John Callingham asked:


A great trader should know that to completely understand the foreign exchange market industry, he should know what a forex option trading is. It is an arrangement or agreement that bestows the holder a right to buy and sell a currency during a particular period in time, despite not having been obligated to do so.

Forex option has two types - call options and put options. The former grants the holder the right to buy the currency; the latter grants the holder the right to sell. Yet, there are still many kinds of options available and being used by businesses that trade abroad to lower the potential for loss brought by the fluctuating foreign exchange market.

But are there dangers in a forex option trading? The answer is yes. So, before investing in stock currency, you should know these three possible dangers that may come along the way.

1. The forex option trading is a risk because the market is big and totally unpredictable and may fall inevitably, thus, a chance to lose a huge sum of money for you.

2. The items may decrease or increase dramatically. For the forex trading market, it is truly convenient for the trick to be missed. Traders may lose the investments upon waiting for the chart to fill in over the internet.

3. Forex trading option is addictive. Like the dangers of addiction in online casinos, the risk of addiction is very high for investors or traders. The opportunity of its 24-hour access in a week provides it a high risk for addiction.

These three significant things should always give you a great deal of thought as to how forex option trading may come to a disappointing result after you have tried all efforts to win or save the game.

And, in contrast to these dangers of forex option trading, here are some helpful tips on how to take forex option trading safer and easier to handle:

1. Use a trusted, tested, and fixed trading strategy that you know have been truly working, basing it from your prior statistical tests.

2. Try to risk only a small set amount for each trade. It should only be a minimum percentage of your total trading capital.

3. Begin your trade only when your set of signals have been tested to hit the market. If there are other opportunities coming in your way, ignore them until you have not been sure of how it truly works in the business. Do not get the idea that you need to be trading at all times.

4. Before and while on the trade, check as much information as you can -both the information that gets to your favor and those that does not. Be smart and observant. Look into all the possible factors that get in your way of winning the game.

Forex option trading or any business for that matter is a game of wit, luck, and real timing. So, if you feel like you have it all at once, then just go for it!



Billy

Vishy Dadsetan asked:


A few years ago on a Monday morning, I checked my brokerage account and to my surprise it showed that I had purchased 1,000 shares of AMD for a total cost of $15,000. The payment for this purchase was taken out of my brokerage money market account.

Why surprised you may ask. I had not put an order for this purchase nor did I really intend to buy AMD. I get to this in a little bit.

Had I wanted to sell the stock on that day, I would have received around $14,500, a loss of $500 in just a few hours. In the end it worked out and I sold that particular stock a few months later for a handsome profit.

But on that day I had a paper loss of $500 and if I didn’t have enough money to pay for the purchase, the $500 loss would have been the least of my worries.

So, how did I end up with a stock that I did not necessarily want or order?

Automatic exercise threshold for equity options is the reason.

Today, I received the following message from two of my brokerage firms that reminded me of that day.

“Beginning October 2006, the Options Clearing Corporation (OCC) will implement a change to reduce the automatic exercise threshold for equity options. The current threshold of $0.25 will be set at $0.05 for expiring options that are automatically exercised by the OCC. The threshold for index options will remain at $0.01.”

Who cares about a measly $0.20? You can’t even buy a stick of gum with that.

For options traders this could mean a huge potential loss, margin calls and a whole lot of trouble.

Let’s go over a few simple reminders about options trading. Options are contracts that allow a person to buy or sell securities, for example stocks, at a predetermined price called option exercise price and on/or before a predetermined date in the future called option expiration date.

Options represent a reserved right but not an obligation. In other words, the holder of this right, that is to say the buyer, can exercise this right or not.

For example if you own a Microsoft January 25 Call Option, it gives you the right to buy Microsoft for $25.00 on or before third Friday in January. It is obvious that you would not exercise your option if Microsoft is at $20.00. In that case, if you really like Microsoft, you just go to open market and buy it for $20.00.

However, if Microsoft soars to $40, then you want to exercise your right (option) and buy the stock at $25 and turn around and sell it at $40 or keep it for further potential increase.

To exercise your options you need enough money to pay for buying the stock. Each option contract represents 100 shares of stocks, so 10 contracts represent 1000 shares of stocks. In our Microsoft example, for you to exercise 10 options contracts at the price of $25.00 requires $25,000 to be in your account.

If you don’t have that money, well, you may face margin calls and some other not so pleasant consequence. This is where the new change can cause some serious damage.

Options are a right and not an obligation except that you have to deal with automatic exercise threshold. This is the threshold the Options Clearing Corporation (OCC) uses to determine if they should exercise your right on your behalf.

In the letter I received from my brokerage firm, they informed me that if the price of the stock is only a nickel ($.05) above the exercise price, that would mean they will automatically buy the stock for me according to this new rule.

So what can options traders do not to deal with unwanted stocks?

First, they can and should watch the stock price and be proactive in the process especially on the option expiration date. Option trading is not by any stretch of imagination a passive approach. They can also call their brokerage firm and find out what other alternatives are available to them.

Seasoned options traders know what they should do and the aim of this article is to bring some facts to the attention of those who are just getting started.

In investing and in life I remember what Robert Grant said, “Men and women everywhere must exercise deliberate selection to live wisely.”

* DISCLAIMER: Vishy Dadsetan, http:/www.MyPersonalFinance.com or My Favorite Shop, Inc. do not endorse any product or company. This article does not provide investment, legal, insurance, or other professional services. If investment or other expert assistance is required, the services of a competent professional should be sought. Although Vishy Dadsetan has made every effort to ensure the accuracy and completeness of the information contained in this site, it assumes no responsibility for errors, omissions, inaccuracies, or inconsistencies.

© Vishy Dadsetan



Cheryl Goldmans

Wincent Loh asked:


An options trading rolling strategy is a strategy where you move your strike point to a new strike point during the month. Rolling basically means moving. In the world of options trading, this movement happens when you move positions from one strike point to another. That can either happen when you move points vertically (within the same month) or horizontally (to another month) or both.

You see, in order to maximize returns, investors should use the covered call strategy every month for a long time. That requires that the investor move, or roll, the strike position when the option expires. That is where the term “rolling” comes from.

Part of options trading rolling strategy also involves knowing when to avoid rolling, though. Occasionally an investor may decide not to roll the strike position. The purpose of that is to allow the capital to appreciate more. That is a rare scenario, however, because, if the call option is exercised when share becomes in the money, it could be called away.

As an option’s expiration approaches, there can be either one of two outcomes. Either the short option could be out-of-the-money or in-the-money. If the option is out-of the-money, it is worthless. The investor simply sells the next month’s call, after letting the option expire. If, on the other hand, the option ends up in-the-money, in order to keep the stock all the investor needs to do is sell the next month’s call after buying the short option back. Even though that sort of trade consists of two trades, buying and selling, it is considered one trade. It is also known as a spread. If you want to roll out your covered call or buy-write, you need to utilize such a spread. That way, you can buy back the short option and keep your stock.

Your second month option would be sold short. Thus, your covered call strategy would be re-initiated. The remaining positions are the short calls and long stock. You have to buy back the option that you are short at the beginning of the month. You would not have a choice for your front month option. However, you would have the choice to sell near term or with a farther expiration date for the next month option.

As you can see, rolling can be a bit complicated. However, you may find it well worth it, in the long run. The trick is to be careful to make the most informed decisions possible. Remember to never risk more than you can afford to lose either. After all, it is not an exact science.

So, now that you understand the options trading rolling strategy better, you may want to consider it. There is something to be said for using options trading rolling strategy to improve your earning potential, after all.



Bill Reinhard

Amar Mahallati asked:


Options are contracts on an underlying trading instrument such as shares of stock, bonds, a commodity, a mortgage loan and many others. However, there are common features among all options. It does not matter if it is a share of stock or a mortgage loan; they all have certain things in common. One such commonality is the contract feature that specifies what the option owner has actually contracted.

Options traders have two situations that may influence their buying and selling: calls and puts. There terms are used to indicate specific behaviors of options at various points of the option’s life.

CALLs

A call bestows on the contract holder the right to purchase an asset at a particular price on or before the option’s expiration date. This is only a right to buy, it is not an obligation. The call owner always has the choice to allow the option to expire. This does mean that all the initial money that was invested in purchasing the contract is lost, but the choice still stands.

Call buyers are gambling on the underlying asset’s behavior; that it will increase in price before it reaches its expiration date. Also that it will not only rise, but will rise significantly enough to show a profit.

In order to show a profit, the price must rise enough to cover the difference between the market price and the strike price. The strike price is that price at which the stock must be bought. But, because the option has a cost attached to it, the price must exceed that amount enough to cover the additional amount. This cost is referred to as the premium.

The premium of an option, whether call or put, is determined by a variety of elements. These include, but are not limited to, the price of the underlying asset, the strike price and the time remaining on the option.

The time remaining on an option is vital. The shorter the time remaining, the greater the risk and vice versa. For example, if there are 90 days left to exercise an option, the risk is somewhat lower than if there was only 1 day left. This is because within that 90 day period the price could rise enough to show a profit. With just 1 day remaining, however, the odds are considerably lower.

For example, on April 1, MSFT (Microsoft) has a market price of $27. Call options for June 30 are selling for $3 with a strike price of $30. One contract for 100 shares is purchased.

If the contract is held until the expiration date, the trader either loses $300 ($3 X 100, the initial price of the contract not including commission) or the trader can purchase the underlying stock at $30. If the current market price was $35, then the trader has profited by $200 ($35 - ($30 + $3) = $2 per share X 100 shares, sans commission).

When the market price of a share rises above the strike price, the option holder is “in the money.” If the market price drops, then the holder is “out of the money.”

PUTs

A put gives the option buyer the right to sell an asset at a particular price by a specified date. Again, like a call, this is a right, not an obligation.

Put buyers are anticipating the stock prices to fall before the option’s expiration date. Therefore, in such cases, the market price must drop below the strike price in order to show a profit from exercising the option. For simplicity purposes, the cost of the put is ignored. Under those circumstances the option holder is in the money.

Still using the previous example, maintain the same situation, but this time the option is a put. If the market price falls to $25, the profit would be as follows:

First, $3 x 100 = $300 = Cost of put, excluding commissions.

Purchase 100 shares at $25 per share = $2,500 this is to repay the broker ‘loan’ (this broker loan is a part of shorting stock which is borrowing shares you don’t own, then repaying later).

Sell 100 shares at Strike price = $30, 100 x $30 = $3,000

Profit = ($3000 - $2500) - ($300) = $200.

It is the broker who handles the underlying mechanics. All the investor has to do is order the trades at a given time and date.

Wise investors do their homework and research their strategies, no matter if they are investing in calls or puts. Options trading does present risks and is rather complicated when compared to simple stock trading, although all trading contains an element of complication and risk. But investors in this line should study the history, volatility and other vital factors of both the option contract and the underlying asset.

A trader should never enter the market blindly and trade without doing the proper research first. The failure to do adequate research and go into the trade informed puts the trader at a must greater risk of losing money and not showing a profit.



ARCHIE