November 5, 2008
Options Trading Mastery: Vertical Spread Test Scenario
Let’s put together what we’ve been talking about, develop an imaginary spread scenario and set it in real life events.
In October, let’s say that you begin to hear about IJK stock. It looks interesting, so you then use a variety of sources to learn about IJK: news, charts, outside analysts, internet research etc. From your investigations you decide that this stock is poised for a strong upward move and you’d like to take advantage of it.
However, each share is $50.00 and you question whether you want to put out the capital for enough shares to make the trade worthwhile.
Now is the time to investigate IJK spreads. Since you are bullish on the stock, you investigate the bullish plays of the call spreads and the put spreads. You check the pricing of both since you are aware that implied volatility and time decay will affect both your purchase price and your selling price if you decide to sell out the spread before expiration.
Let’s say that you set the spread’s maximum potential gain at $10.00 using our formula. Then you decide you want to buy a call spread, so you buy 10 IJK Nov. 50 calls and sell 10 IJK Nov 60 calls. The spread is called Nov. 50-60. The spread’s cost is $3.50, which means you pay $3500 for the trade, inexpensive when you consider that to purchase 1000 shares of IJK stock would have cost you $50,000! Now, you wait and follow the stock price of IJK. If you hold the position to expiration, you face the following losses or gains.
First, if the stock does not move up as you expected and stays at $50 or decreases in value, your spread is worthless and you lose the $3500 that you paid for the spread. Second, if the stock begins to move up, you first recoup your investment and then move into profits. After the stock has moved up $3.50 you are at the breakeven point. Every money advance after that represents profit.
The chart below represents the spread’s losses and gains and your total profit
This chart is based on stock prices at expiration Friday in November. Until then the spread’s value fluctuates between $0 and its maximum (the difference between strike prices) of $10.00
At any time until expiration, you can sell out of the spread but what you receive for the price may be influenced by implied volatility and time decay and that will change your profit or loss. If you hold the spread until expiration and your bullish lean proves true, your maximum profit on your $3500 investment is $6500.
You paid $3500 for the spread and received $10,000 at expiration with the stock at $60.00. That represents a $6500 profit which is a 186% return.
If you had invested $50,000 for 1000 shares of IJK and at expiration sold the stock for $60,000, your profit is $10,000 for a 20% return.
For many investors the reward/risk scenario of the spread is attractive because investors can limit the capital at risk and the time of risk/reward exposure. The spread also offers protection if your lean is bullish or bearish. Finally, the spread has the potential of a large percentage return on investment.
By: Ron Ianieri
About the Author:
In October, let’s say that you begin to hear about IJK stock. It looks interesting, so you then use a variety of sources to learn about IJK: news, charts, outside analysts, internet research etc. From your investigations you decide that this stock is poised for a strong upward move and you’d like to take advantage of it.
However, each share is $50.00 and you question whether you want to put out the capital for enough shares to make the trade worthwhile.
Now is the time to investigate IJK spreads. Since you are bullish on the stock, you investigate the bullish plays of the call spreads and the put spreads. You check the pricing of both since you are aware that implied volatility and time decay will affect both your purchase price and your selling price if you decide to sell out the spread before expiration.
Let’s say that you set the spread’s maximum potential gain at $10.00 using our formula. Then you decide you want to buy a call spread, so you buy 10 IJK Nov. 50 calls and sell 10 IJK Nov 60 calls. The spread is called Nov. 50-60. The spread’s cost is $3.50, which means you pay $3500 for the trade, inexpensive when you consider that to purchase 1000 shares of IJK stock would have cost you $50,000! Now, you wait and follow the stock price of IJK. If you hold the position to expiration, you face the following losses or gains.
First, if the stock does not move up as you expected and stays at $50 or decreases in value, your spread is worthless and you lose the $3500 that you paid for the spread. Second, if the stock begins to move up, you first recoup your investment and then move into profits. After the stock has moved up $3.50 you are at the breakeven point. Every money advance after that represents profit.
The chart below represents the spread’s losses and gains and your total profit
This chart is based on stock prices at expiration Friday in November. Until then the spread’s value fluctuates between $0 and its maximum (the difference between strike prices) of $10.00
At any time until expiration, you can sell out of the spread but what you receive for the price may be influenced by implied volatility and time decay and that will change your profit or loss. If you hold the spread until expiration and your bullish lean proves true, your maximum profit on your $3500 investment is $6500.
You paid $3500 for the spread and received $10,000 at expiration with the stock at $60.00. That represents a $6500 profit which is a 186% return.
If you had invested $50,000 for 1000 shares of IJK and at expiration sold the stock for $60,000, your profit is $10,000 for a 20% return.
For many investors the reward/risk scenario of the spread is attractive because investors can limit the capital at risk and the time of risk/reward exposure. The spread also offers protection if your lean is bullish or bearish. Finally, the spread has the potential of a large percentage return on investment.
By: Ron Ianieri
About the Author:
Ron Ianieri is currently Chief Options Strategist at The Options University, an educational company that teaches investors how to make consistent profits using options while limiting risk. For more information please contact The Options University at http://www.optionsuniversity.com or 866-561-8227
Filed under Investing by Administrator
Here we will outline three trading tools for bigger profits all futures traders can use.
These tools tend not to be used by many traders, but are heavily used by the savvy pro traders to enhance profit potential and you should consider them to in your futures trading.
Check them out for yourself and they will add a new dimension to your futures trading that could increase your trading profits to.
1. Gauging the pulse of the market
The “opening range technique is the ultimate filtering device for futures traders and is highly effective, as it allows traders to take the pulse of the market before entering it each day.
Say you have a buy signal from the previous days close, you can of course blindly buy the open, or you can use this filter.
Here is how it works:
1. Get the opening range and wait.
2. If prices are above the opening range go long with a market order
3. If they are not place a day order 3 ticks above the high of the opening range.
Here you are checking the pulse and strength of the market.
If prices move up your on board, if prices drop from the opening range you are kept out of a losing trade.
If your futures trading method is still telling you to be long, try again the next day. If your short of course, it’s the exact same in reverse.
Sounds simple? It is, but its very effective.
In our experience you can cut losing trades by up to 20% using this tool and it’s an excellent method for filtering your trading signals.
2. How to never a miss a big move
Richard Donchian’s four week rule outlined below may seem simple, but it is highly effective in catching big moves in futures trading.
We all know that most of the big moves each year in futures markets take place from market highs.
Most traders however want to buy dips to support and fail to get in on the big moves. This simple tool however will make sure you never miss a big move.
Here’s how it works.
Let’s assume you are looking at crude oil and spot a buying opportunity. Rather than buying a dip, wait for a new 4 week high and then take a long position.
You should only use this rule only in strong bull or bear markets, not ranging markets.
If you have a strong bull market, buy new four week highs and conversely, if you have a strong bear market sell new four week lows.
Its simple and a very effective tool try it out for yourself and see.
3. Intra commodity spreads
Again, another simple trading idea, which will give you risk reduction and staying power.
All you do is trade two different months in the same commodity
Your aim is to buy the month that is expected to increase most and sell another month to give you some risk protection.
Normally, the front month will move the most, so you buy it and sell a back month. This is known as a bull spread the reverse action in a bear market is a bear spread.
For example, the summer months are the strong ones in unleaded gasoline, so if your bullish buy them and sell a weaker back month as protection.
Spreading works particularly well in these futures markets:
Copper, energies, soybeans, wheat, coffee, sugar, cotton and all the meats expect bellies.
When using intra commodity spreads in futures trading, you need to take into account the general market trend and the strength of the spread. Spreading is great risk control vehicle and a way to get staying power an is a great tool for traders with small trading accounts.
All the above are simple tools, but don’t be deceived by their simplicity. If used correctly they can all enhance your futures trading and give you bigger profit potential.
By: Sacha Tarkovsky
About the Author:
These tools tend not to be used by many traders, but are heavily used by the savvy pro traders to enhance profit potential and you should consider them to in your futures trading.
Check them out for yourself and they will add a new dimension to your futures trading that could increase your trading profits to.
1. Gauging the pulse of the market
The “opening range technique is the ultimate filtering device for futures traders and is highly effective, as it allows traders to take the pulse of the market before entering it each day.
Say you have a buy signal from the previous days close, you can of course blindly buy the open, or you can use this filter.
Here is how it works:
1. Get the opening range and wait.
2. If prices are above the opening range go long with a market order
3. If they are not place a day order 3 ticks above the high of the opening range.
Here you are checking the pulse and strength of the market.
If prices move up your on board, if prices drop from the opening range you are kept out of a losing trade.
If your futures trading method is still telling you to be long, try again the next day. If your short of course, it’s the exact same in reverse.
Sounds simple? It is, but its very effective.
In our experience you can cut losing trades by up to 20% using this tool and it’s an excellent method for filtering your trading signals.
2. How to never a miss a big move
Richard Donchian’s four week rule outlined below may seem simple, but it is highly effective in catching big moves in futures trading.
We all know that most of the big moves each year in futures markets take place from market highs.
Most traders however want to buy dips to support and fail to get in on the big moves. This simple tool however will make sure you never miss a big move.
Here’s how it works.
Let’s assume you are looking at crude oil and spot a buying opportunity. Rather than buying a dip, wait for a new 4 week high and then take a long position.
You should only use this rule only in strong bull or bear markets, not ranging markets.
If you have a strong bull market, buy new four week highs and conversely, if you have a strong bear market sell new four week lows.
Its simple and a very effective tool try it out for yourself and see.
3. Intra commodity spreads
Again, another simple trading idea, which will give you risk reduction and staying power.
All you do is trade two different months in the same commodity
Your aim is to buy the month that is expected to increase most and sell another month to give you some risk protection.
Normally, the front month will move the most, so you buy it and sell a back month. This is known as a bull spread the reverse action in a bear market is a bear spread.
For example, the summer months are the strong ones in unleaded gasoline, so if your bullish buy them and sell a weaker back month as protection.
Spreading works particularly well in these futures markets:
Copper, energies, soybeans, wheat, coffee, sugar, cotton and all the meats expect bellies.
When using intra commodity spreads in futures trading, you need to take into account the general market trend and the strength of the spread. Spreading is great risk control vehicle and a way to get staying power an is a great tool for traders with small trading accounts.
All the above are simple tools, but don’t be deceived by their simplicity. If used correctly they can all enhance your futures trading and give you bigger profit potential.
By: Sacha Tarkovsky
About the Author:
MORE FREE INFO
On finance including investments and becoming a succesful trader succesful trading visit our website for articles features and downloads at:http://www.net-planet.org/index.html
Filed under Investing by Administrator
October 23, 2008
Option Credit Spread Trading - Limited Risk with Limited Profit
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.
By: Brad Griffin
About the Author:
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.
By: Brad Griffin
About the Author:
Brad Griffin is an Accountant and CPA and has been Investing in the U.S Stock Market for 10 years and the options market for the past 5 years. I am now sharing my knowledge and success trading options at my website http://www.indexspreadoptionstrading.com.
Filed under Non Fiction by Administrator
October 5, 2008
Spread Betting
Worldspreads.com offers professional spread betting in the UK with experienced and expert advice on spread betting in all its forms. We also have a variety of products available, including online spread betting, and offer tutorials in all our services for the less-experienced spread trader.
We offer a range of services for spread betting in the UK, including Financial Spread Trading, CFDs, Futures & Options and Foreign Exchange. What sets us apart as a company is our hands-on approach; we know that many of our products can appear complicated at first. Worldspreads is a UK-based company that can offer you industry-leading advice gained from almost a decade in the industry. Our UK spreadbetting company is made up of people who have traded the money-markets for most of their careers.
To ensure that our clients get the best and the most from their spread trading, we not only invite you to our offices for an introduction to our methods, but we also host fortnightly seminars on all aspects of trading, including online spread betting. These seminars are hosted by one of the leading private investors in the UK: Alpesh Patel.
Worldspreads is a specialist spread betting company that trades under two names: ‘Worldspreads’ deals with financial spread trading and our sister company, ‘SportsSpread’, is dedicated to sports spread betting. Any profits made from trading with either of these companies are exempt from betting tax and capital gains tax.
Both companies can be contacted either by telephone, or by using our fully interactive website. To see how you can benefit from over ten years experience at the leading edge of this industry, contact us today.
By: Anant Lewis
About the Author:
Anant is a spread betting expert and has been associated for many years with www.worldspreads.com, the leading spread betting company which offer financial spread betting and sports spread betting services.
Filed under Investing by Administrator