Call Option Trading Secrets » Finance

Trading the Gold Market to Go Up and Down

admin — Mon, 18 Jan 2010 05:42:32 +0000

Gold has had a tremendous year. The flight to the perceived safety of gold, as well as the US Dollar weakness, has pushed the metal straight through the $1,000 per ounce mark and up to $1,200.However, it has not been a smooth upward journey. Investors should be aware that ‘pull backs’ in gold can be very violent indeed. We have had two major retracements in the last four years from fast rallies. Both of these finally ran out of steam but not before wiping out at least 25% of the price. If the same were to happen this time, Gold would slip towards the $900 mark.The acceleration of the gold market towards the end of 2009 was remarkably similar to the March/May move of 2006 and Oct/March 2007/2008. Both of these rallies saw sharp pull backs before regaining the upward momentum. The current target for the more aggressive gold bulls remains $1400. This level is a good deal closer now than when it was first mentioned by certain analysts. Having said this, it must be mentioned that Gold is having problems getting to $1,400.As it turns out, the problems concerning Dubai presented a massive buying opportunity. Of course, Dubai did give us the lesson that ‘the markets are prone to sharp declines’. Any such decline could shake out many bulls and compound moves to the downside.That is the risk of getting in at these levels. Whilst the upside could be fantastic, investors must have the stomach for possible shocks to the downside. On a bad day that could be as much as 5% in a couple of hours. So what to do? One option is to spread bet on gold. With spread betting you can trade in both directions. If the market looks like it will continue up, then you could bet on it to go up. Likewise, if a correction is due you can look at betting on the price of gold to go down.All forms of financial investment have the potential for incurring losses. For example, trading in stock, property, investment funds and pensions can lead to you losing money. With spread bets your losses can exceed your initial investment.Nevertheless, spread bets are a simple way of a) gaining access to the gold market and b) being able to trade the market in both directions.Yes, the gold market may move the wrong way. However, there are measures you can take to reduce your risks. You can add a Stop Loss to your trades which will mean that, if Gold moves against your position, the stop loss will close your bet and stop you from losing any more funds.On the plus side, the 24-hour trading that some firms like Capital Spreads offer on key markets can provide several opportunities. Whilst the underlying financial instrument may be closed you can still place trades on markets like Gold, Oil, the FTSE 100 and GBP/USD from Sunday night all the way through to Friday evening.

How to Make Money with Future Options Trading

admin — Sun, 03 Jan 2010 05:37:39 +0000

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

George Fontanills Incorporates Options to Lower Risk

admin — Sun, 27 Dec 2009 05:33:08 +0000

Trader George Fontanills first began utilizing options in order to go “delta neutral” on his futures positions, which would allow him to “still sleep well at night.” Since he began using options in conjunction with his futures trading, Fontanills believes he has found a way to accelerate his profits while decreasing his risk.
Fontanills began his professional life as a certified public accountant, but “decided that being a CPA wasn’t for me.” After earning a degree at Harvard Business School, Fontanills got involved in the real estate market, but then “the real estate market died.”
In 1988, with a few other partners, Fontanills decided to give the futures market a shot. “We hired a couple of guys. They happened to lose 10% of our money in 30 days and I thought ‘Hey, I could do that,” and Fontanills began to explore trading on his own.
In a systematic fashion, Fontanills studied the market. “I was probably one of the first users of Omega TradeStation and I started writing programs to try and figure out all the variables that were involved in a trade,” he explained.
“The first thing I figured out was that volatility and movement in a market meant that everyone was confused,” he said. To this day, Fontanills says he searches out markets with high volatility in order to place his trades.
Originally, Fontanills began as a day-trader, believing he could better control his risk in that fashion. However, he began to believe that he was missing a lot of the moves, which occurred overnight. At that point, Fontanills began to study options strategies. “I learned how to use options and how to become delta neutral so I could hedge myself in both directions and still sleep well at night and that’s when I really started to accelerate my profitability,” he said.
“Delta, by definition, is the rate of change of a price of an option to the rate of change to the price of the future,” Fontanills noted. “It’s how fast an option will change, relative to the speed of the futures.”
“Delta neutral means whether the market goes up or down, I’m in a position to make money,” Fontanills said. For example, “I’m short wheat and long two wheat calls, at the money. If wheat goes down, I’m making money on my short wheat position and eventually the rate of change will allow me to make more money on that position.”
While he notes that some traders tend to be scared away by the perceived complexity of options, Fontanills said “someone who can figure out how to make money with options can make money easier and safer than just using futures.”
In terms of fundamental factors, Fontanills said, “I don’t ignore fundamentals because I like to see what other people are thinking. Most of my money is made being a contrarian to what everyone else is thinking. The masses are usually wrong.”
In searching out his current trades, Fontanills said, “I look at the momentum of what is happening. If volatility and momentum goes to a certain level of what is way out of line, I’m looking for a reaction in the other direction and then I put on a trade … my greatest returns are made when something is really out of whack.”
The main future markets Fontanills trades are gold, oil, agriculturals (soybeans and wheat), S&P 500, interest rate markets and currencies. “I’m looking for fast, volatile markets and the S&P and bonds are definitely up there,” he said. Typically, Fontanills said his trades last “thirty days, at most.”
Advice he has for beginning futures traders: “Trade small–until you learn what you are doing. “Everyone overtrades at the beginning. I probably lost 20% of my account on my first trade,” Fontanills admitted. “Learn how to use all the methods that are out there to trade … learn how to use options, because every successful trader I know, knows how to use all instruments. Why reinvent the wheel? Follow the (methods) of people who have been successful,” he said. He does note, however, the importance of “whatever methodology you use, it has to fit your personality.”
Finally, of course, “learn how to limit your risk … if you can stay in the game long enough, you will learn how to become successful,” Fontanills said.

Introduction To Options Trading, Part 1

admin — Sat, 26 Dec 2009 17:41:11 +0000

The study of options can expand your perceptions about the range of possibilities. Most people are familiar with two forms of investment: equity and debt. There is a third method, however, and that third method is far more interesting than the other two. Its attributes are unlike any that most people understand-and these differences can be viewed as a troubling set of problems, or as a promising set of opportunities.
Let’s begin with a brief review, laying the groundwork about the two basic ways to invest. An equity investment is the purchase of ownership in a company. The best-known example of this is the purchase of stock in publicly listed companies, whose shares are sold through the stock exchanges. Each share of stock represents a portion of the total capital, or ownership, in the company.
When you buy 100 shares of stock, you are in complete control over that investment. You decide how long to hold the shares and when to sell. Stocks provide you with tangible value, because they represent part ownership in the company. Owning stock entitles you to dividends if they are declared, and gives you the right to vote in elections offered to stockholders. (Some special nonvoting stock lacks this right.) If the stock rises in value, you will gain a profit. If you wish, you can keep the stock for many years, even for your whole life. Stocks, because they have tangible value, can be traded over public exchanges, or they can be used as collateral to borrow money.
Example
Equity for Cash: You purchase 100 shares at $27 per share, and place $2,700 plus trading fees into your account. You receive notice that the purchase has been completed. This is an equity investment, and you are a stockholder in the corporation.
The second broadly understood form is a debt investment, also called a debt instrument. This is a loan made by the investor to the company, government, or government agency, which promises to repay the loan plus interest, as a contractual obligation. The best-known form of debt instrument is the bond. Corporations, cities and states, the federal government, agencies, and subdivisions finance their operations and projects through bond issues, and investors in bonds are lenders, not stockholders. When you own a bond, you also own a tangible value, not in stock but in a contractual right with the lender. The bond issuer promises to pay you interest and to repay the amount loaned by a specific date. Like stocks, bonds can be used as collateral to borrow money. They also rise and fall in value based on the interest rate a bond pays compared to current rates in today’s market. In the event an issuer goes broke, bondholders are usually repaid before stockholders as part of their contract, so bonds have that advantage over stocks.
Example
Lending Your Money: You purchase a bond currently valued at $9,700 from the U.S. government. Although you invest your funds in the same manner as a stockholder, you have become a bondholder; this does not provide any equity interest to you. You are a lender and you own a debt instrument.
The third form of investing is less well known. Equity and debt contain a tangible value that we can grasp and visualize. Part ownership in a company or the contractual right for repayment are basic features of equity and debt investments. Not only are these tangible, but they have a specific lifespan as well. Stock ownership lasts as long as you continue to own the stock and cannot be canceled unless the company goes broke; a bond has a contractual repayment schedule and ending date. The third form of investing does not contain these features; it disappears-expires-within a short period of time. You might hesitate at the idea of investing money in a product that evaporates and men ceases to have any value. In fact, there is no tangible value at all.
So we’re talking about investing money in something with no tangible value, that will absolutely be worthless within a few months. To make this even more perplexing, imagine that the value of this intangible is certain to decline just because time passes by. To confuse the point even further, imagine that these attributes can be an advantage or a disadvantage, depending on how you decide to use these products.
These are some of the features of options. Taken alone (and out of context), these attributes certainly do not make this market seem very appealing. These attributes-lack of tangible value, worthlessness in the short term, and decline in value itself-make options seem far too risky for most people. But there are good reasons for you. Not all methods of investing in options are as risky as they might seem; some are quite conservative, because the features just mentioned can work to your advantage. In whatever way you might use options, the many strategies that can be applied make options one of the more interesting avenues for investors. The more you study options, the more you realize that they are flexible; they can be used in numerous situations and to create numerous opportunities; and, most intriguing of all, they can be either exceptionally risky or downright conservative.
Tip
Option strategies range from high-risk to extremely conservative. The risk features on one end of the spectrum work to your advantage on the other. Options provide you with a rich variety of choices.

Trading Butterfly Option

admin — Tue, 15 Dec 2009 05:33:21 +0000

In stock trading, traders avoid spreads of any kind because limiting losses can also limit gains. It is a must to trade in a realistic way. If you trade a three-fold gain, which is the strategy that requires only little up-front capital, you strictly limit losses by neutralizing declining time value while opening the possibility of five to ten fold gains. This is done by holding the position to expiration, wherein it is part of any options players. The Butterfly option involves all these qualities. The butterfly option spread is the result from combined debit spread and credit spread, stuck over three strike prices. The butterfly option is basically the option position that is comprised of two vertical spreads with common price.

The butterfly option involves an opening position wherein options (Calls and Puts) are bought or sold at three different strike prices. This option is has both limited losses and limited profits. There are two basic types of butterfly option. One is the long butterfly that can be created by either employing call options or all put options. Because of put-call parity, the long butterfly that is generated from call options will behave like a long butterfly that is created using put options. In short, it doesn’t really matter whether you employ calls or puts to build the long butterfly option.

The long butterfly option can also be generated by buying an in-the-memory (ITM) call option or selling two at-the-memory (ATM) call options and or buying another out-of-the-money (OTM) call option. This is actually a combination of two opposing vertical spread options thus the name butterfly spread. Combining the profit profiles from the butterfly option, the stock prices will fall which in turn can cause limited losses. Also, if the stock prices jumps too high, limited losses can also be faced. However, in case the stock prices stay intact at the ATM option strike price, a limited profit will suffice in the butterfly option.

With that being said, the butterfly option is a good option strategy for low volatility. This is for the fact that betting on stock price that is not moving much so as to collect maximum profits. This butterfly option is also a low risk strategy because losses are limited when the stock crashes or creeps unexpectedly. The bad thing about this is that this can yield limited profits. In the long butterfly option, the trader can also use all put options rather than all call options.

Short butterfly option on the other hand is the exact opposite of the long butterfly. In this option, if the stock price falls, the trader receives maximum limited profits. Also, when the stock price is high, the trader receives limited profit. But here, the stock price doesn’t change much so the trader is faced with a loss, though this loss is limited as well. Short butterfly option is basically a strategy that is high in volatility but neutral in direction. A warning in both short and long butterfly option is that, they involve buying and selling options at three strike prices. This means that the investor needs to pay three commissions to open the position and another three commissions to close it. These extra commissions need to be considered when determining whether the butterfly will be profitable for any circumstance.

Option Trading Software- 12 Valid Reasons To Go In For Option Trading Software!

admin — Sun, 13 Dec 2009 17:33:13 +0000

Even in earlier days, most people looked upon the trading business as a lucrative one. The scene is no different today. As a matter of fact, the business is attracting more and more people all the time! Along with “people” growth, there has also been “technological” growth. The result is sophisticated softwares that provide help to the trader/investor in realizing his/her dream of generating huge revenues. The latest one to join the bandwagon is option trading software!
Below is a detailed commentary on the trading world, and how it has ultimately led to the development of option trading software–
(1) Looking at the history of the trading business, it has brought about so many changes. The business has expanded globally, giving rise to international trading markets and exchanges. For example, the New York Stock Exchange and the London Stock Exchange. The capital turnover is quite massive. And people are rushing to invest in stocks and bonds, hoping to get a share of the profits!
(2) All courses on economics focus on trade now-a-days; it has become so much a part of our lives! Actually, regional and international trade have become sources of wealth for developed countries like the United States. Looking at their progress, other developing countries (especially those from Asia) are also jumping into the fray.
(3) What Asian countries do is, export the products that they manufacture to other countries. The payment is made in dollars. These dollars are in turn used to import foreign products. Thus, the performance of the export trade decides the economies of the respective countries.
(4) More lucrative is the foreign currency exchange market, otherwise known as Forex! The capital in circulation daily is around $1.5 trillion, making it the cynosure of all eyes! Of course, there is commodities trading too, and some people are very interested in venturing into that arena also.
(5) What does one have to do in “trading”? Be like a sales agent. The investor/trader purchases what he/she wants, and then tries to sell it at a greater price. With more and more successful trades, the profits keep growing! Sometimes, the revenue generated in a single day itself is quite large!
(6) There is a certain term that the investor/trader needs to be familiar with, when venturing into the trading world–that is, options trading. There are particular “options” that are selected and that work better than others in the market. It is to this end that the option trading software was developed later on.
(7) What exactly are “options”?
They are actually contracts that afford “buyer rights”. The investor/trader is free to buy or sell any amount that he wants to, of a particular security, which could be stocks/commodities. The price for buying, and the price for selling are already determined beforehand (depending on market trends). The purchase/sale has to take place within specified time limits only. The investor/trader is not bound by any obligations.
(8) Contrast option trading with futures trading. The buyer who goes in for futures trading is under an obligation to pay the ordered security at the price asked for. Also, the pre-determined date has to be adhered to. In the same way, the seller is under an obligation to deliver the ordered security on the particular date specified and stick to the price asked for.
(9) In option trading, as mentioned before, the buyer is not obliged to do something that he/she does not want to do. If he/she feels that the security is not going to yield any profits, he/she can allow the option to lapse. What is lost in the process? Only the initial payment made.
(10) The person who chooses to take up options trading would be well advised to also go for option trading software so that risks are minimized. The software can be a guide to some amount of profit, if not 100% profits.
(11) The price may seem too high–$400. In fact, many may feel it is an unwanted luxury, well worth staying away from. But for a neophyte in the trading world, option trading software promises to be an extremely useful tool. It helps in making the right decisions.
(12) Finally, how is option trading software valuable to the trader/investor?
To illustrate with an example, there may be a “call” (for selling) option or a “put” (for buying) option that the investor/trader is dealing with. Despite knowing the market movements, if the buyer pays too much for a particular commodity, he/she stands to lose. The reverse is the case with an underpriced commodity. The risks are therefore lessened by the option trading software.

Stock Option Trading Millionaire Principles

admin — Tue, 01 Dec 2009 17:25:53 +0000

INTRODUCTION
Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs.
I have seen paupers become millionaires overnight…
And
I have seen millionaires become paupers overnight…
One story told to me by my mentor is still etched in my mind:
“Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock market’s direction. When they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He said, ‘One said BULLISH and the other said BEARISH!’”
The point of this illustration is that it was the trader who was wrong. In today’s stock and option market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategy and in the mental attitude and discipline one uses in implementing that strategy.
I share here the basic stock and option trading principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you are doing right and what you may be doing wrong.
You may have read ideas similar to these before. I and others use them because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your stock and options trading.
PRINCIPLE 1
SIMPLICITY IS MASTERY
When you feel that the stock and options trading method that you are following is too complex even for simple understanding, it is probably not the best.
In all aspects of successful stock and options trading, the simplest approaches often emerge victorious. In the heat of a trade, it is easy for our brains to become emotionally overloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.
PRINCIPLE 2
NOBODY IS OBJECTIVE ENOUGH
If you feel that you have absolute control over your emotions and can be objective in the heat of a stock or options trade, you are either a dangerous species or you are an inexperienced trader.
No trader can be absolutely objective, especially when market action is unusual or wildly erratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors, the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as many critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.
PRINCIPLE 3
HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES
This is the most important principle.
Most stock and options traders do the opposite…
They hold on to their losses way too long and watch their equity sink and sink and sink, or they get out of their gains too soon only to see the price go up and up and up. Over time, their gains never cover their losses.
This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have been undisciplined, you will see its truth.
PRINCIPLE 4
BE AFRAID TO LOSE MONEY
Are you like most beginners who can’t wait to jump right into the stock and options market with your money hoping to trade as soon as possible?
On this point, I have found that most unprincipled traders are more afraid of missing out on “the next big trade” than they are afraid of losing money! The key here is STICK TO YOUR STRATEGY! Take stock and options trades when your strategy signals to do so and avoid taking trades when the conditions are not met. Exit trades when your strategy says to do so and leave them alone when the exit conditions are not in place.
The point here is to be afraid to throw away your money because you traded needlessly and without following your stock and options strategy.
PRINCIPLE 5
YOUR NEXT TRADE COULD BE A LOSING TRADE
Do you absolutely believe that your next stock or options trade is going to be such a big winner that you break your own money management rules and put in everything you have? Do you remember what usually happens after that? It isn’t pretty, is it?
No matter how confident you may be when entering a trade, the stock and options market has a way of doing the unexpected. Therefore, always stick to your portfolio management system. Do not compound your anticipated wins because you may end up compounding your very real losses.
PRINCIPLE 6
GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY
You know by now how different paper trading and real stock and options trading is, don’t you?
In the very same way, after you get used to trading real money consistently, you find it extremely different when you increase your capital by ten fold, don’t you?
What, then, is the difference? The difference is in the emotional burden that comes with the possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after some successes.
After a while, most traders realize their maximum capacity in both dollars and emotion. Are you comfortable trading up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.
PRINCIPLE 7
YOU ARE A NOVICE AT EVERY TRADE
Ever felt like an expert after a few wins and then lose a lot on the next stock or options trade?
Overconfidence and the false sense of invincibility based on past wins is a recipe for disaster. All professionals respect their next trade and go through all the proper steps of their stock or options strategy before entry. Treat every trade as the first trade you have ever made in your life. Never deviate from your stock or options strategy. Never.
PRINCIPLE 8
YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE
Ever followed a successful stock or options strategy only to fail badly?
You are the one who determines whether a strategy succeeds or fails. Your personality and your discipline make or break the strategy that you use not vice versa. Like Robert Kiyosaki says, “The investor is the asset or the liability, not the investment.”
Understanding yourself first will lead to eventual success.
PRINCIPLE 9
CONSISTENCY
Have you ever changed your mind about how to implement a strategy? When you make changes day after day, you end up catching nothing but the wind.
Stock market fluctuations have more variables than can be mathematically formulated. By following a proven strategy, we are assured that someone successful has stacked the odds in our favour. When you review both winning and losing trades, determine whether the entry, management, and exit met every criteria in the strategy and whether you have followed it precisely before changing anything.
In conclusion…
I hope these simple guidelines that have led my ship out of the harshest of seas and into the best harvests of my life will guide you too. Good Luck.