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Option Strategies: Profit-Making Techniques for Stock, Stock Index, and Commodity Options (Wiley Trading) [Hardcover]

admin — Thu, 29 Jul 2010 11:12:22 +0000

Updated and revised to include a decade of growth in the scope and complexity of options, Options Strategies: Profit-Making Techniques for Stock, Stock Index, and Commodity Options, 3rd Edition is a comprehensive guide to options trading strategies written in clear, non-technical language. In addition to insight into options issues like carrying changes, strike prices, commissions, interest rates, and break-even points, new chapters show how to predict the direction of implied volatility. Accessible examples, charts, and graphs will help you obtain the information you need to succeed in the high-risk, high-profit world of options.

From the Back Cover

Praise for Option Strategies, Third Edition “Finally, a book on option strategies even guys like me can understand. Whether you’re an options veteran or not, Courtney’s years of experience will be of value to you.” —Larry Williams, author of Trade Stocks & Commodities with the Insiders: Se (more…)

Trading Stock Options: Basic Option Trading Strategies and How to Use Them to Profit in Any Market [Paperback]

admin — Sun, 20 Jun 2010 13:34:24 +0000

Many traders and investors dismiss stock options as either too complex or too risky. But did you know that options can be easily understood and the risk easily managed? This book will show you the basics of stock options in easy to understand terminology. You will be able to read option quotes with ease, get an option enabled trading account, and trade basic option strategies in no time. In Trading Stock Options, experienced option trader Brian Burns explains the basics of stock options and shows you how to trade the most successful option strategies. As you begin your journey on the option path, you’ll have the luxury of real-life trade examples to show you the way. The diagrams and charts help turn the complex world of options into easy to visualize and simple to understand strategies that even the most novice of traders can utilize. Trading Stock Options will show you how you can use options to: * Get paid to buy and sell your favorite stock * Purchase st (more…)

Trading Stock Options: Basic Option Trading Strategies And How I’ve Used Them To Profit In Any Market [Paperback]

admin — Mon, 14 Jun 2010 15:54:21 +0000

In Trading Stock Options, experienced option trader Brian Burns, explains the basics of stock options and shows you how to trade the most successful option strategies. As you begin your journey on the option path, you’ll have the luxury of real-life trade examples to show you the way. The diagrams and charts help turn the complex world of options into easy to visualize and simple to understand strategies that even the most novice of traders can utilize. Trading Stock Options will show you how you can use options to: * Get paid to buy and sell your favorite stock * Purchase stocks for less than their current price * Buy insurance on stocks in your portfolio * Profit when stocks lose value * Perform short-term trades with less money than trading the stock From the Introduction “Through my experiences with option trading, I have tried almost every strategy I could find. In this book, I will be discussing the strategies that I use the most and feel are the bes (more…)

How to Make Consistent Profits Futures Trading

admin — Fri, 22 Jan 2010 09:37:39 +0000

The issue of direct access is an important one and it becomes more important the more short term your trading is. The market can change from a state of seeming paralysis to one of shocking volatility and activity in a flash. The length of time it takes between you deciding to enter an order and the order actually being in the market is obviously important.
When I first started trading I used a phone broker and was dismayed that my fills would often be so far from the price the market was trading when I first entered the order.
The first time I visited the trading floor, I discovered why. When I called in an order, first my discount broker would check my account equity, then he would call a phone booth on the floor, the phone broker on the floor would then write the order down and pass it on to a booth next to the appropriate pit, at that booth my order would be written down again and then signaled to a broker in the pit to be executed.
As you can imagine this would take quite a long time, even longer of course if the market was very active, as this would mean that the broker in the pit would be too occupied to take new orders. Compare this to my experience of trading as a pit trader. In the pit I was in the heart of the market and could observe every single order as it was executed (there was no delay in my price feed!).
To initiate a trade, whether it was to buy or sell at the market, or join the bid or the offer, all I had to do was open my mouth. You can start to see the huge advantage that trading on the floor gave me over off floor traders; and that doesn’t take into consideration the fact that my round trip costs fell by 96%.
Now the floor no longer exists, not in Europe at least, so why talk about the advantages of pit trading? Well the level playing field is now open to all, but very few take advantage of it. Trading with an electronic trading platform is exactly the same as trading in the pit, except I can sit down, it is much quieter and there are no crude jokes flying around.
I can trade with the click of a mouse; my order shoots to the exchange, enters in the market and appears back on my screen before I have time to blink. I think the advantages of direct access trading are clear and any futures trader still using a phone broker should move to direct access, they will also find their commissions are less (around $8 for private client traders).
The next question that arises is why trade futures? That is an important consideration given that there are a variety of alternatives vying for your trading capital (spread betting, CFDs and options), but in my opinion, futures are the only option (no pun intended) for successful short term trading.
A lot of traders are trading the stock indexes like the FTSE, the DAX, the S&Ps, NASDAQ and the DOW, but rather than use futures they are using spread betting firms. The reasons for using these firms is that they require very small amounts of capital to get started, a trader can trade very small amounts (like $1 a point on FTSE as opposed to $10 for FTSE futures) and these firms make opening an account so easy.
I understand the lure of being able to open an account with very little money and trading small amounts, but I have some serious considerations about using spread betting as a realistic vehicle for professional trading.
The two biggest selling points are no commissions and no capital gains tax. There are many different costs to trading, commissions are one and the spread is another (especially when you have to trade at the market as you do with spread betting, with futures you have the choice of joining the bid or the offer).
Commissions are important for an active trader and as an active trader you can get them very low, but lets assume they are $8 per round turn for futures and lets assume that the spread in FTSE futures is an average of 2 points. If the spread with a spread betting firm for FTSE is 6 points and assume that we are trading $10 a point we can compare the two trading vehicles.
Last week I made an average of 2.42 points per contract traded and I traded 48 times. That is, for each contract I bought and sold I made $24.20 before commissions, assuming my commission rate is $8, I made a profit of $16.20 per contract traded, which is $777.60 net profit if my average size per trade is one contract.
Had I had the same success trading with a spread-betting firm, with a 6-point spread, I would have lost $1718.40! Now I would rather pay tax on a profit that no tax on a loss.
There is one other very important reason for trading the futures market rather than a non-exchange traded market such as those offered by spread betting firms. The futures markets are exchange traded and this means that they are fully transparent, i.e. everything is visible and above the table, I can see every single trade that happens. Imagine the trading pit, as it used to be when traders stood physically in a ring trading with each other.
When a trade is entered, the order goes into the pit and is represented there, free to be taken by any other market participant. We can all see what is happening, we trade with the same information and with the same advantages/disadvantages.
Now assume you are a trader who can only trade with one broker in the pit, you can trade as much as you like, any size you like, but he sets the spread he is willing to offer you and you have to trade at market (i.e. buy at his offer and sell at his bid). This broker doesn’t want to loose money, naturally, so he always makes his spread wider than the real market spread, he also, naturally, puts his interests before yours, so he won’t always be willing to trade when the market is moving fast and he is uncertain.
Remember whenever you make money he loses, so he is very careful to maintain his advantage at all times. Who wouldn’t want to be in this brokers position (he isn’t really a broker, though he claims to be)? When you trade with a real futures broker, all the broker does is facilitate your trade; he gives you the ability to have you orders represented in the pit. A real brokers concern is that they execute your order as efficiently as possible, that is their job, they do not take positions and they do not take the opposite side to you.
They naturally want you to make money because by making money you become a client who will continue to pay them commissions. Trading with a spread betting firm is absurdly costly, spread betting firms are like amusement arcades, they can be fun, but to imagine you are going to make your living from slot machines is illusory.

10 Tips To Succeed In Trading Currency Commodity

admin — Sat, 16 Jan 2010 07:43:37 +0000

Whatever the job type, everyones ultimate goal is to succeed and gain surplus. You need to have the right knowledge in order to become successful. Being a business person, you should learn the most reliable and right way to become successful in trading market. Learning the trading commodities concept requires a trader to use different trading tricks, and by using law of charts. This can help in profiting from trading commodities.
In trading commodities, to gain bigger profits and earn large amount of money is to identify the market trends as quickly as you can before anyone else finds it. Currency trading can have many supports or resistance at the same time. If you are quick in determine the market trend then you can earn good profit. Trend is not limited to a specific time. Market trend can change at any time including intra-day, daily, weekly or even monthly.
Some trading commodities tools are available to help you identify these trends. Given below are some trading style for you :
1. Look out for trading up of prices. If you see a trading up in the trend it is advisable to buy at that time. In order to overcome the anticipative resistance, enter into the buy signals which are more than the current prices. On the other hand, if the trading down occurs, you should consider selling. Look for selling opportunities. To break the anticipative support, you must do exactly of that when trading up occurs i.e. to enter those sell signals which are well lower than the current prices.
2. You should look for optional objectives depending on whether it is short or long. You should consider short for anticipative support and long for next level resistance.
3. You should always have a protective stop on your trades till it hits.
Pay attention to some of the factors given below to make sure you know about the opportunities
4. The best time to look for buying opportunity is when the behavior of market changes from normal to bullish.
5. When the behavior is bullish you should hold protective stops for long positions which are below support level.
6. You should let go of the long positions if status changes to neutral.
7. Start finding short positions if the status changes to bearish from bullish. Bearish status is a good opportunity to find selling opportunities.
8. With bearish status you should hold resistance on short positions with protective stops.
9. Let go of short positions when status changes to neutral.
10. Find long positions if status changes from bearish to bullish.
You should have the knowledge about what to expect in future related to market trends. Have knowledge about directional bearish and proprietary bullish market forecast and resistance and support. Listen to different comments about the trends. Always remember that change in market which can be either bullish or bearish is very important in deciding which position to let go and which opportunity to grab.

Option Trading: Thinking “Outside the Box”

admin — Mon, 04 Jan 2010 20:46:24 +0000

Wouldn’t it be great if we could buy an option with five months left until expiration and sell an option with 2 months left until expiration for the same price? You couldn’t lose. Well we can’t. I love options spreads so much I realized something very important. We can buy a spread that has a lot of time value left at almost the same price as we can sell one with less time value left. The reason really opened my eyes and gave me new insight into options. Here is what I came to realize.
I started comparing how expensive options were in relation to the other strike prices in the same month and to the other months. I wanted to know based on th e price per day which options were more expensive.
The first 1 or 2 option months, as everyon e knows loses time value quickly. The at the money strike prices are very expensive compared to the out of the mon ey strike prices. Since there is not that much time left, how much can they charge for an out of the money option? Not much.
The next several months, the opposite is true. Compared to each other, the strikes that are closer to the money are cheaper in terms of price per day than the options further out of the money. Let me explain it another way using the S&P market.
6 days left at the money option cost 12 points
6 days left out of the money option cost 2 points
70 days left at the money option cost 43 points
70 days left out of the money option cost 29 points
There is more than 10X the time left but the 70 day at the money option (43 points) is only less than 4X the price than the 6 day at the money option (12 points).
The 70 day out of the money option (29 points) is almost 15X the cost of the 6 day out of the money option (2 points) but only has 10X the time value. We will buy the cheaper options and sell the more expensive ones.
Sell 6 day at the money and sell 70 day out of the money. Buy 6 day out of the money and buy 70 day at the money. This will be done for a 4 point debit. We are now buying a spread that has 10X more time value than the one we are selling and are only paying 4 points for it.
When the 6 day options expire we can sell the next month to take in more premium, still keeping the 70 day option spread.
What goes up, must come down! We have all heard this befo re in reference to the laws of Gravity. We have laws in the commodity markets as well. What comes down, must go up! The greatest traders of our time like War ren Buffet know this. He is perhaps the greatest Stock trader ever. He had never traded commodities until a few years ago. He bought silver in the futures market. When the market went even lower he bought more. The “smart money”, commercials will not be scared into selling when a market they have purchased drops even further. They know better than anyone that a commodity has real value and will always be worth something.
There is a famous book, “You Can’t Lose Trading Commodities”. The author buys commodities and then just waits for the market to go higher. He would purchase more as the market fell.
You need a big bankroll for this. Personally I know corn won’t go to $1.00 but what if it did? I want to minimize the risk in case I want to end the trade.
I started trading the Soy Complex this way several years ago. Not with options. Strictly futures. I bought what was similar to a crush spread. I increased the contracts as the market went against me until the spread rebounded a little. Since I increased the contracts I didn’t need the market to come back to where I started. It only had to rebound to the next level.
Black Jack players did this until Casinos caught on and put limits on bets. It is a known fact that futures traders make good gamblers and professional gamblers make good futures traders. I am against gambling but even gambling done with a system is not really gambling.
These card players would bet something like this: $5 lose, $10 lose, $20 lose, $40 lose, $80 win. The losses add up to $75. They would win $80, so the profit is $5. Not a lot, but they would do this all day. Black Jack is just under 50% probability for the player.
The problem is there is a slight chance that you could lose 40 times in a row. Now with Commodities we have a 50% probability and we won’t lose 50 times in a row because the market can’t go b elow zero.
Now before I go an y further, I need to tell you that I am not recommending you double down on your trades. What you can find are mark ets that are near their lows where you can do a small scale trade. Spreads offer even better opportunities. They have a closer range (high to low).
By now you can see we only use this to go long a market since we can never b e sure how much a market can go higher. First we need to find a market that is low already so we won’t have to wait that long and also so there will be less capital needed. I prefer to trade this using options. There are many ways to do this. You could buy an option in a market like soybeans and choose how many cents the market will drop before you buy more. The problem is, an option is a wasting asset. The Theta (time decay) would cause you to lose money.
I use spreads so I am not paying for time decay. I will probably sell more Theta than I buy, so if the market does nothing I will make money just on time decay.

Insider Trading

admin — Sat, 02 Jan 2010 21:17:29 +0000

Article on “INSIDER TRADING”

By:

Samant Kumar

5th year BBA LLB,

Symbiosis Law School, Pune.

Introduction:

“Insider trading” is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. By selecting this topic I would like to draw the attention on both the legal and illegal aspect of insider trading. Due to the illegal practice of insider trading it leads to a huge loss to investors and loses the confidence of investors.

The “Objectives and Principles of Securities Regulation” published by the International Organization of Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the three objectives of good securities market regulation are:

(1) investor protection,

(2) ensuring that markets are fair, efficient and transparent, and

(3) reducing systemic risk.

The discussion of these “Core Principles” state that “investor protection” in this context means “Investors should be protected from misleading, manipulative or fraudulent practices, including insider trading, front running or trading ahead of customers and the misuse of client assets.”

I have adopted the Doctrinal research methodology to present an article on Insider Trading. This article is prepared by going through many books and various websites for collecting data. Although I tried my level best to collect the cases related to Insider Trading but in our country only 10 to 12 cases are reported annually. So, does India has fewer incidences of insider trading or are our systems/ laws not geared enough to detect such cases?

Some economists and legal scholars like Henry Manne, Milton Friedman, Thomas Sowell, Daniel Fischel, Frank H. Easterbrook argue that laws making insider trading illegal should be revoked. They claim that insider trading based on material nonpublic information benefits investors, in general, by more quickly introducing new information into the market.

Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: “You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.” Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market.

Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to this view) having been made between the parties to refrain from trading if there is asymmetric information.

Insider trading is the use for gain of secret information about publicly traded investments by those who are privy to that information and who should not be taking advantage of their knowledge of that information. The common investors are denied the same opportunities as the insider dealers to make profits because they do not have access to the information which the insiders have. It is easier to identify the beneficiaries of insider dealing than the persons who lose thereby. The extent of losses occurring is impossible to calculate. Insider dealing also leads to loss of confidence of investors in stock market as they feel that the market is rigged and only the few who have inside information benefit and make profits from their investments.

With a view to strengthening the existing Insider Trading Regulations and to create a framework fro prevention of insider trading, a committee was constituted by SEBI under the chairmanship of Shri Kumar Mangalam Birla. The recommendations of the Committee were considered by the SEBI board and the amended regulations notified in the Gazette on 20th February, 2002. SEBI had framed the Insider Trading Regulations with the approval of the Central Government under the Securities and Exchange Board of India Act, 1992.

Who is an insider?

The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, say, “insider” is any person who, is or was connected with the company, and who is reasonably expected to have access to unpublished price-sensitive information about the stock of that particular company, or who has access to such unpublished price sensitive information.

Connected person shall mean any person who is a connected person six months prior to an act of insider trading.

Unpublished information means information which is not published by the company or its agents and is not specific in nature. Speculative reports in print or electronic media shall not be considered as published information.

Information that could be price sensitive includes periodical financial results of a company, intended declaration of dividend, issue or buyback of securities, any major expansion plans or execution of new projects, amalgamation, merger, takeovers, disposal of the whole or substantial part of the undertaking and any other significant changes in policies, plans or operations of the company. The prices of most securities reflect the available

However, insider trading isn’t always illegal. Trading by a company insider in its shares is not violation per se and is legal. What is illegal is the trading by an insider on the basis of unpublished price-sensitive information.

Insider trading violations may also include ‘tipping’ such information and the person using it.

In the United States and many other jurisdictions, however, “insiders” are not just limited to corporate officials and major shareholders where illegal insider trading is concerned, but can include any individual who trades shares based on material non-public information in violation of some duty of trust.

SEBI’s definition of an insider is very comprehensive.

And their relatives

Relatives as per Companies Act

1. Father 12. Son’s daughter

2. Mother 13. Son’s daughter’s husband

3. Son 14. Daughter’s husband

4. Son’s wife 15. Daughter’s son

5. Daughter 16. Daughter’s son’s wife

6. Father’s father 17. Daughter’s daughter

7. Father’s mother 18. Daughter’s daughter’s husband

8. Mother’s mother 19. Brother

9. Mother’s father 20. Brother’s wife

10. Son’s son 21. Sister

11. Son’s son’s wife 22. Sister’s husband

But several close relatives are excluded

-All in-laws (Brother-in-law, Father-in-law etc.)

-Brothers’ wife’s brother etc.

Government employees are also excluded: Government employees who learn of price-sensitive information because of their employment by the government.

SEBI’s definition of price sensitive information is comprehensive

(i) Periodical financial results of the company;

(ii) Intended declaration of dividends (both interim and final);

(iii) Issue of securities or buy-back of securities;

(iv) Any major expansion plans or execution of new projects;

(v) Amalgamation, mergers or takeovers;

(vi) Disposal of the whole or substantial part of the undertaking;

(vii) Any significant changes in policies, plans or operations of the company.

However, why was the following dropped in the amendment in 2002?

Such other information as may affect the earnings of the company. The range of situations in which one comes to possess valuable Information is extensive and the law should be amended to cover as many typical situations as possible.

We have a weak and delayed dissemination process:

Stage 1

Disclosure of interest by inside insiders

Initial Disclosure: Any person, who is a director or officer of a listed company, shall disclose to the company in Form B, within 4 working days of becoming a director or officer of the company.

Continual Disclosure: Any person, who is a director or officer of a listed company, shall disclose to the company in Form D, and any change exceeding Rupees 5 lac in value or 25000 shares or 1% of total shareholding or voting rights, whichever is lower.

Additional information filed by inside insiders

-All holdings in securities of that company

-Periodic statements of all transactions

-Annual statement of all holdings

Disclosure of interest by outside insiders

Initial Disclosure: Any person who holds more than 5% shares in any listed company shall disclose to the company in Form A, on becoming such holder within 4 working days

Continual Disclosure: Any person who holds more than 5% shall disclose to the company in Form C and change in shareholding, even if such change results in shareholding falling below 5%, if there has been change exceeding 2% of total shareholding or voting rights in the company.

Poor monitoring: There is no efficient monitoring by the exchanges of compliance of such filings

Stage 2

Disclosure by company to exchanges

Stage 3

Dissemination by exchanges to the market

The disclosures made to exchanges are required to be disseminated by them to investors in a quick and efficient manner through the exchange network as well as through their websites.

Is disclosure by exchanges quick and efficient?

There is no format in the regulation for disclosures from exchanges to the market

(Which actually is the most important).The 4 forms (A to D) are not made available on the website. There are a few diligent insiders who file information. However, these filings are impossible to find or make any use of

How does insider trading work?

An insider buys the stock (he might also already own it). He then releases price-sensitive information to a small group of people close to him, who buy the stock based on it, and spread the information further. This results in an increase in volumes and prices of the stock. The inside information has now become known to a larger group of people which further pushes up volumes and prices of the stock.

After a certain price has been reached, which the insider knows about, he exits, as do the ones close to him, and the stock’s price falls. Those who had inside information are safe while the ordinary retail investor is stuck holding a white elephant as, in many cases, the ‘tip’ reaches him only when the stock is already on a boil.

The regular investor gets on the bandwagon rather late in the day as he is away from the buzz with no direct connection to the ‘real’ source. He buys the overvalued stock due to imbalance in the information flow.

Is all Insider Trading illegal?

It is a term that most usually associates with illegal conduct. The term actually includes both legal and illegal conduct.

The legal version is when corporate insiders (inside insiders) buy and sell stock in their own companies. They must, of course, report their trades to the stock exchanges.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.

Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

Objectives of Regulations:

The objective of regulation is to prevent insider trading by prohibiting dealing, communicating on matters relating to insider trading. The regulation provides that no insider shall:

Power to make inquiry or inspection:

If SEBI suspects that any person has violated any provisions of these regulations, it may make inquiries with such persons as it deem fit, to form a prima facie opinion as to whether there is any violation of SEBI regulations on insider trading.

SEBI may appoint one or more officers to inspect the books and records of insiders or any other persons as mentioned in section 11(2) (i) of the SEBI Act.

Some Cases:

Conclusion and Recommendations:

Our systems do not capture majority of the insider trades

The shareholding format needs to change drastically

BIBLIOGRAPHY

Books and treatises

Websites

Understanding Equity Options

admin — Thu, 17 Dec 2009 19:48:12 +0000

Welcome to the wonderful world of equity options. You may have heard that option trading is high risk, and indeed it is, for much the same reasons that spread betting is high risk. The instruments themselves are derivatives from the cash markets, and are highly geared, but options themselves were originally introduced to the US markets in the mid 1970’s as a tool for hedging risk. In other words they were a form of insurance. You paid a premium, a bit like car insurance, which covered you in the case of an accident. In the financial markets you bought some protection in case the market went in the opposite direction. In this article we look at equity options, which are those derived from the cash market share or stock.

In the early years, the options market was very small, with only a handful available on the larger blue chip stocks in the Dow 30 and other major indices. Today, the American market is enormous, with over 12,000 equity options available to trade. In the UK it is just under 100 (the blue chip shares mainly) which can be rather limiting, but if your trading is mainly in UK shares it is not a bad place to start.

OK, let me start with some definitions, and I will try to keep this as simple as possible (not because you will not understand) but because the terminology can be very confusing for newcomers. It took me 6-9 months to get comfortable with this so do not expect to pick it up straight away. Firstly there are two type of options as follows :

A Call Option – A contract representing the right for a specified time to BUY a specified security at a specified price

A Put Option – A contract representing the right for a specified time to SELL a specified security at a specified price

An option is a contract which gives the buyer the right, but not the obligation to buy or sell an underlying asset at a specific price on or before a certain date. Right, let me try and explain. Suppose you are buying a classic second-hand car. You visit the owner, love the car, and agree a price, but explain that you will not have the cash for 4 weeks. The owner agrees to hold the car and the price for you for only 4 weeks, but on condition that you pay a small non – refundable premium for his trouble (this is in addition to the full price of the car)

This is what an option contract is – the car owner has effectively written an options contract to give you, the contract holder, the right to buy the car within the four week period, at the agreed price. Now, as the option buyer ( or holder ) you have an option to buy, but you do not have to if you change your mind. Which is why in the above definition it says ‘ the right but not the obligation’ – if you change your mind you just walk away. All you have lost is your premium which the buyer keeps (even if you do decide to go ahead). The car owner, who has written the contract, has a contractual obligation to deliver the car at the agreed price, and he or she must deliver.

In summary, as an options buyer, you have choices – you can exercise the contract or walk away. As an options seller, you do not have any choices – if the contract is exercised you must deliver the asset. If we take the example a stage further (I know its not ideal but I hope it gives a feel for what these things are all about). Let us assume that whilst you are waiting for the bank to supply the cash, so that you can go ahead and buy the car, the original factory where the cars were made is destroyed by fire. Suddenly these cars increase in value sharply. You, however, have a contract in writing at an agreed price, provided you buy within the next four weeks. Now, you as the buyer or holder of the contract have two choices. Firstly, you exercise your contract by paying the seller the agreed price, and immediately put the car on the market and sell at a profit, or alternatively you sell your contract on to someone else, as it now has a higher ‘premium’ value due to the increase in value of the underlying asset (the car )

Now, as the seller of the car ( the writer of the contract option )you have no idea who will exercise the contract, which could have been bought and sold many times over during the 4 week period. But one thing is constant. If it is exercised, you will have to deliver the asset at the price agreed.It is a contract. This is how the options market works.

If we now look at some of the unique features of options these are as follows:The contract is for a specified time, normally 4 weeks, but there are options called LEAPS which extend for years. As there is a specified time, this is a wasting asset. If you buy an option it will be worthless in 4 weeks if not exercised. Each has an agreed contract price fixed for the life of the option. This is based on the underlying asset ( the share ). The option carries a premium. This is paid to the seller of an option by the buyer and is always kept by the seller. CALL options increase in value as the underlying asset increases, whilst PUT options increase as the underlying value of the asset decreases.

OK, lets just recap the above. When you buy an option the purchase price is called a PREMIUM. If you sell an option, the premium is the amount you receive. As a buyer you have rights, but no obligation. As a seller you have an obligation to deliver the terms of the contract. An option seller is also called a WRITER. Options are a derivative product, they are derived from something else. Equity options are derived from the equities market so the underlying asset is the share or stock price. The premium will vary minute by minute, up and down as the underlying value of the asset changes in the cash market. Options are leveraged instruments and therefore higher risk. Most equity options are ‘Physical Delivery’ which means that shares must change hands if the contract is exercised. Now one last point before we move on and it is simply this – as an option writer (seller ) you do of course have one choice – you can buy yourself out of the obligation by buying the contract back – this will naturally cost you more if the premium has increased in value! ( if the premium has decreased you may want to close out the contract for a small profit, or just leave it to expire for 100% profit on the premium ) As you can see from the above, the same option can be bought and sold many times before it is either exercised or expires worthless. Whatever happens, the option seller keeps the premium received from the initial buyer 1. As you can imagine all this trading has to be tightly controlled to ensure that buyers and sellers are matched correctly, and that contracts are fulfilled by sellers. In the UK, the options exchange is called LIFFE ( London International Financial Futures and Options Exchange ) and this is where all equity options are managed and traded. In the US there are several exchanges, but the principle ones are CBOE ( Chicago Board of Options Exchange ), AMEX and Philadelphia Exchange. Everything to do with trading, managing and exercising the options is conducted by the exchanges. You do not have to worry about actually doing anything – it all happens automatically. So if, for example, you have sold a call, and the contract is exercised, this will all happen automatically and the broker will transfer the shares out of your account at the agreed contract price and replace with cash. Finally there are two ’styles of options’ – American style and European style. American style options can be exercised at any time as in our example above, whilst European can only be exercised only at expiry. Most equity Options will be American style but please check and make sure beforehand.

Whilst the terminology of equity options may seem strange at first, it is worth the effort. In their simplest form they can simply be bought and sold like any other financial instrument. Remember however that these are assets with a time value, they cannot be held for long periods as they all have an expiry date as part of the contract. Many traders simply buy and sell options throughout the trading day, making their money from the increase or decrease in the options value. Others use them in combination with the underlying stock to write calls. There are many ways to benefit from an understanding of these sophisticated instruments and I would urge you to dip a toe in the water!

Option Rollouts â Add Profits and Safeguards to Your Option Positions

admin — Sat, 12 Dec 2009 07:48:03 +0000

For those who have not yet discovered the benefits of rolling out options, itâs high time you look closely at this very valuable feature. Roll outs not only offer additional profit generating advantages but more importantly it offers an extraordinary ability for limiting or eliminating potential losing positions. Before going on to describe the remarkable benefits of using the rollout process letâs be sure we understand what is meant by rolling out an option. It is simply the closing of one option position and the opening of another position either farther away in strike price or farther away in expiration date, or both, with the objective of making an existing condition more beneficial to you.

There are many situations where option rollouts may be used. For purposes of this article, being limited in scope, I will just touch on two of the more practical uses of the rollout process. The first is the benefits it gives the covered call player. The second is the remarkable ability of the rollout feature to offer protection against the potential for loss that faces the naked option writer.

How does a roll out benefit the covered call player? Consider this scenario: you own 500 shares in a company which you originally bought some time back at a price of $50. Assuming the market has recently gone on an uptrend and your stock has now appreciated to $60. You are tempted to sell and take in profits from your investment. At the same time you donât want to miss out on any further upward movement the stock may take in the face of what appears to be a strengthening market. Yet you are also afraid that the market might reverse direction and you could then lose some of the profits youâve already achieved. Selling call options against your stock enables you to participate in any future appreciation of your stock, and the profits generated from the option sale provides some protection if the market should change direction forcing you to exit your position. If the stock continues rising and hits the strike price at which you sold the calls, you are faced with two nice choices. Let the option holder call the option (exercise his right to buy the stock at the strike price you sold it for) or, roll out the options to a farther expiration and strike price once again allowing you to participate in further gains if the stock continues its upward trend. If you let your options be called you have gained not only the money from the option sale but also from the appreciation price of the stock at the time the option is called. But if you roll out the calls you could continue to stay in the game for a further appreciation in the value of your stocks. Of course there is always the potential of a market reversal and losing the potential for further appreciation. Even so you still have gained the premium money you obtained in the sale of the calls. If the market continues uptrending you can ride the appreciation wave by rolling out your positions several times up to and until you run out of future strike prices. By this time you would have gained substantial profits.

Now letâs see how the roll out benefits the naked option writer. When you sell a naked option, be it call or put, you theoretically face the risk of unlimited losses in your position due to the fact that if the underlying security moves against you the potential for loss is unlimited. The term âtheoretical riskâ is used here because this risk has been blown out of proportion and grossly exaggerated. While the potential risk of loss does exist itâs a negligible one if you employ appropriate strategies to defeat it. Please see another article on this subject entitled âRisk of âUnlimited Losesâ In Naked Option Selling Is A Mythâ where it talks about this theoretical risk being totally controllable using proper defensive strategies. One of the defensive strategies mentioned in that article is the use of roll outs.

Hereâs a scenario that may face an option writer. Let us suppose you sold naked puts several strikes out-of-the-money with expiration forty to sixty days away. Some time during its life the market turns against you and begins to drop down to the price level of the strike you sold. Many option traders would just close out the position buying back the puts at a higher price and taking a loss. You being the smart trader would roll out your puts by buying them back at the now higher price and at the same time sell new puts farther out in time and several strikes out-of-the-money at a higher price than you bought back your puts. Youâve just converted your original 40 or 60 day puts into longer expiration puts thereby avoiding taking a loss at this point in time. The process of closing and opening positions can be done as a spread trade and in this way you are paying reduced brokers commissions. If the market continues its downward trend you can also keep rolling out your positions repeatedly till you reach a point where there are no more available future options to roll out to. At this point your puts may be so far out in the future that even if it goes deep in the money chances of it being exercised are slim. There is an e-book written on this subject titled âStock Options: The Greatest Wealth Building Tool Ever Inventedâ where the roll out process is described in much detail together with other protective strategies for naked option traders. The e-book contains numerous actual trading illustrations of the use of the roll out process. See this articleâs author profile for more information.

If you are going to be an option trader or already are one, rolling out is a must strategy in many of your option trades. You will find the strategy highly rewarding and in many cases offers a wide variety of choices to your trading styles. Not only does it enable you to increase your trading profitability but more importantly it affords you the ability to protect your trade positions against certain adverse conditions. As this article is written today, we are in the midst of a financial crises as never seen in a long time. The stock market has now depreciated to panic lows with investors seeing the value of their investments evaporate into thin air. Yet for many option traders extensively using the roll out process they will weather the storm much better than others and they will certainly recover much faster when economic conditions turn for the better.

Trading Stock Options: Basic Option Trading Strategies And How I’ve Used Them To Profit In Any Market (Paperback)

admin — Thu, 10 Dec 2009 14:39:32 +0000