Derivatives Options » Money

Want to Know if Day Trading is for You?

admin — Mon, 25 Jan 2010 12:18:24 +0000

Day trading can be a very dangerous form of financial speculation, but it is going on from PC all over the United States and the world. The idea is to sell a futures contract to buy a currency, or a commodity, and then buy it back, even at a later date, at a lower price. Unlike position traders, who can hold onto a stock, bond or commodities position for a long time, day traders are the scavengers of the system. They have no interest or loyalty to any currency, commodity or stock in a company. They are simply trying to, as Adam Smith, granddaddy of the British System said, to “buy cheap, and sell dear”.

There is not just the buying and selling of stocks and bonds, but also trading in derivatives and futures. Derivatives values are determined by other indexes or numbers, such as interest rates and currency levels. If you are making a futures bet that a stock will go up, or to have an option to buy a stock at a certain level.

There are many courses on the market, some in person, and some through the Internet in written form, or audio or video. Basically, what one learns is a trading system. This system can involve commodities such as gold, silver or oil, or on the Forex (foreign exchange) market, the value of a currency. Since, the person plans on day trading, it makes little difference which one of these objects are chosen to trade, except that they are all values of high volatility where one can make a profit (or loss) quickly. If you do a Google search on these topics, you will see many alternatives. Some systems involve consulting news and financial reports at a certain time of day, and using this to make decisions what futures to buy in the morning and the sell in the afternoon.

Other systems can be more esoteric. A popular system uses the variations of currency values over different time periods, some of which can be a short as 5 or 10 minutes. The curve produced by these currency value fluctuations, say of the US Dollar/British Pound pair are then plotted out on a graph and compared to the Fibonacci number series, the golden mean relations, or other ideal numeric values, and this is used to estimate the right time to buy and sell currencies. Are you willing to risk your fortunes on such schemes? Some say it is a winning proposition if you master “the system”.

Why People Trade Forex

admin — Wed, 06 Jan 2010 12:14:35 +0000

In today’s information technology driven economy you can just about trade anything you want. Whether it is currencies, metals, shares, wheat, pork bellies you name it.
Not only can you trade the main security but also in most cases you can trade the derivative of it e.g. Forwards, Futures and Options.
The Forex market is also vital to the general prosperity of the free world economy. Why? Some $1.5 trillion dollars worth of international currencies are bought and sold every single trading day.
It is by far the largest traded market in the world. This volume of trade is equivalent to over six months of trading in the New York Stock Exchange, which has an average daily volume of $10 billion dollars.
Even though the major focus in this country in reference to investing has always been and still is the stock and equity markets, the Forex market is 150 times larger than the New York Stock Exchange.
All financial instruments are commonly referred to as securities regardless of their name. When I mention securities it encompasses everything that can be traded.
The main thing to remember when trading, is first to decide if you are a speculator or investor.
If you are an investor it makes sense for you to know something about the thing you are investing in. It might be that you are in that field already or have a good knowledge base of what you are investing in.
On the other hand if you are a speculator who only intends to hold something for a few hours and are covering many markets, you will not have time to research as much as an investor.
Even as a speculator though, you should know something about what makes that market tick. In the currencies for instance, when the dollar strengthens it can effect all the major currencies at the same time.
In technology shares you might find that the whole sector is strengthening at the same time.
If the interest rates are raised in one country how will that effect the market you are in?
The point in all of this is that I think it is a good idea for people to trade something they either like, have an interest in or at least are familiar with.
For example I would not feel comfortable trading oil because I don’t know what drives the market or who the main players are.
Last but not least, the journey to the road of successful trading will make you confront your deepest fears. Your armor on this journey will be confidence, knowledge and believing that you can achieve your dreams.
Never, never equate your success or failure in the markets with who you are as a person!

Trading Options – The Basics (Part One)

admin — Wed, 25 Nov 2009 12:50:15 +0000

Definition Mumbo-Jumbo
Options, unlike stocks, are derivatives. That means that their value derives from the value of another financial instrument (called the underlying). The underlying can be a stock or futures contact or an index. For the purpose of this article we’ll concentrate on stocks.
An option is a contract between two parties, the writer (the seller) and the buyer. An option gives the buyer the right to either buy or sell a stock at a pre-determined price. And so there are two types of options corresponding to those rights: calls and puts.
Example for Call Options
Say you go to the farmers market and find a stand where they sell some nice apples. You go to the farmer ask him how much a pound costs and he says 3$. You reach for your wallet and you notice you forgot it at home. The only cash you can find is some 30c in your pocket. So you say to the farmer “Sorry man, forgot my wallet. Can you put away a pound for me and I’ll be back in two hours to pick it up.” The farmer answers, “Nah, I won’t. I might sell it before then.” And then you say, “Ok, all I got is 30c. I’ll give that to you now and when I come back I’ll pay the full 3$. All you have to do is keep it for me for 2 hours. If I don’t come back you can still sell to somebody else”. To which the farmer agrees because he’s going to be around anyway and he’d make 30c profit.
So what just happened is that you and the farmer entered a contract. The farmer “sold” to you the right to buy 1 pound of apples. This right cost you 30c and it is valid for the next two hours (assuming the farmer is an honest man).
Translating this into options jargon: you bought a call option on 1 pound apples at a strike price of 3$. The premium you paid for that option is 30c. Expiry of those options is two hours from now. After that time they will be worthless. You can exercise that right within those two hours and buy the apples for 3$. You can also choose not to exercise it. In both cases the 30c premium is non-refundable.
Let’s continue our example. Say that after you leave a big queue starts to form at the farmer’s stand. The farmer notices that his apples are very popular so he decides to be cheeky and to raise the price to 4$ a pound. You come back and discover that the price is higher.
You have two choices: you can claim your right to buy a pound at 3$ instead of the current price. The farmer would honor his obligation and sell the apples to you. OR, you can go to someone in the queue and tell him “Look man, an hour ago this guy was selling the apples for 3$ a pound. I have an agreement with him to buy a pound at 3$. If you give me 50c I’ll talk to him to sell to you for 3$ instead of 4$.” A quick calculation reveals that a pound at 3$ plus 50c premium is 3.50$ which is still less than the current price at 4$. So the guy agrees to buy the right from you.
Options jargon: you bough the option for 30c. You sold it for 50c. That is a 66% return on your money. And you never even had to buy the underlying (the apples).
And this is exactly what option trading is about. Say you anticipate a price rise. Instead of buying the stock, you buy call options for a fraction of the price of the stock. When the stock advances you sell your options for a profit.
Ok, but what do you do if you expect the price to fall? You buy put options. These are the topic of my next article.

Trading Options – The Basics (Part Two)

admin — Wed, 25 Nov 2009 00:43:23 +0000

Definition Mumbo-Jumbo
Options, unlike stocks, are derivatives. That means that their value derives from the value of another financial instrument (called the underlying). The underlying can be a stock or futures contact or an index. For the purpose of this article we’ll concentrate on stocks.
An option is a contract between two parties, the writer (the seller) and the buyer. An option gives the buyer the right to either buy or sell a stock at a pre-determined price. And so there are two types of options corresponding to those rights: calls and puts.
Example for Put Options
Say you own a thousand shares of BHP stock currently worth 30$ each. You know that reports are coming out soon but you have no idea whether they are going to be positive or negative. If positive the price will go up, that’s easy.
In case BHP reports badly you know you will be selling. But you also know that everybody else will be selling too. This will drive the price down and you will incur a loss even if our order gets filled. Now, wouldn’t it be great if you knew beforehand what BHP was going to report? If you knew and sold that would be insider trading, which is illegal and “that never happens in Australia”. The next best thing would be to secure your right to sell at the current price of 30$ per share. As we know, there is no such thing as free lunch. So, in order to secure this right, you have to pay a premium. And you need someone to sell you that right.
This right is a put option. It is a contract between you and the other guy that gives you the right to sell stock to him at 30$ no matter what. So if the stock drops to 20$ you can exercise you right to sell it for 30$. Or, if you think that the stock has reached its bottom you can keep the stock and just sell the put options you bought previously. Now think, the stock price is 20$ and you are selling the right to be able to sell it at 30$. Of course that right would be worth much more than when you bought it for (because back then the stock was at 30$). So, the more the stock drops the more valuable the put option becomes.
A pure options trader wouldn’t have any stock to sell. His goal would be to buy puts when he expects that a stock will go down. After the stock has dropped the options trader will seek to sell the option for a profit.
So you see, it does not really matter where the market goes, up or down. Trading options enables you to profit from both directions. When you expect the price to go up you can buy the shares or attain higher leverage by buying calls. Should the reverse be the case, you can buy puts. To me, puts are easier to understand than selling stocks short. And believe it or not, there are options strategies (combining calls and puts) with which you can profit from sideways movement. But let’s not get ahead of ourselves.