Options as a Strategic Investment » Options Trading http://optionsasastrategicinvestment.net Option Trading as your main investment strategy Sat, 31 Jul 2010 21:50:46 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Options Mastery Lesson: Straddles http://optionsasastrategicinvestment.net/options-mastery-lesson-straddles http://optionsasastrategicinvestment.net/options-mastery-lesson-straddles#comments Mon, 18 Jan 2010 11:23:27 +0000 admin http://optionsasastrategicinvestment.net/options-mastery-lesson-straddles In our previous reports, we discussed option strategies that feature the use of options in combination with stock such as the buy-write and the use of options against each other in the form of spreads. We will focus on the Straddle, which uses options in unison with each other.
Unlike a spread that features a long option versus a short option, the Straddle features one position (either long or short) and two options – a call and its corresponding put. A Straddle is the strategy composed of a long (or short) call and a long (or short) put where both options have the identical strike price and expiration month.
When putting together a Straddle, the construction should be as follows:
-Different options (call and its corresponding put)
-Same stock
-Same strike
-Same expiration
-One-to-one ratio
Straddle positions are referred to as ‘long Straddle’ or ’short Straddle’ depending on whether you purchase the call and its corresponding put (long) or sell the call and its corresponding put (short). For example, we will construct the long Straddle by purchasing both the July 60 call and the July 60 put. We will construct the short Straddle by selling both the July 60 call and the July 60 put. It is important to note that the Straddle is a one-to-one ratio strategy. For every call that you buy (or sell), you must purchase (or sell) exactly one corresponding put.
Straddle Scenarios
The Straddle relies on movements in stock price or in implied volatility to establish profit opportunities. The Straddle buyer looks for the stock to move aggressively in either direction or for the anticipated perception of possible aggressive moves that will bring about an increase in implied volatility.
Sellers of the Straddle hope for the opposite scenario. A lack of stock movement or a perceived lack of movement, causing implied volatility to decrease, will create profitable scenario.
Straddle Mechanics
Let’s look at how a Straddle works. In our illustration, we see the July 65 Straddle. We can either buy or sell the Straddle. If we purchase both the July 65 call and the July 65 put simultaneously in a one-to-one ratio we have a long Straddle. To construct a short Straddle we would sell both the July 65 call and July 65 put simultaneously in a one-to-one ratio.
Continuing with our illustration, we will set the price for each of the options. With our imaginary stock trading at $65.50, the July 65 call trades at $3.13 and the July 65 put trades at $2.47. The combination of these two prices accounts for the $5.60 cost of the Straddle. Fast forward to expiration and observe what happens to the value of the Straddle at different stock prices.
Price Call Put Straddle P & L
50 0.00 15.00 15.00 9.40
55 0.00 10.00 10.00 4.40
60 0.00 5.00 5.00 -.60
65 0.00 0.00 0.00 -5.60
70 5.00 0.00 5.00 -.60
75 10.00 0.00 10.00 4.40
80 15.00 0.00 15.00 9.40
As you can see, the Straddle’s value increases the further the stock moves away from the strike. The closer the stock is to the strike, the lower the value of the Straddle at expiration. The chart clearly shows that the more the stock moves away from the strike, the higher the Straddle’s value becomes. Conversely, the closer the stock finishes to the strike, the lower the value of the Straddle. Owners of Straddles want and need movement while sellers of Straddles want and need stagnation.
How does this example influence your investment strategy? If you feel that a stock is likely to move aggressively in either direction or if you feel that implied volatility is likely to increase, possibly due to impending news (such as earnings, FDA approval, etc.), look into the purchase of a Straddle. If you feel a stock is likely to enter a stagnant phase, or if you feel that implied volatility is likely to decrease, the sale of a Straddle can be a very profitable trade for you.

]]> http://optionsasastrategicinvestment.net/options-mastery-lesson-straddles/feed 0 Options Trading Mastery: Behavior of the Time Spread http://optionsasastrategicinvestment.net/options-trading-mastery-behavior-of-the-time-spread http://optionsasastrategicinvestment.net/options-trading-mastery-behavior-of-the-time-spread#comments Sun, 10 Jan 2010 11:24:56 +0000 admin http://optionsasastrategicinvestment.net/options-trading-mastery-behavior-of-the-time-spread Time spreads can be a profitable investment strategy if you understand the concept of time decay. A time spread is designed to take advantage of the fact that an options decay curve is non-linear, that is, an option’s value does not decay evenly over time. As an option gets closer to expiration, its rate of decay increases meaning the option loses value more quickly. That decay rate increases progressively until expiration.
An option’s decay rate begins to accelerate when the option is about 45 days out. It picks up steam at 30 days out and really comes under decay pressure at about 15 days out. This scenario is similar to a boulder rolling down from a hilltop. As it starts, it rolls slowly, then gains more speed, and momentum the further it gets down the hill until it achieves its maximum speed at the bottom. Option decay acts the same way – gathering speed and momentum as the option approaches expiration.
In time spreads, both options have the same strike price that remains constant. Each option’s value decays at different rates and over different lengths of time. The option, with one month until expiration, experiences value decay at a faster rate than the one with three months until expiration.
If you buy an option with three months to go and sell an option with the same strike but with one month to go, you have set up a spread between the two options values (prices). As time passes, your short option loses value more quickly than your long option that decays more slowly. The value of the spread widens and you profit from that spread’s expansion. This is the fundamental behavior of the time-spread.
Consider that you are long the 60-30 day time spread. That means you are long the 60-day option and short the 30-day option. We will assign a price of $3.00 to the 60-day option and $2.00 to the 30-day option. Since you pay for the one and receive payment for the other, the bottom line cost of what you put out for the spread is $1.00.
During the same 30-day period, it goes from $3.00 to $2.00. Remember, the spread’s bottom line cost was $1.00. The 30-day option (now expired) will be worth $0 while the 60-day option (now a 30-day option) will be worth $2.00. If you had invested in this spread, after 30 days decay you would be holding one option worth $2.00. The investment has provided a nice return!
This is an ideal situation. The stock price and volatility remain constant and you capture the decay. The time spread has worked just as it should. It does work that way sometimes, but nothing works as it should all the time. As we know, stock prices and volatility levels do not remain constant. They are always changing. In the time spread strategy, the investor must choose opportunities carefully. In addition to picking a stock that will be in a stagnant period, the investor should look for two other situations where the spread has profit possibilities: changes in volatility and to a lesser degree stock price movements.

]]> http://optionsasastrategicinvestment.net/options-trading-mastery-behavior-of-the-time-spread/feed 0 The Art of Hedging in Options Trading http://optionsasastrategicinvestment.net/the-art-of-hedging-in-options-trading http://optionsasastrategicinvestment.net/the-art-of-hedging-in-options-trading#comments Sun, 03 Jan 2010 11:22:38 +0000 admin http://optionsasastrategicinvestment.net/the-art-of-hedging-in-options-trading A hedge is an investment made to offset the risk incurred by entering another investment. Essentially you are setting up a bet on both sides so that one offsets the other and you can end up winning either way.
Think of it as a form of insurance.
Options are frequently used in hedging.
For example, you can speculate that the market price will rise in the future and buy a call today. But, because the market is uncertain and you’re not certain it will rise, you simultaneously buy a put option.
By carefully selecting the appropriate combinations of strike price, expiration date and type of option an investor can minimize risk and maximize the probability of making a profit.
So how does it all work?
Well let’s take a look at a common hedging strategy: the Strangle.
In this strategy, an investor holds both call and put options with the same maturity, but with different strike prices.
The contracts are purchased ‘out of the money’ and are therefore cheaper. ‘Out of the money’ means the strike price of the underlying asset is higher (for a call) or lower (for a put) than the current market price.
For example let’s say Intel (INTC) is currently trading at $40 per share. You could buy one call at $3 and one put at $2 with the call having a strike price of $45, the put $35. Your total investment would be ($3 x 100) + ($2 x 100) = $500.
If the price over the length of the contracts stays between $35 and $45 the total possible loss = $500, the cost of the options. So your risk in this kind of hedge is limited to $500.
Suppose the price drops near expiration to $25. The call would expire worthless, but the put is worth ($35-$25) x 100 = $1000 – ($2 x 100) = $800. Subtract the cost of the call, $800 – $300 = $500. So that’s your net profit (ignoring commissions and taxes).
The difference between the exposure and the potential profit represents a kind of hedge. Though you are essentially ‘betting’ that the price could go either way, your downside is limited to the combined cost of the put and the call.
There are, not surprisingly, nearly as many hedging strategies as there are investors. A couple of common types are:
The collar: Hold the underlying asset and simultaneously both buy a put and sell a call of the same asset. The short call limits gains, but the long put hedges against any losses from the underlying asset.
The protective put: Buy the asset and also buy a put option on the same asset. At expiration, the asset may have gained (eliminating the value of the put option), but the rise in the asset offsets the loss.
And there are a whole host of other variations. Most do involve speculating on the price direction of the underlying asset, while taking advantage of the leverage, cost and timing characteristics of options. As with any investment strategy, make sure you understand the pros and cons before laying down your bet.

]]> http://optionsasastrategicinvestment.net/the-art-of-hedging-in-options-trading/feed 0 Balance of Risk and Reward in Options Trading http://optionsasastrategicinvestment.net/balance-of-risk-and-reward-in-options-trading http://optionsasastrategicinvestment.net/balance-of-risk-and-reward-in-options-trading#comments Sat, 02 Jan 2010 23:16:31 +0000 admin http://optionsasastrategicinvestment.net/balance-of-risk-and-reward-in-options-trading You don’t need to be a trader or an investor to know that the higher the risk, the greater the reward. This concept is true in all aspects of life and business. The more risk you are willing to undertake in life, the more life returns to you. Indeed, risk and reward are directly proportional and often in trading and investment, the more risk your account is exposed to, the greater the return on investment when things work out as planned.
Knowing that risk and reward are proportional makes finding the correct balance of risk and reward extremely important to all kinds of traders; stock traders, futures traders, options traders etc. There is no one solution that works for everyone and the correct balance is decided upon the risk appetite and risk tolerance of the individual trader.
For stock traders, balancing risk and reward primarily involves adjusting the amount of growth stocks and defensive stocks in one’s portfolio. Generally, the more growth or speculative stocks in one’s portfolio, the greater the risk due to greater uncertainty and therefore the higher the gain when things works out as expected. The more defensive stocks in one’s portfolio, the more predictable returns become and therefore the lower the return as these stocks does not generally move a lot. This degree of risk / reward balancing is at best crude compared to the surgically fine degree of balancing you can have in options trading.
Stock options are the most versatile trading instrument in the world right now due to the wide array of options strategies that are employable. Yes, not only can risk and reward be balanced through employing different mix of strategies in your portfolio, there are also different risk and reward profiles achievable by each individual options strategy. There are options strategies that range from making over 1000% profit while risking all your money to options strategies that make a mere 0.01% return while risking nothing as well as every centimeters in between.
As long as you understand what your personal risk appetite and risk tolerance is, you will be able to find an options strategy that suits your needs 100%. Here’s a general outline of the kind of risk reward balance that can be achieved through options trading:
Highest Risk, Highest Reward – OTM Call / Put buying
This is the options strategy that produces the legendary 1000% profit that amazed so many beginners. What those ads did not tell you is that the risk is losing ALL the money that you put into the strategy. This options strategy involves buying out of the money(http://www.optiontradingpedia.com/out_of_the_money_options.htm)call options when you think a stock is going to go up or buying out of the money put options when you think a stock is going to go down. Professionals use this options strategy with only a very small portion of their money in order to place a bet on an uncertain event such as leveraged buyout. Some lucky amateurs use this options strategy with all their money and then become millionaires overnight. The downside of this strategy is the fact that if the stock did not move far enough in the direction you expected it to, you can lose all the money you put into the strategy. That is also why so many beginners break their accounts overnight in options trading.
Various Degrees of Risk and Reward – Options Spreads
There are literally hundreds of possible options spread strategies out there with various degrees of risk and reward for every market condition. There are more aggressive bullish, bearish, neutral and volatile spreads and there are more conservative ones. All of them shares the same logic of higher risk compensated with a higher profit potential.
Lowest Risk, Lowest Reward – Options Arbitrage
Yes, there are literally risk free trading opportunities in options trading which also returns very small, sometimes negligible returns. These are the legendary options arbitrage strategies. Options arbitrage strategies such as conversion/reversal aims to make a fixed return totally risk free through simultaneously buying the underlying and shorting the overpriced synthetic equal or vice versa. The problem with such strategies is that the returns are so low that most of the time, it’s even lower than the commissions you will pay for the trades made. Even if you manage to return a positive return, the return can be as low as 0.01% in percentage terms. That is why arbitrageurs aim to make an absolute return using enormous amounts of money.
With this in mind, the most conservative traders may choose to specialize totally in arbitrage strategies (http://www.optiontradingpedia.com/options_arbitrage.htm) while the most aggressive traders may choose to specialize in leveraged speculation using OTM options. Everyone else would be able to find something to suit your risk appetite in the hundreds of spread possibilities. This degree of flexibility and range of risk/reward possibilities makes stock options the most versatile trading instrument in the world today and why options trading (http://www.optiontradingpedia.com) is so popular these days.

]]> http://optionsasastrategicinvestment.net/balance-of-risk-and-reward-in-options-trading/feed 0 Options Trading for Beginners: Making More of Your Money http://optionsasastrategicinvestment.net/options-trading-for-beginners-making-more-of-your-money http://optionsasastrategicinvestment.net/options-trading-for-beginners-making-more-of-your-money#comments Fri, 01 Jan 2010 23:45:36 +0000 admin http://optionsasastrategicinvestment.net/options-trading-for-beginners-making-more-of-your-money Options trading is an investment vehicle for experienced investors, who track their investments proactively. It is not a suitable vehicle for investors looking to maintain assets without direct management, as it’s very much a timing related purchase and float. Options trading is an excellent technique for using financial leverage to make bigger purchases.

A very simple example of an options trade would be this: If you’re selling a commodity worth $100,000 (say 1,000 shares of a stock worth $100 per share), and a prospective buyer likes the price, they can offer to pay for an option to buy all of those commodities, while spending the time researching other investments. Say, for example, they’re offering you $1,000 to hold that price for them while they gather the rest of the funds, which they say will take three months.

When three months passes, they either pay the remaining $99,000 for the shares of the stock, or forfeit the option. If the stock goes up in price to $110 per share from $100, they can either buy the stock, or sell the option to someone else for the difference between the old price and the new price. Either way, the person holding the option stands to make a tidy profit.

Options trading has its own set of terminology, which we’ll get into a bit later, but the basic premise is this: You buy an option to purchase a stock or commodity at a given price; the option expires after a given time period (American style options trading), or the option must be exercised on a specific date (European style options trading).

There are two principle types of options that are traded. Calls increase in value as the stock price rises, and puts increase in value as the stock price declines. (There’s a lot of fiscal mathematics behind both of these, but the layman’s explanation will suffice.) In most cases, options are sold to other investors just before they expire; most options traders don’t end up holding shares in the stock they have options for; the options are bought, sold, liquidated and transacted before their expiration dates. It is possible to have both call and put options on the same commodity or stock; this is a “straddle” strategy.

Options trading is not a casual investment strategy; it’s a strategy used by people who are investing as their profession, or who intend to manage their own wealth directly. The benefits of options trading is flexibility, coupled with (in the case of put options) a bit of a countercyclical strategy for bear markets.

The key to options trading is market research on specific stocks; an options trader will be researching stocks that are either slated for a price spike (call options) or are likely to undergo a price decline (put options). How quickly these options express themselves is a measure of market volatility, and most options traders will try to take a neutral position – they’ll put in put and call options to cover both directions, and to cover themselves against broad market trends.

Options arbitrage is a lower risk strategy done by floor traders, and can be short term profitable, with good liquidity. The aim is to swap options with other traders before certain factors influence the market, or to get rid of underperforming options while still getting some profit out of them. Options arbitrage is perhaps the best place to start in options trading for a novice.

]]> http://optionsasastrategicinvestment.net/options-trading-for-beginners-making-more-of-your-money/feed 0 Options Trading Edge http://optionsasastrategicinvestment.net/options-trading-edge http://optionsasastrategicinvestment.net/options-trading-edge#comments Wed, 23 Dec 2009 12:24:29 +0000 admin http://optionsasastrategicinvestment.net/options-trading-edge Many private traders deem that options are thought to be traded by experts with good mathematical skill. There are two reasons why many private traders think so, that are. trading options are too risky and difficult. Many private traders think that it is easier to just trade stocks or futures. So, a simple question, if trading futures or buying stocks looks so much easier and less complex to do, then why options are available to be traded? The actual reason is that options, which are unlike other trading vehicle, can offer a trading edge to the private traders and allow them to cover almost any investment strategy and risk profile with flexibility. In many ways, options are the most superior trading vehicles that many traders use nowadays. To trade options, you certainly do not need to be an expert in financing.

In the book “The New Market Wizards” written by Jack Schwager, concludes that nobody can win without an edge, even you have the world greatest discipline and money management skill. If you trade futures on the All Ordinaries Share Price Index (SPI), you have to know exactly what is your trading edge; particularly, if you are a professional floor trader. With the trading edge, you should able to see the buy and sell orders that coming into the trading pit and also who is buyer and seller. Besides, the speed of execution of your orders and the transaction costs also should able to see. The popularity of the stocks, options and futures is increasing; therefore, many people trade these products. Only a small proportion of these traders apply a real trading edge. The main reasons for the unsuccessful of many private traders in the financial markets are due to the lack of a trading edge, poor risk management and insufficient capital. The key point here is to find an edge, utilize it consistently and use the right risk and money management techniques. When the odds are in your favor, it is better that you learn how to trade options. It is also importantly when the odds are not in your favor, make sure you stand aside. You are doing yourself with the best possible chance of success if you doing so. Trading systems are as many as traders. We won’t trade a system if it doesn’t provide us with some sort of edge. If you have a system, which is able to give you an edge, why not further enhance your edge by trading options in a right circumstance. Before placing a trade, try to get as many factors that going in your favor as possible. By practicing this, you provide yourself with a much greater chance to success in the long run.

Without doubt, with any form of trading, there are no absolute guarantees. You can’t help compared to the many of the people who do not know anything about options and trade without an edge. But, you have a better chance to succeed in the long run and reach your financial ambitions. Flexibilities that can be offered by options are as follows:

i) Profit gained from an accurately anticipating rising or falling market. ii) With a relatively small disbursement, your potential returns can be greatly magnified.

iii) If the market goes to the way that you anticipate, you have unlimited profit potential, whilst you limit your risk by choosing an amount that you afford to risk.

iv) Profit still can be gained by correctly picking options where the market will not go.

v) Profit gained from flat or non-trending phases markets.

vi) Profit gained by letting the time passes by.

vii) Profit gained at an increasing rate when the market moves further in your favor.

Extremely flexible trading tool is option. You can use options trading strategies that are precisely suit your view of market, whilst sewing them closely to your personal risk tolerance level.

People who trade options for a living and as their business will try to understand and apply the principles, which have been outlined in this article. They do so because they know that there is an edge for then to be gained compare to the people who don’t. They are similar to the typical casino gambler if they do not trade with edge; their money will be destined to be lost ultimately. They are exactly like the casino itself if they trade with trading edge. For those people who trade the markets to make their living, you probably don’t have the chance to talk with them. Their occupation looks exotic and these people are imagined as weird mathematical geniuses who could give their money to Kasparov to run it in a chess tournament. The flair of occupational options traders couldn’t be going beyond from the veracity. Although many of the professional options traders who involve in the financial markets are intelligent people, they were not in the genius category. Nevertheless, they have one thing in common among them. They knew and applied certain unique principles in their options trading. The principles that they utilized offered then an edge to successfully trading in the market. Therefore, throughout their options trading life, they earn a good living.

You don’t have to be a professional options trader. The edge offered from the principles to the professional options traders also available to the private traders as well. Practically, these principles can be learnt and applied by yourself and the odds can be helped to put it more squarely in your favor. All the advantages that most of the professional options traders have may not be possessed by you. By using the same principles that they used, you can learn to make your trading more selective. In this way, you too can benefit from a trading edge.

]]> http://optionsasastrategicinvestment.net/options-trading-edge/feed 0 Know What Does an Investment Really Means http://optionsasastrategicinvestment.net/know-what-does-an-investment-really-means http://optionsasastrategicinvestment.net/know-what-does-an-investment-really-means#comments Sat, 12 Dec 2009 23:21:24 +0000 admin http://optionsasastrategicinvestment.net/know-what-does-an-investment-really-means  

Investment is an expansive word that encompasses a wide variety of things, but on tracing the word back to its roots, it is funny that this word finds its origins in the Latin word ‘vestis’, meaning garment. Digging in a little deeper, we find that the word was used in reference to putting things (money or other claims to resources) into others’ pockets, which though simple, is the most effective way of defining this word. By investing our money, or resources, or time for that matter, we are making a definitive contribution to an activity or the acquisition of an asset that is capable of producing a recurring profit. But the flip side to this two sided coin is the use of the misnomer profit, which is not necessarily what the investor ends up with. Investment in financial circles, is of two types –

The first being a Real investment, which deals the acquisition of tangible property, such as an automobile or a house. The other type of investment is the acquisition of Financial assets, such as money in a bank, or stock market shares, that one can trade or sell at will.

But from an investor’s standpoint, one worries only about the ‘recovery’ of one’s investment, and hence the classification would be on the basis of whether his or her investment earns him money, or ends up with him going ‘belly-up’ if you could use the expression.

So how does one toe the fine line and find the right balance which would be the difference between hero and zero. The trick lies in one’s ability to filter and select only those assets that have a relatively high probability of success, and I use the word relatively here because some of the most brilliant ideas do not make it big because of circumstance, which unfortunately is out of human control. It is a person’s cognitive ability to analyse the situation at hand and take calculated risks that separates the successful from the not-so successful.

One often hears or reads about investment guaranteeing immediate results. I would add that to redundancy in wording. A key in investing is patience and persistence. One cannot expect his input to immediately produce returns. A parallel can be drawn between the lives of an investor and a mosquito. One cannot expect returns too soon; even a mosquito doesn’t get a pat on the back until he’s nearly completed his task.

During the course of writing this article, some research on the internet led me to many sites that gave tips on successful investing. Kind of surprising is it not that with such potent advice available you don’t find as many Ambanis or Donald Trumps walking down the road. The real reason is that you do not become a successful investor by reading about how to become one, but by going out there and developing this intuitive feel to the ground reality. Technology is growing by leaps and bounds and this will only enhance your ability to keep in touch with your investments. But it is the discretion of the investor whether he adapts to this technology and raises the bar just that little bit more for his competition.

]]> http://optionsasastrategicinvestment.net/know-what-does-an-investment-really-means/feed 0 Bewildered by Options Trading? Don’t Worry, Help is on the Way! http://optionsasastrategicinvestment.net/bewildered-by-options-trading-dona%c2%80%c2%99t-worry-help-is-on-the-way http://optionsasastrategicinvestment.net/bewildered-by-options-trading-dona%c2%80%c2%99t-worry-help-is-on-the-way#comments Sat, 12 Dec 2009 11:52:59 +0000 admin http://optionsasastrategicinvestment.net/bewildered-by-options-trading-dona%c2%80%c2%99t-worry-help-is-on-the-way To the average citizen, the stock market itself denotes something quite mind-bogglingly complex. Of course, options trading simply makes the merely complex truly confounding to such individuals. Providentially, the modern world is all about making complex things simple and this process has been aided effectively by the internet. Options trading is no longer as remote and inaccessible as before, patronized only by the most hardened of stock market junkies – if you’re interested enough to learn about it!
First off, why do people trade options? The answer is that options trading provides the investor a certain level of security. Essentially, if your speculations are correct that an asset’s value will increase, you are rewarded with a large profit or more than you invested for. One the other hand, if an asset’s value falls, you only lose what you bought an option for which could be much less than the price of the asset itself. Advanced investors however even have techniques to help them benefit from options even when the market goes down.
What’s important to remember though, is that options trading is not to be dabbled in lightly. Options trading requires time, research and dedication, resulting in options trading being an investment tool used only by people for whom investment is a profession and/or people who want to manage their wealth directly, without the need for middlemen. This is because options trading is mainly dependant on timing as a major factor when making purchases and floating stocks on the market. You can’t possibly be detached – it’s all about direct involvement.
If you’re interested in the world of options trading, and looking to invest, it is very advisable to take up classes. There are a number of very comprehensive websites offering up-to-date and detailed information on how best to maximize your gains from options trading. These courses give you the chance to learn absolutely everything you can about the market, how it works and most importantly, how best you can use its trends to your own financial advantage. Real-time trading and in-depth technical analyses are often features of these classes, thus giving you the opportunity to view options trading as it happens.
Hands-on knowledge is quite indispensable for options trading and classes give you the chance to make mistakes and not come off too badly from them. It is important thought, to choose the right course and, of course, avoid scams! As much as the internet is a boon, it can also be quite deceptive – so choose your options course wisely. A course that offers you one-on-one tutoring, live examples of trading and in-depth theoretical knowledge is usually a good bet. Options trading courses can be expensive, but they’re worth the investment considering the amount of time and money that you will ultimately be investing in the options trading world!

]]> http://optionsasastrategicinvestment.net/bewildered-by-options-trading-dona%c2%80%c2%99t-worry-help-is-on-the-way/feed 0 Why Trading Stock Options is Better in a Recession http://optionsasastrategicinvestment.net/why-trading-stock-options-is-better-in-a-recession http://optionsasastrategicinvestment.net/why-trading-stock-options-is-better-in-a-recession#comments Thu, 03 Dec 2009 00:47:21 +0000 admin http://optionsasastrategicinvestment.net/why-trading-stock-options-is-better-in-a-recession The 2008 recession and stock market crash is the worst financial and economic crisis since the great depression. By Feb 2009, the Dow has dropped almost 50%, erasing all its gains since 1998. In terms of absolute points, the Dow has dropped over 7000 points, which is more than the entire Dow index before 1998. Without doubt, this stock market crash has rendered many traders and investors helpless in search for profit.
Even though profiting during such market condition is a really tough thing to do, traders and investors still bought stocks in hope of a recovery only to be disappointed again and again leaving a bunch of stocks in deep losses in their account. When money is used this way, what it really does is to rob investors and traders of cash for investing when the real recovery starts.
So, is there a way to place those bets with very little money and limit your losses to negligible amounts if your bet is wrong as it had been so many times in this stock market crash so far? Yes, the answer can be found in stock options trading (http://www.optiontradingpedia.com).
Everyone knows that stock options trading is risky and that you could potentially lose all your money. What everyone failed to recognize is the fact that stock options trading is also a risk limited way of trading for big profits while controlling potential losses to negligible amounts!
Stock options (http://www.optiontradingpedia.com/stock_options.htm) are contracts that allow you to buy a stock at a specific price no matter how high the price of that stock is in the future (Call Options (http://www.optiontradingpedia.com/call_options.htm)) or sell the stock at a specific price no matter how low the price of the stock is in the future (Put Options).
By replacing the buying of the stock with buying its call options, you will be able to control the profits on a stock using just a small amount of money. If the stock goes up, you simply sell the call options for the same profit as you would as if you bought the stocks. If the stock goes down, you lose nothing more than the small amount of money you paid for the call option contract. See where I am going with this? If you had bought only the call options of those stocks that you have bought all of last year, you would have lost only a small fraction of the losses that you would already have incurred through buying the stocks.
Let’s look at an example.
John and Peter have $15000 to invest with each and they both decided to buy shares of Apple Inc, AAPL, after it has dropped to $141 in October 2008, expecting a rebound. Peter decided to buy 100 shares with $14,100 and John decided to play it conservative and bought 1 contract of AAPL’s call options with strike price of $140 which was asking at $10.20 for a total price of $1020. 1 contract of call options allows you to control the profit of 100 shares of the underlying stock. In this case, John totally replaced the buying of 100 shares of AAPL with buying 1 contract of its call options. 2 weeks later, AAPL fell all the way to $85 as the recession deepened. Peter lost over $5600 while John lost only the $1020 that he spent buying the call options.
Assuming both Peter and John were right about AAPL and the stock rallies to $200. Peter would have made $5900 in profit while John would have made the same $5900 less the amount of $1020 that he paid for the call options.
See how buying stock options rather than the stock itself in this volatile condition allow you to make a few bets for a rebound without risking all your money? In the above example, Peter would only be able to make one bet once on AAPL with $15,000 while John would have been able to make those same bets more than 10 times at strategic support levels. Who would have a better chance of winning?
By replacing the purchase of stocks with controlling the same number of shares of that stock through its call options, you would definitely have a better chance of survival in this recessionary market condition. Be warned however, that you fully expect to lose the entire amount of money paid on the call options should the stock continue to go down, which is why you NEVER use all your money in a single trade.

]]> http://optionsasastrategicinvestment.net/why-trading-stock-options-is-better-in-a-recession/feed 0 The Many Benefits of Option Trading http://optionsasastrategicinvestment.net/the-many-benefits-of-option-trading http://optionsasastrategicinvestment.net/the-many-benefits-of-option-trading#comments Tue, 24 Nov 2009 23:16:56 +0000 admin http://optionsasastrategicinvestment.net/the-many-benefits-of-option-trading Option as a strategic investment is fast becoming the choice of many. The benefits that option trading offers are many and we shall discuss the same here. Option trading having many benefits it is actually a wonder as to why it was not a sought after means for investment for so long.
1. Option trading is not as risky as it seems if traded wisely. In case of option you do not require as much finance as you would do for stocks. As far as hedge is concerned, option trading seems to be the most reliable of them all. In case of option trading you have an insurance throughout he day, all seven days a week and not until the close of the market.
2. Option is very cost effective. You could be in a similar position as you would have stocks but by putting in much less as investment but the catch is that the investor needs to be careful and select the right call option so as to be in the same position as he would be with stocks. This stock replacement strategy is very cost effective.
3. Option as a strategic investment offers to its investors a high return on its investments. The return investors make on the right selection in option trading is far greater than any stock investment. Option can get you about 60-70% and even more on your investments and in the same scenario your stocks may give you a return of only about 10-15%. But there is a flipside to this. When option give you such high rate of return it is only when you have made the right choice but a wrong selection on the other hand can get you back by the entire 100%. So the returns are good but only when you take calculated risks.
4. Option as a strategic investment provides the investor with multiple options so as to attain their aim. Option offers the investors various alternatives if planned and executed well. An example to quote here would be how a margin would have to be paid if short selling is to be done. At times the margin quoted by the brokers is so high that the investor finds it difficult to go ahead with his plans. Then there are those who do not allow short selling by the investor thus again the investor going back to square one as far as his investment plans are concerned. This puts the investor in the back seat as he is unable to execute his plans and here is where the option trading comes into play. You wouldn’t find any broker who says that the investor cannot purchase puts when the market seems to be falling. This would give the option trader an advantage and he would be able to reap the benefits later.
An option trader can invest in the market not only when it moves up or down, when the prices are almost steady, a trader can also use the time factor where the prices are not moving significantly as a profit making opportunity. Thus it is only the option trader who gets a share in the pie in every kind of market.

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