — Sat, 06 Mar 2010 08:36:36 +0000

Forex or foreign Exchange or FX involves the buying and selling of one currency against another currency. They are always traded in pairs e.g. EUR/USD, USD/JPY. So when you are buying Euro dollars (EUR) you are also selling the US dollars (USD) in exchange for the Euro dollars. If you want to buy US dollars then you would sell the Euro dollars in exchange for buying the US dollars.

An example that we would encounter frequently is when we travel overseas and need to exchange the local currency for the foreign destination currency and we would head to the local money changer or bank to buy the foreign currency. This is a good example that we are familiar with.

By buying and selling currencies at the money changer or bank we are already involved in this huge foreign exchange market. Banks and central banks, investment funds, hedge funds, exporters and importers, companies and retail forex traders are among the main participants in the forex market.

Banks trade to generate profits and also act as buyers and sellers of one currency against another for their clients trading and commercial transaction. While central banks buy and sell currencies to hold as reserves and protect the reserves. They also act to moderate their country’s currency strength to facilitate reasonable terms of trade in the international markets for their exports and imports.

Investment funds have a percentage of their portfolio in the forex market for many reasons like diversification, hedging, etc. While most hedge funds will speculate on currencies as it is the biggest market in the world thus able to accommodate their large trading size which is quite difficult to do in the equities or futures market.

To be continue.. at – Forex Options Trading – What is Forex? (Part 2 of 2)