Beginning Option Trading

December 15th, 2014

Want small risk and big rewards? Try option trading. There are many trading options available in option trading.

There are many terms that you will need to learn. However, the payoff can be great. Option trading allows a trade to be leveraged, thus the trader can control the entire value of an asset. The loss can only be equal to what the contract was bought for. The profit, therefore, can be greater since it is based on the asset itself.

An option is not set in stone. It gives the owner the option to sell or buy an asset at a certain price before a specific date. The option can be canceled. If it is not exercised before the date it expires by itself.

When a contract is settled the price is called the exercise price. It may also be referred to as a strike price. Cash-settled or by delivery are the ways options may be settled. Delivery is a basic transfer. Cash-settled means the owner may receive a payment in cash.

These are only a couple parts of options trading. Options trading allows for trading and profit in many types of markets. Learning how takes time but will be rewarding in the end.

Advanced Option Trading Terms You Should Know

November 30th, 2014

If you are using options, it is important to know advanced options trading terms and their meanings. The option trading terms below are commonly used and it is an advantage to every investor to understand the terms. Some are more obscure, but every investor should know and understand the following option trading terms.

Hedge – A trade that offsets, or partially offsets, the risk of owning another position. As an example, when you buy a call option and sell another, your potential profits are reduced. But, so are potential losses. Hedged positions are referred to as spreads.

Spread – An order instructing your broker to fill two (or more) orders for different options simultaneously. Your broker must execute both parts of the order, or neither. In order to open a hedged position, a trader who buys a bullish call spread buys one option, hoping to profit when the sock moves higher. But, to reduce the cash needed, you may create a position by selling a different call option – with a higher strike price.

Cash-settled – Upon execution, instead of transferring shares, the intrinsic value of the option, in cash, is transferred from the option seller to the option owner.

Derivative – An instrument whose value depends on the value of another instrument. In other words, its value is derived from the value of the other. Options are derivative products.

Equivalency – The concept that two or more different option positions appear to be very different, but, in fact, have identical risk and rewards. These positions are said to be equivalent, or synthetic. As an example a covered call is equivalent to a naked put (same strike and expiration) and is often referred to as a ‘synthetic put.’

Inside market – The true bid-ask market for an individual option or spread. It’s often narrower that the published market. To make the trade you don’t have to pay the offer on one option and sell the bid on the other. You can do better.

NBBO – The national best bid and offer. This should be a beginner’s term, but it is usually not the case.

Open Interest – A number of options that have been opened, but not yet closed or expired.

Settlement Risk – Is the risk associated with owning a position when you are at the mercy of the market’s opening price. European style options cease trading Thursday, before the 3rd Friday of the month, but the final closing price of the underlying, is not determined until the following morning. The Settlement Price, can be very different from Thursday’s close, resulting in unexpected large gains or losses. Settlement risk is the money gained or lost by accepting the settlement price Friday, instead of exiting Thursday.

Day Trading Using Options

November 30th, 2014

Options that offer leverage and loss-limiting capabilities, would seem like day trading options would be a great way to invest. In reality, the day trading option strategy faces a few different problems.
First, the time value component of the option, tends to dampen any price movement. For near-the-money options, while the intrinsic value may go up along with the underlying stock price, this gain is offset a little by the loss of the time value.
Second, due to the reduced liquidity of the options market, the bid-ask spreads are usually wider than stocks, sometimes up to half a point, cutting into the limited profit of the typical day trade.
If you are planning to day trade options, you must overcome these two problems.