Derivatives Options » Online Trading

Online Trading simplifies all your Investing & transaction needs

admin — Wed, 13 Jan 2010 12:10:55 +0000

Off the top of one’s head, ‘Investing in the 21st Century’ brings to mind terms such as Online Trading, Futures & Options, Equity Research and Share Market trading among others. These investment enablers and instruments have brought their own complexities, advantages and risks.

Let us consider the revolutionary phenomenon known as Online Trading. It essentially allows you to buy shares, sell shares and track the position of shares instantaneously. The ease, swiftness and security with which shares are bought and sold encouraged many investors to switch to this format. However, this burgeoning demand necessitated a compatible infrastructure. The lack of such infrastructure — as was the case in India—lead to a delay in trade executions, and ultimately, great losses in the already volatile stock markets.

Another investing phenomenon are ‘Futures & Options’. Futures and Options have undoubtedly become the two most widely publicized derivative instruments in the world today. A futures contract is essentially an agreement between a buyer and seller of an underlying asset. In a futures contract, the buyer agrees to buy and the seller agrees to sell the underlying asset at a price agreed upon now at a future date. Futures contracts are standardized contracts and traded publicly in an exchange.

The underlying investment in the futures contract may be a commodity such as wheat, oil, sugar, orange juice or cocoa. There are also futures that are tied to the performance of financial items in the marketplace, such as currencies, interest rates and stock and bond indices. An option, on the other hand, gives you the right to buy or sell the underlying asset but not any obligation, thus compounding the complexities of this option.

And of course, investing in the share market still continues to be one of the major investment options through out the world. The recent economic recession might have cast a shade over this investment option but the market cycle of boom and bust still proves to be an attractive as well as intimidating option for investors. However, this recession has also brought to prominence the role of ‘Equity Research’. The role of research is to provide information to the market. An ideal market relies on this fairly objective information as the uninformed void creates inefficiencies that result in stocks being either over valued or under valued. An equity research firm uses its expertise and spends a lot of time analyzing a stock, its industry and peer group to provide studied estimates about earnings and valuations.

With several, new financial instruments being tested, the options available for investing your money are still growing; only giving you lesser excuses for keeping your money idle, inactive, uninteresting.

Be Smart to Get Successful In Futures Trading Systems

admin — Sun, 10 Jan 2010 00:50:18 +0000

Futures Trading Systems is attracting a large number of investors now. However, it is necessary to get an understanding of this market before delving any further into it. In Futures Trading Systems, the seller of the derivative is supposed to sell it to the buyer on a settlement date. The buyer has to the buy the derivative on this particular date, no matter what the ongoing price of the derivative is. The asset governing the derivative can be an asset like a crude oil barrel too and not necessarily a financial security. The underlying assets of a future can be intangible also like interest rates and stick indexes. If their value on the final settlement date is not what it should as per the future, then the buyer definitely makes a profit or a loss.

If physical commodities are involved in Futures Trading Systems, their contract states the manner in which they are to be delivered on the final settlement date. The quality of the physical commodity is also an imperative part of this contract. The buyer can also choose to get rid of his obligation of purchase of the derivative previous to the settlement date, by picking up a long position or a short position option. Since the buyer has an obligation to fulfil the contract, the prevailing price of the security on the final settlement date is of quite a concern to him. The settlement price of the future is settled officially between the buyer and the seller at a security exchange.

The clearing house of the exchange looks at all the future transactions establishing the margin requirements and helping in their settlement. Futures Trading Systems provide an opportunity to the investors to deal in a wide range of commodities from cotton, bonds to gold. With future trading options, investors get a better understanding of the real market. The predictions of the future prices based on models of the commodities prove to be quite useful. With the help of various calculations like theta, delta, gamma and Vega and reliable models like “Black-Scholes”, investors can have a better understanding of the future price of a certain commodity. But before traders decide to venture into this segment of the market it is very essential that they have all the knowledge about the technical terms involved in future and the functioning of the market. Futures Trading Systems can be prove to be pretty lucrative if the investor is well-prepared before to deal with the futures through these models and can take advantage of the market in his favour.

How to Trade Commodities

admin — Sat, 26 Dec 2009 12:18:21 +0000

The key to successful investing is developing your knowledge in the markets and to take things slowly and methodically. Commodities trading is no different. It is an exciting market which, if you are preapred to put in the time and effort, can be very lucrative, but always be aware that risks lurk in the shadows just like any other investment.

Physical Trading

Physical commodities trading is buying and selling the actual commodity itself not some sort of derivative instrument like a futures contract. There are obvious downsides to this method namely storage costs, insurance costs and shipping costs.

The physical market, for our purposes, focuses on those commodities that are easily stored, bought and traded for the average investor. These are such things as Gold, Platinum, Palladium and Silver.

The most popular method of trading such items on a retail basis is in the purchase of coins. There are many companies on the web that provide services for the purchase of coins for collectors and speculators.

The internet, of course, has given investors many options for the purchase, storage and trading of gold coins however, our favourite example of trading gold on the web is Bullion Vault. They allow the purchase and storage of gold in small quantities and have an efficient trading system. They hold $290mn of gold for clients and appear to have a very good reputation.

Leverage

If you didn’t know the term ‘leverage’ before the current financial mess, you do now. For those who need a refresher, here is how it works. Let’s say you buy £100,000 of gold and whomever you buy it off only needs you to put down a 10% deposit, £10,000. Let’s say gold goes up 10%. You now have gold worth £110,000, if you sell it now you pay back the £90,000 you borrowed and you get your original £10k back along with your £10k profit. Basically you have turned a 10% gain in the price to a 100% gain on your investment.

Obviously if the price dropped 10% you lose your money, hence the mess that some are in at the moment.

Physical Commodities on Leverage.

There are still some companies around that provide leverage on physical commodities across a range of products, however, the costs associated with trading, such as interest on loans, storage and insurance fees have made the product less attractive to the active trader. Having filled a gap in the market for some time the product was overtaken by some of the instruments mentioned below.

ETFs (Exchange Traded Funds)

More accurately described as ‘Exchange Traded Commodities’ these instruments take into account all the fees such as storage etc associated with trading. They trade like shares are liquid.

An Exchange Traded Commodity is an investment vehicle that tracks the performance of an underlying commodity or basket of commodities. ETCs work on exactly the same principle as ETFs – with the ETC tracking the performance of a single underlying commodity or a group of associated commodities. Single commodity ETCs follow the spot-price of a single commodity, whilst ‘index-tracking ETCs’ follow the movement of a group of associated commodities, such as cattle, energy or livestock.

ETCs offer the commodities trader a number of inherent advantages without the associated vagaries of trading an individual stock:

Direct exposure to the commodities markets – the value of your investment will rise and fall in direct proportion to the price of the underlying commodity.

Liquidity – ETCs are ‘open ended’ securities, which are created and redeemed on-demand. This means that the supply of ETCs is unlimited and that price changes will accurately mirror developments in the price of the underlying commodity.

Stamp duty & CGT – ETCs are not shares and so trades are exempt from stamp duty. Furthermore, ETCs can be traded within ISA accounts, allowing you to shelter your profit from Capital Gains Tax.Low dealing costs – ETCs are traded on the regular stock exchange, making them both accessible and affordable – they can be traded through your share dealing service for a commission.

Portfolio diversification – ETCs give broad representation across entire commodity sectors and different geographic regions.

Futures

A futures contract is an agreement to buy or sell your chosen commodity at a specific date in the future – at today’s prevailing market price. These markets are highly liquid and the contracts can be sold on again at any point before the final delivery date, i.e. the day when the farmer or miner will deliver the raw materials to the person holding the contract.

The producers and end-users are still present in today’s markets, but it is the traders and speculators who are now responsible for most of the volume that keeps the market liquid.The main benefit of trading futures is that you are making a direct investment into the underlying raw material and your future profit or loss is entirely dependent upon fluctuations in the underlying commodity price.

Going back to leverage, most futures trading is done ‘on margin’, which dramatically increases potential profits (and losses, remember).

Exposure to the commodities market can be gained from buying and selling companies whose business it is to mine, distribute or trade in commodities that you are interested in.

The shares are, generally, liquid and accessible for trading, the problem, however, is that there are many other factors that could effect the share price that may not have anything to do with the underlying commodity. These could be management issues, cash flow, macro economic issues and geo-political issues.

CFDs and Spread betting.

CFDs and Spread betting are easily accessible trading instruments which are essentially derivatives of many of the above, however spreads and dealing costs can be harsh to investors.

Technical Phrases

You will hear such phrases as ‘contango’ and ‘backwardation’.

Contango is a term used in the futures market to describe an upward sloping forward curve (as in the normal yield curve). One says that such a forward curve is “in contango” (or sometimes “contangoed”).

Formally, it is the situation where, and the amount by which, the price of a commodity for future delivery is higher than the spot price, or a far future delivery price higher than a nearer future delivery.

Backwardation is a futures market term: the situation in which, and the amount by which, the price of a commodity for future delivery is lower than the spot price, or a far future delivery price lower than a nearer future delivery. One says that the forward curve is “in backwardation” (or sometimes: “backwardated”).

Commodities trading has many aspects that set it apart from trading other markets and for those that become learned in the trading of the instruments it can be lucrative. Commodity traders over the last few years have seen huge swigs in price which have lead to large profits (and no doubt some large losses).

Currently the global market in commodities is in a state of flux. Gold, for example, is seen as a safe haven against inflation and uncertain times, hence it recent volatility.

Having worked in commodities for some years it was always noted that volatility is our friend, whether a price is going up or down there is money to be made, when commodities are flat there is not much action and the cost of trading out ways the potential profits.

For the foreseeable future volatility is definitely here to stay. Stock market issues and global recessionary fears on the one side and continued development of emerging markets using vast amounts of the world resources on the other, will see volatility in this market for many years to come. This, therefore, as a market to learn about and trade ,is a very interesting and potentially lucrative proposition.

As with all trading, however, there is a very real possibility that trading commodities, especially on leverage, could lose your portfolio a lot of money and you should be aware that it is highly risky. Do not risk more money than you can afford to lose and make sure you have a system that allows you to use limits and stops to contain this risk.

The online trading system available from HF Markets allows you to trade all of the above with assistance, if required, from a professional regulated broker who can guide your initial trading strategies and help you become familiar with trading this exciting area of investment.

Trading Commodities – Commodity Types

admin — Wed, 23 Dec 2009 00:26:59 +0000

There are several different types of commodities. Commodities are categorized so that it’s easier to price compare, do research, and to make other trade tasks convenient. If you’re an investor who wants to get involved in commodities trading, you need to know the basics. This is indeed one of the riskiest areas to invest in, but it can also be among the most profitable if you know what you’re doing.
Energies
This area has been one of the most active in commodities trading recently. This category is comprised of products that are used to provide energy that will heat and power businesses and homes. The most common of these is petroleum and its byproducts, among them crude and heating oil, propane, natural gas, coal and some others, including subtypes or derivatives.
Each commodity has its own defined “tick” or price change; these are set by the exchanges. Each commodity also has a standard contract size. The standard contract size is the amount covered by a standard futures contract. For crude oil, for example, the amount is 1000 barrels. For wheat, it is 5000 barrels.
Grains
Wheat, oats, corn, rice and soybeans (although soybeans are not technically a grain) are agricultural products traded on various exchanges, including the well-respected Chicago Board of Trade, or CBOT for short. The exchanges trade the product as well as the futures and options contracts on these and other derivative products, such as bean oil.
Each of these products has its own tick or price change, standard contract size and unit. Some prices are listed in dollars per ton, such as with soybean meal. In this case, the standard contract size is 100 tons. It should be noted that most traders never see the actual commodity they trade in; you can see by the amount quoted here that there’s a reason why.
Softs
Orange juice, cotton, sugar, cocoa and coffee are all what are called “soft” commodities. Many of these are traded on the Coffee, Sugar and Cocoa Exchange, or CSCE. It should be noted that 80% of the oranges grown in the United States are turned into frozen orange juice concentrate, and that it is the juice itself traded as the commodity, not the orange.
There’s a relative newcomer on the New York Cotton Exchange, Frozen Concentrated Orange Juice, or FCOJ. This has been actively traded since the creation and widespread use and integration of inexpensive refrigeration, beginning after WWII.
Meats
Pork bellies, lean hogs and live cattle are traded on various exchanges, as are some derivatives. One of these exchanges is the Kansas City Board of Trade, or KCBT, which is the United States’ livestock trading historical center.
One very unique commodity here is pork bellies, because the bacon that comes from pork bellies can’t be substituted with a similar product. Their prices also usually interdependent with the price of grain, because hogs are fed a diet of corn and other grains. These prices are generally less volatile than they are within many other commodities.
Financials
Most traders invest in commodities futures or options rather than the good itself. Because of this, financial products are often listed on the same exchanges.
U.S. Treasury bonds futures are traded on the CBOT, as well as other places. A few indexes track stocks. The S&P index futures contract is one popularly-traded item.
It should be noted that some sites will list abbreviations showing the expiration month of the futures contract within the prices quoted. For example, these are shown are as follows, listed by quarter:
January – F, February -G, March – H
April – J, May – K, June – M
July – N, August – Q, September – U
October – V, November – X, December – Z
For example, you might see an item listed as PBH07; this is a pork belly contract that is due to expire in March of 2007.

Commodities Trading Options – 10 Best Buying Options For Commodities Trading

admin — Sun, 29 Nov 2009 12:30:45 +0000

Commodities can refer to anything–food stuffs, barrels of oil, sacks of nuts, metals, and so on. But when you are referring to buying options for commodities trading, it is advisable to give priority to those associated with the futures market. These can be–crude oil and its derivatives, coffee, sugar, copper, gold, wheat,etc.
The market for commodities never remains steady; it is subject to rise and fall, based on changing demands and supplies. You have to indulge in a lot of speculation before you can actually think of parting with your money. If the decision is impulsive, it is an invitation to losses; well-thought out, lots of gains!
So how are you going to decide which are the best buying options for commodities trading?
(1) Buying options for commodities trading is a common strategy practised even by experts in the arena, since it has proved to be a generator of huge revenue.
(2) Again, a word of caution here! If you have invested your money in the hope of getting instant results, then it would be advisable not to go in for buying options for commodities trading. The value of these options expires over a period of time. And if you have chosen the most expensive ones, you may find yourself on the loser’s side in case things do not go right!
(3) So start with less expensive options and in a small way. It is easier to take risks if the amount you may lose in the face of probable losses, is small. With more experience and constant practice, it will become easy to pick up winning situations and get profits.
(4) Develop an attitude of objectivity. Seasoned veterans suggest that the best thing to do is to purchase the stock and forget all about it, instead of worrying about it every waking moment of your life! Do not try to force a transaction to take place. After all, patience is the name of the game!
(5) A little bit of research is required to decide the buying options for commodities trading. The best way to find out which options are trustworthy, is to check out the history of that particular commodity. Charts related to its performance over the last ten years or more, should suffice to give you an understanding of its ups and downs.
(6) If some commodities have been at their lowest levels for some years or have been in scarce supply, these options can prove to be profitable.
(7) After you have found such commodities, buy out-of-money call options which hope to last for at least one more year before expiring. Hopefully, the values of these options should rise soon.
(8) Next, search for call options that have recorded losses since the corporates controlling them have been indulging in mass sales. Or these commodities have simply refused to go higher in value. If these commodities are so dependent on market movements for their success, remove them from your list. They are too volatile!
(9) Yes, professionals or experts do dole out good advice. But sometimes, they can be too dampening and prevent you from trading at all. You do not want to end up in depression because nothing is happening! Do take their advice, but also learn to make your own decisions. After all, at some point or other, you do have to be on your own! As a matter of fact, even ignorance can work in your favor at times!
(10) Keep an eye on the movements of the market. When the prices rise, dispose of 25% of your stock. At least, you will get some profits from buying options for commodities trading. Newspapers also comment on commodities–see if the ones you have purchased are also mentioned. The rest of the stock is to be disposed off when the market becomes parabolic.

Options Trading – Benefits of Leverage

admin — Sat, 21 Nov 2009 15:51:32 +0000

Options are riskier to trade than stocks. That’s fairly well known. And we’ll get into why.
Since options have an expiry date the investor has to make a choice within a relatively short time frame. This adds risk and complexity to the trading scenario.
Also, since options are derivatives, they have no inherent worth. Their value is determined by the value of the underlying security. They can move in sharply different directions from the underlying asset. One can short a stock or go long, but once bought the value of the shares is known. Even after you purchase options, their value is often solely ‘time value’, they’re worth money only because some event may occur in the future, such as a rise in the price of the asset.
But they also offer significant advantages over stocks! And that’s why they’re so exciting to trade.
And one of the characteristics that make them so interesting to many investors is that a trader can make use of the power of leverage.
And the word “Leverage” is no accident. It comes from the word “Lever” . Think back to your Physics classes. You probably learnt how levers can help a small person lift a very large weight. By placing the pivot point at the right spot (close to the heavy object and far away from the person) the small person can lift up a much heavier object! The force the person exerts is “multiplied” by the lever.
Well this “multiplying” effect is exactly what leverage does in trading as well.
The basic idea is that an investor can control a very high valued asset for a much lower investment amount. e.g. An investor could control $2000 worth of a security with an investment of only $200.
Suppose INTC (Intel) is trading at $24 on a given day. A trader who anticipates that the price will rise can purchase one options call contract which confers the right to buy 100 shares.
That call option, with say an expiration date in three months time with a strike price of $26, will cost somewhere around $3. (The ’strike price’ is the pre-set price at which the shares have to be bought if the option is exercised.)
If the shares were purchased outright, even at the lower $24 price, the investment would cost $24 x 100 shares = $2,400 (plus commission). But by buying the call option instead you invest $3 x 100 shares = $300 (plus commission) and control the same number of shares. That ratio, $2400/$300 = 8 is the “leverage”. You have control of an asset that is worth 8 times more than what you’ve invested.
Why is leverage such an advantage?
The answer is that, though the investor takes on the risk of losing the premium (the cost of the contract), that multiplier effect operates on profits in just the same way as it did for the costs. A smaller movement in value of the overall assets controlled becomes a much larger movement in the smaller amount invested.
Suppose INTC rises above the strike price ($26) to $31. If you purchased the shares directly at $24 per share, with $300 to invest, you could only purchase 12 shares. (12.5 if you have a plan that allows fractional share investing, but part of that will go for a commission.)
Your profit on the trade would be (ignoring commissions) 12 x ($31 – $24) = $84. If instead you had purchased an option on 100 shares, your profit would be (($31 – $26) – $3) x 100) = $200.
You had to pay more per share, and the premium reduced your profits, but you controlled many more shares. The net is still considerably higher.
It’s important to remember, though, that leverage also works on losses in the same way. If INTC had fallen in price, but you were obligated to a strike price of $26. So exercising the option would cost you by that same factor. Under those circumstances, traders simply let the option ‘expire worthless’, limiting the loss to the amount of the premium or 100% of your investment…
So treat leverage with respect. But when you have it working for you it can be a huge ally in helping you make tremendous profits trading!

So You Think You Know Option Trading?

admin — Thu, 19 Nov 2009 13:41:41 +0000

We all know that many opportunities exist in Option Trading today. Wherever you turn, someone is waiting to inform you of the tremendous profits to be realized within the stock and the futures markets. Nevertheless, many people are unaware of the derivative trading possibilities that are available within and across several different markets.
Option Trading is just one of the leading many ways to participate in such type of secondary markets. And in contrast to the popular belief, this potential trading arena is not limited strictly to the practice of selling or writing options.
Option Trading is an important element of investing in markets, serving a function of managing risk and generating income too.
Contrasting to most other types of investments today, Option Trading provides a unique set of benefits to its clients. Not only does Option Trading provide an economical and effective means of hedging one’s portfolio against adverse and unexpected price fluctuations, but it also offers a tremendous exploratory dimension to trading.
One of the foremost primary conveniences of Option Trading is that an option contracts enable a trade to be leveraged, allowing the trader to control the full value of an asset for a fraction of the actual cost.
Then since an option’s price mirrors that of the underlying asset at the very least, any constructive return element within the asset will be met with a greater percentage return resource within the option provides limited risk and unlimited reward.
With Option Trading the buyer can only lose what was paid for the option contract, and not a penny more, which is a fraction of what the actual cost of the asset would be. However, the profit potential is unlimited because in Option Trading the option holder possesses a contract that performs in sync with the asset itself.
If the outlook turns out to be positive for the security, so too will the outlook be for that asset’s underlying options. Option Trading also provides their owners with numerous trading alternatives. Option Trading can be customized and combined with other options and even other investments to gain the benefits of any possible price dislocation within the market.
Option Trading enables the trader or investor to acquire a position that is pertinent for any sort of market outlook that he or she can have, and then be it bullish, bearish, choppy, or silent. It doesn’t matter at all.
Risks Involved In Option Trading
While there is no disputing that Option Trading offers many investment benefits, it also involves risk and is not for everyone. For the same reason that one’s returns can be large, so too can the losses.
Also, while the potential for financial success does exist in Option Trading, the means of realizing such opportunities are often difficult to create and to identify. With dozens of variables, several pricing models, and hundreds of different strategies to choose from, it is no wonder that Option Trading and its pricing have been a mystery to the majority of the trading public.
Quite often, in Option Trading a wonderful deal of information must be processed before a knowledgeable trading decision can be reached. Computers and sophisticated trading models are often relied upon to select trading candidates.
However, as humans, we like things to be as simple as possible in Option Trading. This often creates a conflict when deciding what, when, and how to trade a particular investment. It is much more easier to buy or sell an asset outright than to challenge with the many extraneous factors of these derivative markets.
If an investor thinks an asset’s value will appreciate, he or she can simply buy the security; but if an investor thinks an asset’s value will depreciate, he or she can simply sell the security. In such scenarios, the only thing an investor must worry about is the value of the investment relative to the value of the prevailing market. If only Option Trading were that easy!
Generally, Option Trading is more awkward and complicated than stock trading because here the traders must consider many variables aside from the direction they believe the market will move.
The effects of the passage of time, variables and delta, and the underlying market volatility on the splendid price of the Option Trading are just some of the many items that traders need to gauge in order to make informed decisions. If one is not prudent in one’s investment decisions, one could potentially lose an enormous number of money trading options.
Those who actually ignore cautious and sound money management techniques often find out the hard way that these factors can promptly and easily grind down the value of their Option Trading portfolios.
Due to the risks and benefits, Option Trading offers tremendous profit potential above and beyond trading in any other device, including the underlying security itself. This is the moment at which theoreticians enter the picture. Once the benefits have been defined, it is then just a matter of determining how to matchlessly attain them.
Up till now, the vast majority of Option Trading techniques have been elaborate mathematical models designed to help identify when option writing or selling opportunities exist.
On the other hand, we hope to break used ground by introducing simple market-timing techniques to Option Trading that will enable the traders to buy options with greater confidence and with greater success in Option Trading.

Options Trading – The A,B,C Of Options Trading

admin — Mon, 16 Nov 2009 00:23:34 +0000

Like futures trading, an option gives a trader the right, but does not obligate him, to buy the underlying stock at whatever the specified price on a preset time in future.
You make profits if the stock value ends up higher than what you purchased at. On the flip side, if the prices drop, then you lose out on your investment.
There are 2 kinds of options: the put option and the call. When you purchase a call option, you expect that the value of your investment will rise and you buy a put option when you expect the prices to fall.
In either case you make a profit, provided your foresight was correct, unlike other derivatives where you get a profit only when value of shares increases.
You could use the hedging strategy when you are unsure if the price of your stocks is going to go up or fall down. What you should do in such case is go for a put option. If the price dips, you make a profit and if it goes up, at least you do not lose the investment, only the profits.
If you are sure your stocks are going to dip in value, it would be better to sell out and re invest in put options.
Another strategy could be to sell out before the expiry date of your options so you can purchase the underlying profitable stocks. Selling on the options is not a problem because there are bodies responsible for the purchase of so as to maintain a balance in the system.
Do take the time to be a part of forums and online discussions on the possibilities of options trading. You will find up to date information there that no book can provide. Some websites can offer free training material as well, which is a great boon for beginners.
Like any investment, options trading requires you to be updated with regularity, on the economy and businesses of different trading companies, if you would like to buy stock options on their company. It is great when you have a good idea of who you will need to trade with.
When you have the adequate information on the goings-on of the market, you are best equipped to make your self a good profit. Secondly, the timing with which you make your moves is vital, so make sure you make regular observations of the market if not continous in your business day.
To conclude, although trading with options can be a risky business, it can give you good returns when you play your cards right. So make sure you are getting regular information updates and that you have a strategy to work with.