Protective Put Secrets » Foreign Exchange

The Joy of Options

admin — Mon, 25 Jan 2010 08:26:06 +0000

Owning stock has only two, maybe three, possibilities. The stock goes up. Or the stock goes down. Or, as a third possibility, it does a little of both. If you buy a stock, all you want it to do is go up.
If you sell a stock short or close a position (or consider buying it and then decide not to , all you want it to do is go down. I call this one-dimensional trading. You’re long, you’re short, or you’re flat. Your gains and losses travel up and down the number line you may remember from elementary school in lock step with the movement of the stock. Not only that, but it takes a big move to make a big profit. And a big move against you can mean a big loss. Potentially all the way down to zero.
You need to add a second dimension to your trading. You need more choices than picking a direction and hoping you are right. You need to limit your losses, improve your returns, and increase your flexibility. You need options.
For many people, options are something to avoid, being dangerous, complex, and scary. I would like to introduce you to the joy of options. Any time you think you want to buy a stock, I’d like to get you in the habit of first looking at how you could do more with less using options.
In the stock and commodities markets, the type of option we just described would be known as a call. A call typically represents 100 shares of a stock. In the commodities markets, a single option contract represents a single futures contract. (For simplicity, from this point forward, I will talk about options on stock. Just remember that the same discussion applies to options on futures.)
Owning a call gives the owner the right to buy 100 shares (usually) of the underlying stock at the agreed upon strike price at or before the expiration date. (I say “usually” 100 shares because, due to splits or acquisitions, there are times when an options contract may represent something other than 100 shares.) Selling a call gives the seller the obligation to sell, if asked, 100 shares of the underlying stock at the agreed upon strike price any time up until the expiration date.
The other kind of option is called a put, and it is exactly the same as a call with one simple difference. A put gives the owner the right to sell 100 shares (again, usually) of the underlying stock at the agreed upon strike price at or before the expiration date. You can think of a put as insurance. No matter how badly the stock price crashes, having a put means that you can sell your stock for the strike price. On the flip side, selling that put means you may be obliged to buy stock at far more than its current market price.
An important distinction to always keep in mind: Buying an option gives you rights. Selling an option gives you obligations. Buying an option cannot cost you more than what you pay for the option. Selling an option can cost you far more than what you receive for selling the option.
Let’s examine the terminology of calls and puts. The underlying is the actual instrument such as a stock or commodity that is being represented by the options contract. In the real estate example, the house would be the underlying. Options are said to be derivatives because their value is directly tied to or derived from that of the underlying. An option has no meaning without an actual asset underlying it. It is the right to buy or sell that underlying asset that gives the option a reason for being and some value.
The strike price is the agreed upon price for which the underlying can be bought or sold under the terms of the option contract. In the real estate example, the strike price was $100,000. The expiration date, obviously, is the date when the option expires. The day after expiration, an option is worthless. This is the single most important fact about options that you must remember. This is why your friends think you are crazy for your interest in options. Unlike a stock, which you can hold forever, an option has a clearly defined shelf life.
One term remains, and that is the premium. The premium is what you pay for the option, when you are the buyer. Or what you receive for an option, when you are the seller. In our real estate example, the premium was $500. That’s what it cost you to hold the right to buy the house any time in that thirty-day period. The last day of the thirty-day period would, again, be the expiration date.
We have barely scratched the surface. I say that not to intimidate you, but to make you realize that you only have enough knowledge to be dangerous to yourself. Please do not think that you are ready to go out and buy calls or place spread trades. You are not. You don’t know how an option moves relative to moves in the price of the underlying. You don’t know what time does to the value of an option. You don’t know what volatility is or how it plays into option prices. You don’t know the types of spreads or what they are used for.
Please, please get yourself better educated before you start putting money into option trades. Resist the temptation to buy some cheap options, just to try it out. This is expensive education. There are plenty of advantages to trading options, but it’s still a ruthless market, happy to take your money, your wallet, and your hand if you give it an opportunity. Learn the rules of the game before you put money on the line.
Trading options can be satisfying, rewarding, stimulating, and fun. I invite you to add another dimension to your trading by including options to your repertoire.

Naked Options

admin — Sat, 23 Jan 2010 08:39:55 +0000

Options are one of the oldest trading vehicles man has ever used. Around a 1000 B.C Aristotle Thales predicted by the stars that there would be a bumper olive harvest and bought options on the use of olive presses.
When the harvest did in fact prove to be a great harvest Thales was able to rent the presses at a significant profit.
When you buy an option you have the right but not the obligation to buy (call) or sell (put) a specific underlying asset at a prearranged price on or before a given date.
Similar to futures, options can give the holder protection against adverse price moves.
Call options when bought allow you to buy an asset at a fixed price (strike price) on or before a specific exercise date.
Exercise date: some options can only be exercised on a particular date and they are commonly know as European options. Options that can be exercised on or before the due date are commonly known as American options).
A Put options is the reverse of the call option. When you buy a put option it gives you the right but not the obligation to sell an underlying asset at a predetermined date.
Now let’s look briefly at the result of selling naked calls. In this scenario, the call writer simply sells the call and does not own any of the underlying stock to cover the short call. If the stock plummets, the call writer is very happy and relieved.
The premium of $400 is his to keep, and no one will be knocking on his door asking to buy the stock for $100 per share, since it is available on the open market for $50. It’s his ideal scenario. Actually, any stock price at or below the strike price will be in his favor.
However, here’s a very bad scenario. The call writer sells short a naked call. And the stock leaps 50%. He’s got big problems. Somebody’s going to want to buy XYZ from him for $100 per share, just as the option contract states.
But he doesn’t own any shares of XYZ. So he now has to go to the open market and buy 100 shares at the current market price, which is $150 per share. He took in $400 of premium and now has to cover is with a $15,000 stock purchase, for which he will only receive $10,000. He loses $4600 ($10,000 – $15,000 + $400). Not a happy ending.
Do NOT even consider selling naked calls. Your broker probably would not allow you to anyway. However, until you really know what you are doing, don’t sell naked puts either. When the bottom drops out of a market, naked put holders get very, very badly hurt. They are forced to pay high prices for low priced stock. You do NOT want to be in this position!
An option gives you something called leverage. Leverage is when you are able to control a large amount of money with a small investment. Each option contract lets you control 100 shares of stock for far less than the cost of buying those shares. But leverage is not the best reason to trade with options.
True, with the leverage that options afford you, you stand to risk less and make more, assuming things move in your favor AND in your time frame. Remember the expiration date! You have traded leverage for limited shelf life. If things don’t move your way soon enough, you lose. So, what is the main reason to trade options? Spreads!

What is a Vertical Spread?

admin — Thu, 21 Jan 2010 19:58:55 +0000

Forex Trading – Calm and Collected Risk Taking

admin — Thu, 14 Jan 2010 08:04:16 +0000

There are absolutely no guarantees in forex trading. About the only thing that is guaranteed is that nobody knows for sure how the market will move. Sure there are indicators and trend lines to read, but these are really not fool proof. The successful forex trader should be able to accept at the onset of his forex options trading and currency trading career that there are risks involved in forex trading. It is your ability to stay cool in the face of these risks that will spell your performance in the forex options trading and currency trading business.

When you see entry signals, you have to be quick on your feet to think whether this is a trade that you want to get into or not considering the risks vis-a-vis your forex trading strategy. Taking on the risks sans emotions and sticking to your strategy is often the best way to make forex options trading and currency trading decisions. Do not be too emotional about the way you are trading. Assume the worst but hope for the best is a good tenet to follow. If you believe in your trading strategy, give it a chance to work for you.

Start with low-risk trades to get a feel of the forex market if you are a novice. Sometimes, running after bigger pips can result in missed opportunities and great losses for the forex trade. By keeping your emotions under control you will be able to develop your own trading strategy of spreading out risks, enjoying small pips in the short-term, and planning for long-term pips.

Forex Options Trading – Essential of Forex Trading Knowledge

admin — Tue, 05 Jan 2010 09:49:24 +0000

It was a strange sight in the past to witness customers exchanging stacks of money with their agents at public places such as the international bus terminus, prominent official buildings or even at the airports. These agents were prepared to sell you the foreign currency that you want with a little profit given to them. However, all these have changed over generations. Forex trading is now handled by licensed companies and unsolicited individuals are not allowed to operate illegally. With the invention of new technologies and the coming of professionals, Forex trading is now made easier and more systematic. It is also much safer to do business with these professionals to prevent scams.

At the beginning stage, most of the large companies would carry out their Forex trading via the different banks or even through the major institutes that deal with finances. These institutes had to be the ones that operate internationally. Forex trading has attracted a lot of popularity today because of the presence of modern technology. Via the use of the internet and the increasing telecom market, it is easier to spread messages and to bring across information on issues such as the economic polices worldwide. With the creation of the Forex Software that you can find on the internet, you will easily get the latest news about the Forex trading online. This has actually become a platform that facilitates the exchanges of trading since it makes it easy for you to seize opportunities on the spot and to implement your decisions immediately.

Apart from some problems at the beginning stage, Forex trading on the internet has become more standardized and the people who take part in Forex trading can now get a close to 100% secured access via the different companies that deal with Forex trading. The advantage of using these companies is that they are free from restrictions and give the customers more freedom of choice. As people now become more aware of the usefulness of Forex trading on the internet, it has helped to boost the popularity of advanced technology. Since it has been so successful to trade online, more people are entering this Forex trading platform and as a result, it has become commercially possible to use the Forex Software as a mean for trading exchanges to take place.

Surveys have shown that more and more people are getting involved in Forex trading. People joined for different reasons and in fact, some are even starting it as a hobby. In the conventional Foreign Exchange Market, this was usually dominated by big companies such as banks or Multi National Companies and you don’t get commoners involved apart from brokers. However, now there are many guide books on the trading methodologies, as well as trend analysis, so it will make it easy and safe for any newbies who might want to learn Forex trading online.

If you understand the margin trading concept that you apply in Forex, you can actually save a lot of money on deposits. It refers to the margin that is traded on and this margin differs depending on the banks’ policies but it will always in percentile terms based on the initial amount. How much you are allowed to play in Forex trading depends on what is the original amount given by the bank. The actual potential can be illustrated by the example below. Let’s say a bank has imposed a 2% as the margin deposit. This means you will only have to put in $20000 USD as a deposit in order to trade for two million dollars. As such, you will be able to increase by 200% for your profit. On the other hand, should you be unlucky and loses money in the Forex trading, the margin deposit of 2% will mean a loss of 200% too. Whether you are playing Forex trading online or offline, the rules are the same.

So long as you participate in investments, there will be the impending dangers of profits or losses. As it is, the Forex trader’s luck online can be anywhere between 2 to 25% on an average each day. As a newbie in Forex trading, it is essential that you know that your deposit’s interest rates will change depending on the currencies. As such, most traders play in a few different currencies in the world of Forex, which is what is known as the variable currency and the Base currency. This is applicable both in the conventional mode as well as the Forex online mode. In order to be a successful Forex trader, you will need to have an ability to analyze, a high level of knowledge on the subject and your intuition to act appropriately when the opportunities come. You must also be able to make full use of your Return on Investment (ROI) so as to gain the most profits from this lucrative financial market.

Fibonacci and Forex Trading

admin — Tue, 29 Dec 2009 07:39:00 +0000

Who knew that a modest illustration of an Italian mathematician from centuries ago would soon become a moving force in the vastest market of modern times? Leonardo Fibonacci, also known as Leonardo Pisano, experienced a stroke of genius as he tried out several number sequences and tried out (or used as examples, to be precise) what are now known as the Fibonacci numbers in Liber Abaci, his groundbreaking book. The book introduced the Arabic numerals and the Fibonacci numbers, long used by Indian mathematicians, to the Western world, earning Fibonacci a place in history. He is presently regarded as arguable the most talented of all the mathematicians from the Dark Ages.

The Fibonacci numbers, which Fibonacci simply introduced through a problem involving rabbits, play an important role in Forex trading, one of the most popular choices in investments these days. According to the system used by the said sequence, each number after the first two numbers it follows is, in fact, the sum of the preceding two numbers. This is why the Fibonacci number sequence begins this way: 1, 1, 2, 3, 5, 8, 13, 21, and so on. But what does this mean, or how does this apply in the Forex market?

It is no hidden secret that the Forex market is always on the move. It goes up and down according to changes in economics. Thus, engaging in Forex trading amounts to hard work as far as maintaining a profitable position is concerned. A Forex trader has to use all his or her faculties to spot alarm signals and make the necessary trend lines to protect his or her investments. The Fibonacci number sequence helps a Forex trader become more attuned to possible abrupt changes by anticipating the results of a particular movement cycle. Through the use and understanding of the Fibonacci numbers, a trader engaged in Forex trading can, at the same time, minimize his or her risks and maximize his or her profit yield.

Tips on Speed Money With Forex Trading

admin — Mon, 28 Dec 2009 19:42:03 +0000

Minor profits are common for most forex traders but there are still a number of them that manage to stand out and make their profits on triple digits annually.

Here are 4 specific tips that will help you speed up your money and pile up your wealth.

1. Be the manager of your destiny

Success can’t be bought. It’s you who can make yourself successful. In trading you can’t rely with others opinion to be successful so forget those people that sell techniques for a hundred bucks.

So again; don’t rely with others instead rely on yourself.

2. Have your personalized method

You need to make your own personal method that you have confidence in using. Here’s how to build a successful trading methodology.

A. Use the Breakout Method to spot trends. This system is not new and is widely used methodology. B. Smart traders look for previous trends with significant break resistant. C. Use confirmation indicators to confirm trends that are already detected. We recommend bands, stochastic and RSI.

Making your personalized methodology will help you gain confidence in using it for trading.

3. Money Management

To speed up your money you need to know the right time to calculate the risk. One of the fatal errors that a trader commits in forex trading is to not known the right time to stop the placement. Some big trends last for a long time so you need to stick with them. Don’t be scared! let the trend and don’t try to be protective because go if you and hit stop at the wrong time this will just give you a marginal amount of profit and you’ll be surprise that the trend goes on and makes more and more profits.

4. Patience and courage.

Having patience and courage is very important in forex trading, you need to be patient in waiting for big trends since it doesn’t come in every day – as a matter of fact big trends comes in just a few times each year so need to be patient. And when it comes you need to have courage to enter the trade and stick with it even if it sometimes back off on you and shows small outcome. If you have the courage to take risk on bog trends you might then be rewarded with huge profits.

So to be successful in forex trading make your personalized method and be confident to use it. Be smart in using in your money and be patient in waiting for big trends and take courage to enter on it.

Forex Trading – Managing Your Money to Make More Money

admin — Mon, 28 Dec 2009 07:58:28 +0000

Let’s face it. You are into forex trading because you want to make money. But, making money is more than just betting on certain trades and hoping that you will make a killing when the market moves favourably. The risk of the market moving in the opposite direction is always present. It is your ability to manage your money given these risks that will actually make you more money in the long-run. Working the forex trading market based on statistical probabilities is obviously the way to succeed in the business. Aside from guides provided by indicators, you should be able to analyze your trades versus one another to see that you are covered in all forts – both in upswings and drawdowns.

Upswing markets are not as much a concern as drawdowns. People start to get concerned when they start losing money. You can manage your forex trading in such a way that you are able to balance off your drawdowns and get off at least at a breakeven point. The rule of thumb is that the lower the risk you put in a trade, the lower your maximum drawdown will be and the easier it is for you to get back to breakeven levels. A risk-reward ratio in the upper figures indicate a good trading scenario. This simply means that you have more leeway in averting losses even when your projections are a little shaky.

A 1:3 risk-reward ratio gives you a bigger chance in profitability in forex trading. This indicates a potential of making three times more the amount you are risking. It is always recommended that you risk only a small percentage of your investment in every trade as a way of protecting your portfolio. This will effectively reduce your potential forex trading drawdowns and make it easy for you to recover from whatever losses you may experience in your trades.

Understanding Options

admin — Fri, 18 Dec 2009 08:12:07 +0000

Options are one of the oldest trading vehicles man has ever used. Around a 1000 B.C Aristotle Thales predicted by the stars that there would be a bumper olive harvest and bought options on the use of olive presses.
When the harvest did in fact prove to be a great harvest Thales was able to rent the presses at a significant profit.
When you buy an option you have the right but not the obligation to buy (call) or sell (put) a specific underlying asset at a prearranged price on or before a given date.
Similar to futures, options can give the holder protection against adverse price moves.
Call options when bought allow you to buy an asset at a fixed price (strike price) on or before a specific exercise date.
Exercise date: some options can only be exercised on a particular date and they are commonly know as European options. Options that can be exercised on or before the due date are commonly known as American options).
A Put options is the reverse of the call option. When you buy a put option it gives you the right but not the obligation to sell an underlying asset at a predetermined date.
Options are frequently used in real estate deals. A property developer may take the option on a piece of land he wants to develop. He may for example buy (call) the right to purchase a particular piece of land at $100,000 on or before sixty days beginning on the day he takes the option.
For the privilege of fixing the price for the next sixty days he agrees to give the seller $1000. This now gives him time to arrange any permits he may need to construct the building he wants. He also has the knowledge that he can buy that piece of property at any time in the next sixty days at the price he has already agreed upon.
If for some reason he can not get the permits he needs then he simply does not exercise his option to purchase. He will of course forfeit the $1000 that he paid for the option. The seller in this case was obliged not to sell that piece of land to anyone else for the next sixty days.
The same process can be applied to almost anything. If you apply the example of the property deal to the stock market you get the same situation.
Lets assume you buy a call (right to buy) 100 shares of Xyz company at an agreed price (strike price) on an agreed date (expiration date) at say $40 per share and you pay $5 for the option.
If on or before the expiration date Xyz is trading at less than $40 per share then you would not exercise your option and you would have lost the price you paid on the option $5.
If Xyz Company is trading at $50 per share on or before the expiration date your option is in effect worth $10. This is the difference between the price you have an option to buy Xyz at in this case $40 and the price it is actually trading at $50.
The reverse of this is a put (right to sell) option on an underlying asset. You might feel that the market is overheated at the present time and want to buy a put (right to sell) option.
This will give the individual who bought the put option the right to sell that option at and agreed price (strike price) on or before a specific date (expiration date).
You can also sell options (as opposed to buying a put). The writing of call options can be extremely high risk and I would not advise this for new traders until they thoroughly understand their liability. Buying an option either call or put gives you rights, selling (writing) options gives you an obligation.
The day after the expiration date an option has no value. At this stage it may seem that the buyer of the option has all the cards but don’t forget the seller of the option receives the money for granting the option. The money that is exchanges is commonly referred to as the premium.
Although option trading has more than its fair share of jargon remember the essence of all markets is that there is a buyer and a seller and both believe they have an advantage and have the potential to make money.
Think of an option in the same way that you would pay your house insurance company. The premium you pay each month gives you the right to a benefit if some event in the future happens and you decide to exercise your right to have the insurance company pay you for that event.
The insurance company on the other hand has the obligation to pay you should you should you exercise that right in exchange for accepting your premium each month.

Forex Trading – Going Japanese in the Forex Market

admin — Sun, 13 Dec 2009 19:39:32 +0000

For the uninitiated, going Japanese in the Forex market may sound bizarre, but for those who are familiar with Forex options trading, they know that the phrase has something to do with Japanese Candlesticks, one of the many seemingly complex concepts involved in the industry.

Japanese candlesticks, as far as Forex options trading is concerned, do not pertain to home design pieces, decor, or accessories. The term is used in the singular form and refers to a technical analysis illustration that the Japanese invented long ago to trade rice. It was Steve Nison, a Westerner, who discovered this Asian secret and shared it with the world, prompting it to become one of the most heavily relied-on technical analysis tools in the Forex market today. Japanese Candlesticks is in fact a chart that makes use of candles to indicate buying and selling activities.

It is best to explain Japanese Candlesticks by making a plea to the imagination. Think of a candle and the possible sizes it can have. If you find long-bodied candles in the charts, you’d be looking at indicate strong selling or buying, with the length representing the intensity of the selling or buying pressure. If, on the other hand, you find short-bodied candles in the charts, you’d be looking at weak selling or buying. Japanese Candlesticks also makes use of shadows to indicate hints about the current trading session. If you find candles that have long shadows, you’d know that the trading action took place over or above the opening and closing prices. If, on the other hand, you find candles that have short shadows, you’d know that the trading action took place near the opening and closing prices.

There are other indicators out there, but many experienced traders in Forex options trading recommend the use of Japanese Candlesticks to ascertain the best and worst times to enter the market, allowing one to protect his or her investment. Going Japanese can surely do you good in as you set out to become a successful Forex trader.