Protective Put Secrets » Option Trading

Backspreads (Reverse Ratio Spreads)

admin — Mon, 18 Jan 2010 19:47:36 +0000

Backspreads, also known as reverse ratio spreads, are an option strategy utilized when you believe there will be much volatility in the stock but are not 100% sure whether it will go up or down. If the stock moves a lot in the predicted direction, you will earn a tidy profit. If the stock moves a lot, but in the opposite direction, you will earn a small profit. However, if the stock doesn’t move much and is stuck in a trading range, you will experience a loss.The backspread position used when you are bullish on the stock is known as a Call Backspread, since call options are used to create this position. The call backspread is created by buying a certain number of Out-of-The-Money (OTM) call options (i.e. call options whose strike price is higher than the current stock price), and selling a lesser number of In-The-Money (ITM) call options (i.e. call options whose strike price is lower than the current stock price). You can create a call backspread by buying and selling any number of call options, but for the purposes of this article, we will talk about buying 2 OTM call options and selling 1 ITM call option.Because you are selling a call option that is ITM and buying 2 call options that are OTM, this position should be a credit position, that is you will earn a premium by opening a call backspread. However, because you are selling an option, you are not able to allow this position to expire. You will need to buy back the option before expiration date, which brings us to the risks involved with this position.If the stock price goes below the strike price of the call option that was sold (the ITM price), you can allow the position to expire since the calls at both strike prices are now worthless. Your profit in this case would be the initial premium made when the position was opened. If the stock moves above that ITM strike price but is still below the strike of the 2 calls that you bought (the OTM price), you will be in trouble. The 2 calls with the OTM strike price would still be worthless, but the call you sold at the ITM strike price would be worth something and will need to be bought back before expiration. Once the stock moves above the OTM strike price, your profits are limitless. The ITM call will still increase in value (and must still be bought back), but that cost is negated by the fact that you now have the 2 calls (bought at the OTM strike price) gaining value just as quickly and can be sold for profit.A Put Backspread functions in the same way but in the opposite direction, and is a bearish position. You would use this position on a stock that you expect to move a lot, with a high likelihood that it will go down in price. The reason it is known as a put backspread is because it is created by buying and selling put options.The put backspread is opened by buying any number of out-of-the-money (OTM) put options (i.e. put options whose strike price is below the current stock price, and selling a smaller number of in-the-money (ITM) put options (i.e. put options whose strike price is above the current stock price). Doing this should give you a net credit premium. Similar to the call backspread, a put backspread can be created by buying and selling any number of put options, but for this article we will talk about the simplest case, which is selling 1 ITM put option and buying 2 OTM put options.If the stock moves above the strike price of the ITM put option you sold, you can allow the position to expire and keep your original credit premium, since all 3 put options will be worthless. If the stock price ends up between that ITM strike price and the strike price of the 2 OTM put options you bought, then you will incur a loss, since you will need to buy back the ITM put option which is now worth something, but the 2 OTM put options are still worthless. Once the stock price drops below the strike price of the OTM put options, you will start to see unlimited profit since the cost of buying back the ITM put option is more than offset by the profits from selling the 2 OTM put options.Do bear in mind that you cannot allow a backspread position to expire, since you have sold options that need to be bought back to prevent them being exercised. As such, you will need to make sure you have enough funds to buy back those options in case the stock price doesn’t move.For a more detail and illustrations on backspreads, please visit: http://www.option-trading-guide.com/backspreads.html

Long and Short Butterfly Trading

admin — Sat, 16 Jan 2010 19:46:11 +0000

The Butterfly is an option position that is composed of 2 vertical spreads that have a common strike price. In other words, butterfly trading involves an opening position where options (either calls or puts) are bought (or sold) at 3 different strike prices. The way in which these options are created makes the butterfly a position that has both limited losses and limited profits.The Long Butterfly can be created using either all call options or all put options. Due to put-call parity, a long butterfly created using call options will behave like a long butterfly created using put options. In other words, it doesn’t really matter whether you use calls or puts to create your long butterfly. Our example here will focus on the version using call options.The long butterfly can be created by buying an In-the-Money (ITM) call option, selling 2 At-the-Money (ATM) call options and buying another Out-of-the-Money (OTM) call option. This is actually a combination of 2 opposing vertical spread options, hence why the butterfly is also known as the butterfly spread.Combining the profit profile of these 4 call options, you will find that if the stock price falls, you will face limited losses (which is the initial premium you paid for the entire butterfly trade). Similarly, if the stock price climbs too high, you will also face limited losses. However, if the stock price stays around the vicinity of the ATM option strike price, you will receive limited profit.This makes the long butterfly a good neutral option strategy for low volatility, since you are betting on the stock price not moving much in order to collect maximum profits. It is also a low-risk strategy, since your losses are limited if the stock crashes or climbs unexpectedly. Unfortunately, this is accompanied by limited profits as well. As has been mentioned above, the long butterfly can also be created using all put options instead of all call options.A Short Butterfly is the exact opposite of the long butterfly. Instead of buying an ITM call, selling 2 ATM calls and buying an OTM call, a short butterfly is constructed by selling an ITM call, buying 2 ATM calls and selling an OTM call. As before, the short butterfly can be created using all put options instead of all call options.The short butterfly’s profit profile is the opposite of the long butterfly’s. If the stock price falls, you will receive your maximum limited profits (which is the initial credit premium you received when opening the short butterfly position). Similarly, when the stock price climbs, you will also receive limited profit. However, if the stock price doesn’t change much, you will face a loss, though that loss is limited as well.As can be seen from the above description, the short butterfly is meant to be a strategy that is high in volatility but neutral in direction (ie. you expect the stock to move a lot, but do not know in which direction). As a side note, this might not be the best strategy for you if you are indeed expecting high volatility and are uncertain in stock price direction. Both the Straddle and the Strangle strategies also have the same lean towards high volatility and neutral direction, but with the extra benefit that they have the potential for unlimited profit. However, the benefit of the short butterfly is that it is a credit position where you pocket the initial premium when creating it.One warning about both long and short butterfly trading: these positions involve buying and selling options at 3 strike prices. For most option brokers, this means you will be paying 3 commissions to open the position, and another 3 commissions to close it. You will need to consider these extra commissions (which differ from broker to broker) when trying to determine if the butterfly will be profitable for your circumstances.For a more detail and illustrations on butterfly trading, please visit: http://www.option-trading-guide.com/butterfly-trading.html

Stock Trading for Bold Brave Investors

admin — Tue, 12 Jan 2010 19:56:14 +0000

Stock trading is one of the last true meritocracies. All that matters for your investment success are your own decisions. Stock trading is a precision-based activity and one tiny mistake in judgment could send you plummeting right to the bottom and result in a huge loss.
Likewise, the opposite could happen. You may make a great buying decision that will put you on the path to riches. Traditional stock trading is done at stock exchanges, which are places where buyers and sellers meet and decide on a price, although electronic trading is gaining in popularity. Stock trading is affected by how well the economy is doing and by basic supply and demand considerations.
Stock Trading is a get rich slow process. Money can be made, but it takes time. Stock trading is something that interests many people because it offers them a chance to make money without breaking into a sweat. In addition, it has a lot of excitement attached to it especially when using short term strategies that help pit traders against the stock market.
Stock Trading is trading stocks and shares of different types of companies and organization at the stock exchange. In every country, there is a stock exchange where various companies get their shares listed, when they arrange to raise required funds by means of issuing shares.
Stock trading is a very competitive field and in order to succeed you need to FOCUS on a set of simple strategies that you can implement without hesitation. The real “secret” of the stock market game is enclosed within the trading set ups and market signals you rely on to decide when to buy or when to sell shares. Stock trading is a business (because it is done for making money).
So as in a business, in stock trading, one needs to complete solid planning before making any buy/sell/trade. Stock trading is viewed by some people as a very complicated matter. This is regarded by many as an arena better reserved for those who have extensive exposure and experience in stock trading.
Stock trading is a game in which you cannot afford to be average. Thousands of new and inexperienced traders are being charged hundreds, even thousands of dollars by scam artists and self proclaimed experts for dubious stock picking services and mechanical buy and sell signal generators.
Stock trading is a relatively simple activity compared with other professions, particularly with the tools available in today’s Internet world. It is certainly within your abilities, and as you educate yourself on and build your skills, you’ll find that your fears subside as your confidence grows.
Researching a stock and then buying online it is one part of the story. The other part being how to plan a trade with an exit strategy? You must research the risks attached to online trading to make sure you are prepared for the worst. Be determined and goal orientated.
Exchange traded funds are good to use for trading and investing. By keeping trading simple, there is less stress and more opportunity to profit. Exchange Traded Funds, also known as ETFs, are index funds traded on the major stock exchanges just like stocks. An index fund involves a collection of securities, much like mutual funds, except that ETFs differ from mutual funds in some distinctive ways.
Options are bets about the future price movement of exchange traded securities. The prospect of unusually high returns always signals unusually high risk so be careful about trading options. Timing is everything.
Options are a great way to both earn and lose a lot of money. If you’re interested in involving yourself in the more unpredictable, risky, and spontaneous part of the stock market then trading options is something you should investigate. Option strategy is about selection of the best stock opportunities and following your signals. Here, you can achieve success if you are acquainted with the correct option trading strategy .
There are online resources available that will provide you with free simulated stock and option trading. You will easily find enough information to start your trading venture. You can practice trading stocks, options, spreads, futures, short sells, and so forth. Just run a search for “demo stock trading accounts” and you will find a good list to research.
Stock and option trading is a big game in many ways. But as it is a game involving the exchange of money if you play you need to take the game seriously.

Example of a Bull Call Spread

admin — Sat, 09 Jan 2010 19:42:22 +0000

Written on 15th February 2008 (see below for further updates)

I thought I’d provide an example of a Bull Call Spread (BCS) using the Commonwealth Bank as an example. There is a lot of volatility in the market at the moment. If you have studied my course then you will know that high volatility is a great advantage for the Option Seller – a decrease in implied volatility means a decrease in the Option premium – but let’s get back to this example!

Since making a high around $62.00 in November 2007 CBA has spent the last few months falling to its current price of $47.00. Can it go lower? Is this the bottom? I have no idea! Instead of buying the stock and watching it plummet even lower let’s look at a strategy where we know EXACTLY what our MAXIMUM risk and MAXIMIM profit is – a Bull Call Spread.

When you BUY a CALL Option your view is that the underlying Stock will rise. So with CBA closing last night (14th Feb) at $47.05 you might to decide to BUY a CALL Option with a Strike price of $48.00 that expires on the 27th March 2008. The quoted price for this option is $1.69. If you bought 2 contracts it would cost you 2,000 @ $1.69 = $3,380 (plus brokerage). In 10 days time if the stock price increased by 4% to $48.93 the Option price would be somewhere around $2.15. You could then Sell the CALL Option and profit $920 or around 27%.

To reduce the cost of Buying the CALL Option you can SELL a CALL Option at a higher strike price. Building on the above example you would SELL 2 March CALL Options at a strike price of $51.00 and receive a premium of $0.71 which means you receive 2,000 @ $0.71 = $1,420. So your total cost would be the price that you paid for the contracts that you bought ($3,380) less the money that you received for the Options you sold ($1,420). Total Cost $1,960.

The advantage is that you are reducing the cost of entering the trade. The disadvantage is that you are limiting your profit to the upside if CBA trades above $51.00. I like the Bull Call Spread trade because you know your maximum profit and maximum loss before you enter the trade. The best way to view this is via a picture (listed on the next page).

Please note that this trade is purely for educational purposes only. I’ll send an update of this trade in a week or two to see how it would be progressing. If you have any questions you are more than welcome to send me an email glenn@optiontrader.com.au.

Cheers

Glenn Dove

www.optiontrader.com.au

Update written on 22nd February 2008

It’s always worth reviewing your trades especially when you trade Options. One week ago I provided an example of a Bull Call Spread Option strategy on CBA shares. At the time of the Option trade CBA was trading @ $47.05 and we had entered a long position.

How would we be going on the 22nd February with the price of CBA trading at $42.40?

The trade has not gone in the direction that we wanted but there’s a lot we can learn from this type of strategy. The Bull Call Spread (BCS) that we entered entitled us to Buy 2,000 CBA shares @ 48.00 and to sell 2,000 CBA shares at a maximum price of $51.00 anytime before 27th March. The total cost of the BCS position was $1,960.

So what’s so good about that?

• We are in control of $96,000 of CBA shares (2,000 @ $48.00) and it only cost us $1,960 to enter the trade. This works out to around 2% of the total trade value.

• We are limited to a maximum loss of the premium that we paid $1,960. If we had of bought 2,000 CBA shares at the market price (on 15/2) we would have paid $94,100. With the current price of CBA at $42.40 we would be sitting on a paper loss of $9,300.

So as you can see even though the trade has not gone in the direction that we wanted the BCS has provided great leverage while limiting our loss potential to only 2% of the trade value. Also remember that we still have until 27th March for this trade to work. You could also decide to close the position if you thought that the CBA had no chance of getting back above $49.00 by the 27th March which would leave you with a loss of $1,297.

It’s also worth mentioning some of the disadvantages even though I believe the advantages far outweigh the disadvantages:

• If there are any dividends payable during the Option period we are not entitled to them (as we don’t really own any shares)

• We have a limited time (until the Option expiry date) for the trade to become profitable. Once the contracts expire they become worthless.

• Our profit potential is limited due to the fact that we SOLD Option contracts to reduce the cost of the Options that we bought.

If you have any questions send me an email: glenn@optiontrader.com.au

Cheers

Glenn Dove

www.optiontrader.com.au

Option Credit Spreads – Limited Risk With Limited Profit

admin — Fri, 08 Jan 2010 07:52:33 +0000

I started trading options in the late 90’s. After selling my first option and collecting an immediate credit I and became an option seller for life. I became a student of option selling strategies and started selling covered calls on stocks I brought and owned. I was doing OK collecting premiums month after month until a few of my stocks tanked and my losses over a 2 month period wiped out 6 months of profits. My mistake was picking not so good stocks for this covered call option selling strategy. So I became a student again and discovered an option trading strategy that is truly amazing.
Selling Option Credit Spreads on the broad based stock indexes was my new strategy. My goal was to collect premiums each month using OTM (Out of The Money) options spreads, specifically Bull Put Spread and Bear Call Spreads on the SPX index. I was choosing spreads that were very far OTM so that I had a greater cushion which reduced my risk.
Selling spreads is more akin to waiting for the big move to occur and it rarely does. Time decay is very relevant because despite being a spread, the spread does have a significant rate of decay in the last week or two. The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40-60 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You can just check in the morning and at the close at your leisure as long as you are sufficiently OTM. When the market starts moving closer to your short strike, some due diligence is required. With credit spreads you want the position to expire worthless or buy back for way less that you sold it for.
The goal is to collect premium month to month. Using OTM spreads is a way to do this without predicting the market for the month. In any given month, the market can still move sideways, lower or higher and your positions will still be profitable. You are trading without concern over market direction for a major crash lower.
Today I employ a very safe and conservative Iron Condor credit spread trading strategy. My strategy with iron condor trading is to leg into the trade by selling the Bull Put Spread first for .20 – .25 cents. This is only a 2% – 2.5% return but the trade is very safe and the short strike is usually 60 points or more away from the current index price. I will then complete the condor by selling the Bull Call Spread later on for another .20-.25 cents, but only if the trade is safe. Safety is the key to my strategy with a goal of earning on average a 3% return each month.

Option Credit Spread Trading – Limited Risk with Limited Profit

admin — Thu, 07 Jan 2010 20:42:49 +0000

Selling Option Credit Spreads on the broad based stock indexes was my new strategy. My goal was to collect premiums each month using OTM (Out of The Money) options spreads, specifically Bull Put Spread and Bear Call Spreads on the SPX index. I was choosing spreads that were very far OTM so that I had a greater cushion which reduced my risk.

Selling spreads is more akin to waiting for the big move to occur and it rarely does. Time decay is very relevant because despite being a spread, the spread does have a significant rate of decay in the last week or two. The beauty of this strategy is that you do not necessarily need to sit on top of it all the time. If your strikes are 40-60 points OTM and the SPX is up 1.20 today, you gain nothing by checking the quotes every minute. You can just check in the morning and at the close at your leisure as long as you are sufficiently OTM. When the market starts moving closer to your short strike, some due diligence is required. With credit spreads you want the position to expire worthless or buy back for way less that you sold it for.

The goal is to collect premium month to month. Using OTM spreads is a way to do this without predicting the market for the month. In any given month, the market can still move sideways, lower or higher and your positions will still be profitable. You are trading without concern over market direction for a major crash lower.

Today I employ a very safe and conservative Iron Condor credit spread trading strategy. My strategy with iron condor trading is to leg into the trade by selling the Bull Put Spread first for .20 – .25 cents. This is only a 2% – 2.5% return but the trade is very safe and the short strike is usually 60 points or more away from the current index price. I will then complete the condor by selling the Bull Call Spread later on for another .20-.25 cents, but only if the trade is safe. Safety is the key to my strategy with a goal of earning on average a 3% return each month.

Index Credit Spread Trading

admin — Wed, 06 Jan 2010 19:40:36 +0000

I am an active trader of option credit spreads on the SPX, NDX and RUT broad based stock indexes. I am very conservative and only enter into trades that have a very high probability of being profitable. I write OTM Bull Put Spreads first. During months when the market is moving sideways or slightly up, I add OTM Bear Call Spreads to create Iron Condors. My goal is to collect premium month to month. I want all my spread trades to expire worthless.

I like trading the Indexes because they are not subject to the same wild price swings as individual stock. It is also easier to make risk management adjustments on Index trades than say GOOG which can change in value quickly on some bad news.

An option credit spread is a limited risk option trade involving the simultaneous purchase and sale of two differing option contracts on the same Index, i.e. the SPX. This produces an immediate cash credit in your trading account. A profit is realized in a credit spread position if the index moves in the direction anticipated, remains the same and even if under appropriate circumstances the index moves adversely to your position.

Benefits of Index Credit Spread Trading

• Index credit spread trades have a 90% probability of expiring worthless when filled.

• These credit spread trades can profit in any type of market. Markets today are more likely to trend sideways, or move slightly higher or lower month to month.

• The majority of time you just make a trade, collect your credit and wait for the next month. This is not a day trading system. There is no need to monitor the market and your active trades all day long in front of the computer screen. In fact it’s really a very boring trading system.

• Paper trading is the best way to learn this option strategy. It’s all free with CBOE’s new Virtual Trading system.

• The SPX, NDX and RUT Indexes are not subject to the same wild swings as individual stocks.

• With Iron Condor trades you get double the credit but only have one margin side at risk.

• You want your credit spread trades to expire worthless but you can always buy them back for way less than you sold them for.

• Your trading capital is only used to support margin requirements. Most option brokers allow you to invest your trading capital and use it as collateral for spread trading. This way you can earn 2 returns with the same capital.

You can see my actual performance results of all trades for the last 12 months and the current YTD return which is amazing. My website is over 25 pages and full of content that covers all aspects of this trading strategy.

Option Trading Tip – Follow A Consistent ‘Routine’

admin — Sat, 02 Jan 2010 08:37:32 +0000

Just as elite athletes go through a specific warm-up routine for their body and their mind before competing at a meet, we too as option traders need to follow a specific routine/process before we enter a trade and compete in the markets.

Here is the step-by-step routine that I follow each market day when looking for new short-term option buying opportunities.

1) I wake up at 5am Australian time (3pm New York time – 1 hour before the close) and go to the computer.

2) I then pull up the ‘real-time’ charts in my watchlist and check the DOW, S&P 500 and Nasdaq Comp to see if the day’s sentiment is bullish, bearish or neutral. I then check each individual stock chart for my core Call or Put buying ‘trigger’ which is either a higher trough or a lower peak.

3) As I go I make a list of those stock codes that fit this criteria so I can analyze their charts further.

IF NO STOCKS FIT THIS CRITERIA MY ROUTINE IS COMPLETED UNTIL THE NEXT MARKET DAY!

IF THERE ARE STOCKS THAT FIT THIS CRITERIA, I CONTINUE ON.

4) I then focus on each of these charts and analyze the underlying long and short-term trend, long and short-term moving averages, RSI, bollinger bands, potential breakout patterns or candlestick reversals and last but not least, volume.
– I’m looking for ‘evidence’ of an imminent upside or downside move.

5) I then try to cull this list so that only the highest probability trades remain.

6) I then run the remaining stocks through my Volatility Cone to establish whether implied volatility is low, high or fair.

7) I then take another run through my remaining stock charts and choose the single best opportunity, taking all factors into consideration including my GFI (’Gut Feel Indicator’).

I then login to my trading account and check out strike prices, expiry months and delta.

- If the options on the stock I have chosen have high implied volatility, I will be looking to buy the current month deep ITM options, with a delta as close as possible to 1.

- If the options on the stock I have chosen have low implied volatility and the stock has formed a reliable break-out pattern, I will be looking to buy the next month out, ATM options with a delta close to 50.

- If the options on the stock I have chosen have relatively ‘normal’ implied volatility, I will be looking to buy the next month out, ITM the money options with a delta of 75-80.

9) Once I have found the strike price and expiry month I want, I then work out roughly how many contracts I can buy considering per my capital allocation for the trade (usually 10-15% of my short-term trading bank).

10) I then pull up the order form I need and fill everything out except for the limit price.

11) I then wait until 3.45pm and as long as the stock is trading within the top 1 third of the day’s range for calls OR the bottom 1 third of the day’s range for puts, I enter in my limit price (usually the ‘ask’ price for tight spreads or ‘in between’ the bid and ask for wider spreads) and pull the trigger.

12) Once the order is filled, I then place a 20% trailing stop on the option, which will close out the trade ‘at market’ if hit.

13) I then fill out my trading diary, which includes the details of the transaction and exactly ‘why’ I got into the trade and what my exit scenarios will be, and attach a copy of the stock chart.

ROUTINE COMPLETED!

NOTE: If I am currently in a trade/trades this process will also include analyzing that/those particular stock charts and making my decision to either stay in or exit the postion(s).

Now the reason I just shared my daily routine with you was to illustrate the importance of ‘consistency’.

When you follow a trading system and analysis sequence consistently, you get to a point where you know EXACTLY what you need to do and EXACTLY what you are looking for.

This keeps you objective, focused (i.e. not jumping around all over the place looking for trades) and also supports you making the best possible use of your time.

Afterall, who wants to be staring at a computer screen all day? I have found success in letting my trades come to me on my terms and that fit in with my ‘routine’.

Commodities Trading… Do You Know Your Peas and Qâs Of Futures?

admin — Thu, 31 Dec 2009 08:27:28 +0000

More Than One Hundred and Fifty Years of U.S. HistoryAnyone who has seen the classic movie Trading Places knows what commodities are. For those of you who have not gotten the privilege of seeing Eddie Murphy at his best,Â commodities are any physical, tangible goods. From crops such as corn or wheat, to oil, gold, and currency, commodities get traded on the futures market. Rice was undoubtedly the very first commodity traded at the original market of the Chinese. Here in the U.S. it began more than 150 years ago at the Chicago Board of Trade with the first agricultural futures contract. In 1982 options on futures was introduced, and in the 1990’s exchanges introduced electronic trading. Futures trading is now a 24 hour, seven days a week enterprise, and undoubtedly the main reason you are researching it.Â Like all financial instruments, the futures market is highly regulated, but not by the SEC. The SEC administers and enforces the federal laws that govern the sale and trading of securities, such as stocks, bonds, and mutual funds, but they do not regulate futures trading. The federal agency that does regulate futures trading is the Commodity Futures Trading Commission. With limitedexceptions, the trading of futures must be executed on the floor of a commodity exchange. Similar to broker-dealers that are members of the National Association of Securities Dealers, Inc. or some other self-regulatory organization, all firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association (NFA).Hedgers and SpeculatorsTwo Kinds of Commodities Traders:Commercial hedgers are corporations and sometime individuals, that seek to ensure the stability of a given commodity by taking a position in the commodities market. Take peas for example, and the hedger, a food processor who cans them. If pea prices go up the hedger ends up having to pay the farmer or pea dealer more. Because it is basically a cash commodity, to protect himself against higher pea prices, the processor can âhedgeâ his risk exposure by buying enough pea futures contracts to cover the amount of peas he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of peas rise enough to offset cash pea losses.Speculators are the second major group of futures players. These participants include independent floor traders and investors. A speculator is a person, or more likely an institution, that purchases or sells the commodities based on factors other than simply analysis. Whereas investors will focus, by and large, on detailed analysis.The Proâs and Conâs of Speculating Futures Looking ProsperousSince most individual traders are speculators, here is a list of some of the advantages and disadvantages of the futures market over other investment possibilities. 1. The possibility exist that a person can make more money faster in the futures market, becauseÂ the speed of prices tend to change faster than stocks. Conversely, bad judgment can cause one to suffer greater losses than traditional investments.2. Futures are highly leveraged investments. The trader only puts up about 15-20% as a margin, yet still being able to ride the full amount of the contract. Unlike stocks where at least 50% of its value has to be put up, and the investor pays interest on the difference between the margin and the full contract value. 3. For the most part there is no inside trading. Everyone has the same insiders information on the weather, for example. This is an open outcry market, very public, which insures a fair outcome.4. Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.5. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution. I hope this has helped in your research. I donât profess to being an expert, but I do know of some. I obviously donât have the time to go into all the details now, but at my siteÂ Market Mentalist you will find all you need to know about investing online. I have a page devoted to commodities. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.

Futures Trading…Know The Market Before The Experts

admin — Wed, 30 Dec 2009 09:30:26 +0000

You Don’t need a Crystal BallOne might say that there has to be some kind of mystical knowledge being used, considering the price for the commodity doesn’t yet exist. Commodities are any physical, tangible goods, such as crops like corn or wheat, to oil, gold, and currency, just to name a few. The futures market has nothing to do with the use of a crystal ball, though there are many traders who wish they had one. A futures contract is a standardized contract to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price (the futures price). The contracts are traded on a futures exchange.A futures contract gives the holder the obligation to make or take delivery under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to establish a position previously held by the seller of the option. Like all financial instruments, the futures market is highly regulated, but not by the SEC. The SEC administers and enforces the federal laws that govern the sale and trading of securities, such as stocks, bonds, and mutual funds, but they do not regulate futures trading. The federal agency that does regulate futures trading is the Commodity Futures Trading Commission. With limitedexceptions, the trading of futures must be executed on the floor of a commodity exchange. Similar to broker-dealers that are members of the National Association of Securities Dealers, Inc. or some other self-regulatory organization, all firms and individuals who trade futures with the public or give advice about futures trading must be registered with the National Futures Association (NFA).The Players In This Chess MatchHedgers and Speculators

Commercial hedgers are corporations and sometime individuals, that seek to ensure the stability of a given commodity by taking a position in the commodities market. Take peas for example, and the hedger, a food processor who cans them. If pea prices go up the hedger ends up having to pay the farmer or pea dealer more. Because it is basically a cash commodity, to protect himself against higher pea prices, the processor can “hedge” his risk exposure by buying enough pea futures contracts to cover the amount of peas he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of peas rise enough to offset cash pea losses.Speculators are the second major group of futures players. These participants include independent floor traders and investors. A speculator is a person, or more likely an institution, that purchases or sells the commodities based on factors other than simply analysis. Whereas investors will focus, by and large, on detailed analysis.Gambling With Your FuturesFive Reasons To Roll the DiceSince most individual traders are speculators, here is a list of some of the advantages and disadvantages of the futures market over other investment possibilities. 1. The possibility exist that a person can make more money faster in the futures market, because the speed of prices tend to change faster than stocks. Conversely, bad judgment can cause one to suffer greater losses than traditional investments.2. Futures are highly leveraged investments. The trader only puts up about 15-20% as a margin, yet still being able to ride the full amount of the contract. Unlike stocks where at least 50% of its value has to be put up, and the investor pays interest on the difference between the margin and the full contract value. 3. For the most part there is no inside trading. Everyone has the same insiders information on the weather, for example. This is an open outcry market, very public, which insures a fair outcome.4. Commission charges on futures trades are small compared to other investments, and the investor pays them after the position is liquidated.5. Most commodity markets are very broad and liquid. Transactions can be completed quickly, lowering the risk of adverse market moves between the time of the decision to trade and the trade’s execution. I hope this has helped in your research. I don’t profess to being an expert, but I do know of some. I obviously don’t have the time to go into all the details now, but at my site Market Mentalist you will find all you need to know about investing online. I have a page devoted to futures. There is access to some of the top trading systems available including software, books, newsletters, and Forums. Whether you are an inquisitive novice or a seasoned pro Market Mentalist offers the online investment resource you just might be seeking.