Abhishek Agarwal asked:


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.



Gene

Jason Ng asked:


The recent stock market crisis (2008) not only rocked the financial system and the world economy but also the pockets of countless options traders all over the world. Options traders who used to profit in the years prior to this market crisis broke their bank as none of their options strategies seem to work in this market anymore. So what is it about extremely volatile markets and how should one profit through options trading under such conditions?

Extremely volatile market conditions not only produce unpredictable short term stock price swings but also open up the bid ask spread of individual stock options due to a lower liquidity and profiteering by market makers. This combined effect not only made it doubly hard for options traders to make a profit. Volatile options strategies, supposed to be meant for such conditions due to their ability to make a profit when the market moves up or down strongly and their ability to profit from an increase in volatility, also failed to produce any consistent profits due to the higher premium outlay and wide bid ask spreads, soaking up most of the profits. Unexpected rallies also crunch volatility to the extent of producing losses through decaying the premium of long legs at express speed. Short term (weekly, monthly) directional options strategies fared even worse as it not only became almost impossible to predict short term price swings but the high premium and bid ask spreads also took most, if not all, of the profits away even if the stock did move in the expected direction.

So what works in an extremely volatile market condition such as this one?

First of all, let’s look at all the different ways to trade options. There are 3 main options trading methodologies; Swing Trading, Position Trading and Day Trading.

Swing trading is a directional options trading methodology that aims to pick stocks that will move quickly and strongly within a short period of time in a predictable direction and then execute bullish or bearish options strategies in order to profit from these moves. As mentioned before, trying to profit from directional swing trading in an extremely volatile market is like swimming against the tide. Not only is directions hard to predict in the first place but the high options premium along with gapping bid ask spread all work against its favor.

Position trading is more complex than Swing Trading as it aims to profit mainly (although there are also position trading strategies that are directional in nature) from volatility or premium decay through putting together several different options and / or stocks in order to produce a hedged, market neutral position. Position trading has produced some pretty profitable results for me in this market crisis as volatility soared and options premiums are high. This puts the disadvantages of an extremely volatile market condition in the favor of the options trader. Such positions include dynamically hedged delta-neutral as well as delta-gamma-neutral positions. Both of these position trading strategies aim to neutralize market movement such that unexpected swings do not affect the position significantly while the position safely takes the high options premium on the short legs into your pockets.

Day trading is an extremely dynamic options trading method where options are bought and sold very quickly within one day in order to profit from the slightest intraday price swing or change in volatility. This strategy was a pretty hard one to profit from in low volatility market conditions as prices doesn’t change enough within a day to produce significant profits. However, day trading becomes extremely profitable in the hands of seasoned options trading veterans in extremely volatile market conditions such as this market crisis as the Dow itself has produced intraday trading ranges of up to 10%! Yes, this is the kind of trading range and price range that cannot be realized in normal market conditions. Day trading often takes the form of simply buying or shorting call or put options and then quickly covering them when profitable. Day trading also avoids the extreme overnight uncertainties that so often catch swing traders by surprise in this market crisis. Sudden overnight good news can often gap the Dow up by a significant amount and closing it over 10% higher. This can wipe out all your profits if you had been betting in the opposite direction overnight. Day trading, however, is extremely risky for beginners in options trading as the price movement is so fast and dynamic that when things happen, beginners may not know what to do and be able to do it quickly. This is therefore not recommended for beginners.

So, there you have, 2 ways to profit from this market crisis through options trading which I have used profitably. Options trading (http://www.optiontradingpedia.com) is definitely profitable under any market conditions as long as you use the right method for the prevailing conditions.



Den Burke

Chris Viscaya asked:


Stock Options are wonderful! This clever derivative of the equities market has to be one of the most ingenious inventions of modern times. For the trader who can learn how to win at trading options, there are many luxuries in life that can be experienced.

Success in options trading requires a consistent approach for long-term success. This statement is not meant to be some grandiose, idealistic comment made by some ‘trading theorist’. Rather, it is a statement born out of the hard knock and success experiences of the author and many other long-term, successful trader contemporaries.

A “consistent approach” to options trading can also be called a “trading system”, or an “options trading system” in this case. The term “trading system” is not necessarily confined to a series of computerized “black box” trading signals. A trading system could be something as simple as “buy an option on a stock in an uptrend that breaks the high of the previous bar after at least two days of pull back down movement that make lower lows.” A trading system is simply an organized approach that takes advantage of a repeated pattern or event that brings net profits.

Since an Option is a “Derivative” of the stock you must derive your options trading system from a stock trading system. This means your trading system must be based around actual stock price movement. That said, your trading system doesn’t need to work for all stocks it just has to work for certain types of stocks, certain volatility of stocks and certain price levels of stocks - So focus your trading system on certain stocks that have price behavior that is predictable to the net results you wish to abstract from a stock.

You can develop a trading system, a trading approach, and a trading methodology by identifying a price movement pattern (or lack of price movement pattern) or some event that occurs on some sort of regular basis. This means you can trade price behavior patterns on price charts such as: traditional chart patterns, trends, swings, pivot points, boxes - or you can trade events that motivate stock price such as earnings runs, post earnings runs, stock splits, or seasonal factors. Bottom line to make the maximum profit in options trading you want your stock to move in your favor fast and you want it to move far. Just a relatively small movement in the price of a stock can double your money in options!

There are so many different strategies and combinations that you can trade with options. You can buy calls and puts for directional trades. You can employ call spreads and put spreads to trade directional movements with a buffered risk, and profit. You can sell or purchase spreads to receive the credit of the premium decay by options expiration. You can trade straddles and strangles if you expect a big move but are not sure in which direction. You can also get into ratio back spreads, condors, and butterflies. And if you’re really feeling crazy you can sell ‘naked’ options (just better use a stop loss or you’ll end up like one of my old trading buddies who ran an account to $20 million then gave it all back selling naked options.) You can go to cboe.com for more information on options trading.

Directional options trading systems are the best. Keep it simple, buy calls for and upside trade or buy puts for a downside trade. But this means you need a directional stock trading system in order to trade directional options.

Here are a couple of different approaches for directional systems:

Develop an options trading systems that trades the swings in stock price movement. There are many good swing trading systems available today. We suggest you obtain one. Bottom line with swing trading is that you want to swing trade with the trend. Options brokers these days have advanced order technology that will allow you to enter swing trades based on the price movement of the stock so you don’t have to watch this stock all day. That huge advancement to swing trading options.

Swing trade the day bars. Most swing trading systems are based on daily bars on the stock price chart.

Swing trade the Intra Day Bars! Their other fantastic systems based on intraday charts that pin point swing trading entries.

Develop an options trading system that trades three to six month trends. This is where the big money is. Trading the large trends is where many are able to place larger sums of money to develop their net worth.

Develop an options trading system that trades pivot points. Pivot point trading is arguably the best way to trade options, because price action usually is explosive, and happens quickly in our direction when a trade works.

This is good because you can use shorter-term options and leverage yourself a little better. And it’s also nice you can make great gains in five days to four weeks on average so time decay issues become less of a worry.

There are many different directional trading methods you could use to trade options. You need to pick one, work it, and never use more than 10% options position size per trade on small accounts 1% to 5 % max position size on larger accounts. This methodical way of money management trading options is the fastest way to potentially rapid account growth, helping you avoid needless setbacks.



James

NobleTrading asked:


The ability to trade financial instruments like stocks, funds, futures and options have made trading much easier with high degree of automation and analysis. Traders can now trade options on different financial instruments over internet with discount commission schedules and on advanced trading systems. There are now a variety of online brokers offering options trading services including NobleTrading, OptionsXpress, Scottrade, and so on.

There are many things to be considered when choosing an online broker for options trading; most important ones are discussed here.

Products Available: Not all online options brokers allow traders to trade options on all financial instruments such as stock options, futures options, currency options, and so on. Choose the broker who enables you to trade your choice of options contracts.

Account Type: Some online options trading brokers offer single account to trade options, stocks and other financial instruments, while others offer different account for trading different instruments. Choose the broker who offers better connivance for you.

Commission and Charges involved: Different online brokers have different commission plans. Often there is a minimum amount required (which can be as low as $7 per contract) and additional charges ($1, $1.5 or $2) for each additional contract traded. Also look for other fees involved such as minimum account requirements, maintenance fees, wavy charges, etc.

Access to Markets: The market access you want should correspond to your trading style. Where option investors need delayed market access day traders and other active traders need real-time/direct/level 2 market access. Also not all brokers allow to trade all exchanges such as ISE, AMEX, PHS, PSE, CBOE, etc.

Trading Software: Successful options trading require good trading platforms. There are both web based and direct access (installable) options trading systems available today. The charting packages, greeks and technical analysis tools of these systems vary considerably. Find a suitable trading software and demo trade on it; almost all online brokers for options trading offer free practice accounts.

Options Trading Strategies: Options are powerful profit building tools for any market condition. Options traders follow a wide range of trading strategies from simple call and put options strategies to multi-legged complex options trading strategies. Make sure that you will get enough support from your brokerage firm to practice your strategies.

Order Types: Enquire which market and limit orders are supported by your broker and trading software. This is important as it is a major factor in practicing complex trading strategies.

The best place to start your quest is search engine results. You can get really good idea about the brokers from their websites and there are also many sites which provide comparison charts and reviews of online options brokers. Before we end one note – what ever broker you are associated, it is ultimately your trading knowledge and skill, and market performance which determine profit and loss.



Bernard

Jason Ng asked:


Are you about to pay thousands of US Dollars to attend an option trading seminar this weekend?

Whether or not you have decided to join that weekend seminar, I hope I can help you make a more intelligent decision here.

A Grim Experience At An Option Trading Seminar

I had a friend who joined a weekend, 2 days, option trading seminar (a very well-known one by the way), promising that every participant will walk away with enough knowledge to profit at any market condition and be on their way to their first million just by option trading. He paid USD$3000 for the 2 days seminar and walked away feeling all hyped up but totally confused as to how exactly to start option trading. He was then told to sign up for an advanced course for another USD$5000 for 4 days. That 4 days seminar taught him little more than option trading basics and how to open a trading account but still completely no idea whatsoever as to how to read the market and pick stocks on which to trade options in the first place. He was then asked to buy a USD$6000 laptop containing a magical software that will tell him exactly what to trade daily. That software turned out about a hundred opportunities a day… again, he is totally confused.

After paying a grand total of USD$11,000, my friend had completely no idea how to start trading options consistently and you guessed it, he ran into another USD$11,000.00 in credit card debt which he is still paying 24% per annum of interest on. (Not to mention losing another USD$5000.00 on losing trades produced by that “magical software”)

The Truth About Most Option Trading Seminars

The truth about option trading seminars these days are that they are conducted by people who claimed to have made millions from option trading but are really making millions by conducting seminars like that.

Here’s a math from an internationally acclaimed option trading “guru” who charges USD$2500.00 for her 4 days seminars:

Cost Per Head : USD$2500.00

Average Number of Participants : 120

Average Number of Seminars Per Month : 2

Average Gross Takings Per Month : USD$600,000.00

Average Gross Takings Per Year : USD$7.2 MILLION!

See how these option trading “gurus” are really making their millions?

What Option Trading Seminars Really Teach

Sadly, most option trading seminars have nothing magical nor proprietary to teach. Most of these option trading seminars simply teach people what option trading can do and how to do some of the common option trading strategies which anyone can learn completely for FREE on option trading sites like http://www.OptionTradingpedia.com .

These fake option trading “gurus” then use a lot of hype and motivational techniques to make all participants think that they have indeed stumbled upon a gold mine.

What Option Trading Seminars Are Not Teaching You

Option Trading, like all kinds of trading activities requires foremost for the trader to be able to pick the right stocks that behave within the predetermined limits of the strategy in the first place. You will lose money if you do a bullish option strategy on a stock that stumbles eventually and you will lose money if you do a neutral strategy on a stock that suddenly surges. The ability to pick the right stocks is the real key to any kind of trading, including option trading and that is exactly what you will not learn in most of these option trading seminars. This means that most of these option trading seminars really have nothing proprietary to teach anyone at all!

To make up for the gap, these fake option trading “gurus” make participants sign up for stock picking programs or buy expensive software which eventually still led to nowhere. Being able to pick the right stock for option trading is an extremely tricky task which the best in the industry are still trying hard to do consistently!

Everyone who learnt option trading must then begin the long and arduous journey of looking for a reliable way of picking stocks for option trading consistently. That is a long and wide journey which includes learning about fundamental and technical analysis, different scopes and methods of trading options and things like that… things that really do have proprietary knowledge and which is ok to pay a fair price for.

I am sad to see so many people who loves to learn about option trading fall prey to these option trading seminars and to pay thousands to learn things that can be learnt for free. That is why I started the http://www.OptionTradingpedia.com where I provide all the information and knowledge all beginners need to know what option trading is and how to trade options and I sincerely hope that the public can help me to help yourselves by spreading the good news around.



Jason

Casey Yew asked:


One of the most exciting and little understood markets available to the investor is the Futures Option Market, or Commodity Trading. It is similar to the Stock Options Trading market in many ways, but there are also some major differences. Some of the terminology used in Futures Trading also has a different meaning than the same term when applied to Stock Option Trading, and caution must be used to avoid confusion.

In the United States, all of the trading of future contracts are recorded and monitored by the Commodity Futures Trading Commission (CFTC). This agency was created by Congress in 1974 and replaced the earlier Commodity Exchange Authority. The CFTC acts as a watchdog over the entire market, and has considerable power in enforcing its rules and standards.

The Future trading market is often called the Commodity Market, or commodity exchange. This is because the underlying asset is a commodity rather than a share of stock. The commodity can be almost anything from a barrel of olive oil to the value of an index. The most important difference between a Future option and a stock option is that the contract in a Future option gives you the right and the obligation to purchase or sell the underlying asset at a certain price on a specified date. It is obligation that is the key difference, as the stock option is a true option, and no obligation exists.

The trading of commodities has a long history. Some claim the market can trace its origins back to the Roman era. It was certainly active in Japan several centuries ago where the trade was in rice and silk. The market began in the United States in Chicago in the early part of the nineteenth century. Chicago grew and became a centre for transportation and for the trading of the agricultural products of the growing Midwest. The massive amounts of produce that flowed into Chicago coupled with the primitive methods of transportation and communication created virtual chaos. The supply and demand of various commodities fluctuated wildly, and as they did prices rose and fell so quickly that everyone involved were constantly at risk. The market developed to provide some measure of protection from these risks.

The basic concept behind the market was the idea of “forward” contracts. The forward contract was basically a promise to buy now, but pay and deliver later. It brought order to the chaotic market place because suppliers were given some security that their products would be purchased at an acceptable price.

From this beginning, the concept of forward trading developed in the modern futures market. It has been regulated and brought under control, but it remains a volatile and expanding entity. The definition of commodity continues to expand. No longer is it restricted to grain and cattle, but now includes just about every disposable item, as well as non-tangibles like interest rates, and financial instruments. Economist debate over where the definition of commodity will reach its end. Is it an infinite concept? Are such things as human life and free time considered commodities?

One thing is certain. The Future Options Market is incredibly complex, and very little that happens in the world does not impact the prices of the future. Weather conditions impact agricultural output. Political events on the other side of the World impact oil prices. The global economy intertwines more and more each day as transportation and communication continue to shrink the globe.

All of this may appear extremely daunting to the beginning investor, but with a little bit of work with the terminology and the procedures of the market, a profitable and exciting investment option awaits.



Harry

Casey Yew asked:


Option trading is not restricted to individual stocks. The large commodity market is an option market that deals in all manner of commodities such as grain or cattle. There is also another type of investment known as index option trading.

An index is a listing of a number of different stocks that share something in common, and it represents the composite value of all of them. An example is the Dow Jones Industrial Average which represents the value of the 30 largest and most widely held industrial stocks on the New York Stock Exchange. The Standard and Poor’s 500 is another index that represents 500 different stocks. These two well known indices are used frequently to gauge the progress of the economy and the general health of the stock market. They are familiar to most people, even those with little or no interest in the market, as they are widely quoted on news broadcasts.

They represent just two of a large number. There are broad based ones that reflect a wide range of widely different stocks, and there are ones that are very specific to a certain group. As the Dow Jones tracks industrial stocks, another index called The Morgan Stanley Biotech Index tracks 36 different stocks of companies engaged in biotech research. An index can list companies with similar products, and even similar management styles. There are also a wide variety of foreign indices that reflect the composite value of foreign stocks.

An index may also be classified as to how it is weighted. Some regard every stock equally, and a price fluctuation in any stock in the index will have an impact of the index price no matter how large that individual stock’s share of the index might be. Other indices “weight” the index based on the size of the company. In other words, small companies that experience even a large price change will not have as much impact on the index as a small change in one of the largest companies.

Index option trading is popular in part because the risk is considered to be lower than with individual stock. This is partly because the index, representing a variety of stocks, is less likely to be subjected to the same adverse pressures that may cause an individual company to experience a very rapid decline in its value. The index is seen as much easier to subject to trend analysis, and this makes it a popular part of most Mutual Fund portfolios.

There is another classification of indices that might be of interest to investors with certain social and environmental sensitivities. They are known generally as Ethical Indices as list stocks that satisfy certain criteria in their business operation. An example of one such index is the Wilderhill Clean Energy Index. Sadly, in the current market there is no direct connection between environmental sensitivity and profit, but with an Ethical Index, you can at least feel good about yourself while you make money, or even feel somewhat good if your investment turns out the opposite way.



Bill Reinhard

Jason Ng asked:


Robert Kiyosaki says that Option Trading is the investment of the rich.

Indeed, option trading is the most versatile form of investment in the world today. Its versatility has been the topic of many speakers all over the world. Terms such as “Covered Calls” and “Credit Spreads” have become well known amongst traders new and veteran alike.

Option Trading Explained - Simply put, it is the trading of option contracts on a particular stock.

Options Explained - A contract that allows you to sell or buy a stock at a predetermined price within a set time frame.

There is enough material written explaining the technical make up of an option and I shall not dwell into it further in this writing. The purpose of this writing is to explain to you what the effects of option trading is. … let’s go into Option Trading Explained!

Option Trading Explained - What Can Stock Options Do?

Let us first examine the effects of this thing called stock options. Knowing all the effects of stock options allows us to better understand why it is such a celebrated investment tool and also why so many people go bust doing it. Let’s start from the Positive Effects of stock options.

Stock Options are:

Leverage. It allows you to control more shares (100 shares per option) with the same amount of money thereby exponentially increase your returns per dollar.

Discount. Just as you control more shares with just one option, you will then be able to control the same amount of shares with lesser money than before.

Protection. It allows you to protect the stock you hold by owning the right to sell them at a predetermined price no matter what happens.

Regardless of market direction. It allows you to profit from both upward and/or downward moves in the stock.

Creative. It allows you to put different types of options together to form all sorts of investment positions. It can even make money no matter which way the market goes.

And the Negative Effects are:

No value beyond expiration. You can potentially lose all your money along with the expiration of the option.

Negative Leverage. Just like it can amplify your gains, options will also amplify your loses.

Time Decay Effect. Options reduce in value over time and sometimes can completely obliterate any gains from movement in the underlying stock.

Looking at the above effects, it is clear that Option Trading indeed is an extremely versatile investment tool that allows its investor to profit from any market direction, protect his/her stock positions, reduce capital commitment and lots more, based on the way it is utilized.

Conversely, once such power of leverage is being abused, the investor could then lose everything he/she have put in by expiration or lose more from the same stock move than he/she is comfortable with. Also, by holding on to Options, time decay sometimes can obliterate your profits if the movement in the underlying stock is not big enough.

Therefore, investing in options requires careful planning on the part of the investor. You must know for what effect are you using options for and how much you are putting at risk. In essence, using options for Leverage confers the highest risk and the highest rewards and demands that you use only proven strategies with a proven track record.

Using options creatively even allows us to structure investment positions to reap a fixed monthly return that beats the market regardless of which way the market goes! Just like in the Ride the Flow System offered at http://www.mastersoequity.com/MOE_ridetheflow.htm . Where your capital can be fully protected no even if the market enters a severe drop. Sounds amazing?

Option Trading Explained - Conclusion

I hope this “Option Trading Explained” has given you a good overview of the effects of options.

For a full and complete education in option trading, please visit http://www.mastersoequity.com/OptionUni.htm



Martha

Alexander Chong asked:


Option is a very popular derivative because its price is cheaper than other derivative such as future. Blue chip stock is a very volatile stock but it is very expensive. However, by buying option of the blue chip stock, we could earn profit just similarly like buying the stock. Investing and trading option seem to be very easy just like buying stock. However, due to the existence of time value and also the expiration date of the option, buying naked option is very risky. This is because if the stock price is going down a lot just after you have bought the naked option, after a certain period of time, although the stock price has gone up, the option price may still below the ask price that you have used to buy this option. That why we need strategy to invest or trade option. Option is a very powerful tool in investing and trading stock. By utilizing option, we could earn profit from the stock that moves upside, downside and sideway. Moreover, option also could be used to execute arbitrage strategy to earn a profit no matter the stock price is going up, down or sideway.

Back spread is one of the option trading strategies that is quite popular. This strategy is quite similar to a Chinese gambling called big and small. In this gambling, when we stake big and the three dices after shook and opened show the total point is big, we will win one fold of the money that we have staked. That means if we stake 100, we will get back one more 100. But if we loss, we will loss 100. Back spread strategy is quite similar to this gambling game. That means if we invest USD 1000, we either get back one more USD 1000 or loss USD 1000 that has been staked in. The maximum profit and loss is USD 1000. That has fixed. You won’t loss more that that. Actually, back spread is the reversal of the ordinary spread. The maximum profit and loss is not always the same. Sometimes, it will differ a little bit and depend to current price of the stock.

This strategy could be executed by buying out-of-the-money option and selling in-the-money option. Because the price of the in-the-money option is more than out-of-the-money option, the amount of money that has been received after selling in-the-money option will be enough to buy the out-of-the-money option. Although like this, we still need to put an amount of deposit in our trading account and the amount usually is equivalent to the maximum loss that you could incur if the stock price goes to the reverse direction. So, if we are expecting the stock price will go up in the near future, we should buy out-of-the-money and in-the-money put option. Conversely, if we are expecting the stock price will go down in the near future, we should buy out-of-the-money and in-the-money call option. Just for easy to understand, we try an example. Table below shows a list of put options for MMM company stock, which will expire in Apr 07.

http://www.makemoneystocks.com/back-spread-table1.jpg

Table 1: List of put options for MMM company stock.

Current price of the stock is USD 80.94. Put option with its strike price more than current price is in-the-money option and less than current price is out-of-the-money option. If we are expecting the stock price will go up in the near future, we will buy one contract of 80 put option (MMMPP) and sell one contract of 85 put option (MNZPQ). When we sell option, we will receive an amount of money that is equivalent to the bid price multiplying with the number of unit that has been purchased. The amount of money that has been received per unit option is USD 5.2 and the amount of money that we need to pay per unit option when we buy out-of-the-money option is USD 2.7. Therefore, the net amount in your trading account after executing this strategy is USD 2.5 per unit option. That means there will be USD 250 net in your trading account. The maximum profit and loss are calculated as follow:

Maximum profit = In-the-money option bid price Out-of-the-money option ask price

Maximum loss = (upper level strike price lower level strike price) (In-the-money option bid price Out-of-the-money option ask price)

Upper level strike price is 85 and lower level strike price is 80. In-the-money option bid price is USD 5.2 and the out-of-the-money ask price is USD 2.7. After substituting all values into the equations above, we will know that the maximum profit is USD 2.5 and the maximum loss is also USD 2.5. So, if we buy one contracts each of the in-the-money and out-of-the-money option, the maximum profit is USD 250 and the maximum loss is also USD 250. The breakeven point for this strategy could be calculated using equation as follow:

Breakeven point = Upper level strike price maximum profit

Or Breakeven point = Lower level strike price + maximum loss.

In this case, the breakeven point is 82.5. As long as the stock price goes up more than 82.5, we will earn a profit from this strategy. We only could earn the maximum profit if we keep the position until the expiration date. If we sell off early before the expiration date, we could not earn the maximum profit. But we still can earn money but with a little bit lesser than if we could keep the position until the expiration date. This is due to the incomplete gaining of the time value of the sell off in-the-money option.

So, by utilizing this option trading strategy, you could earn a profit as long as your prediction accuracy is more than 50 %. That means you have to be accurate for at least six bets within ten bets. From here, the maximum continuous loss is four times. Therefore, in order that you won’t lose all your money until you could not continue to bet, you have to keep four back up moneys or more. So, if you lose one bet, you still have the money to continuously stake for the following bet. Like this, as long as you could keep your prediction accuracy more than 50 %, your money will continuously grow along the time. So, if you interested to know more about option trading strategy, just drop by our homepage and we will show you how to utilize option to maximize your profit.



Samuel

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