An option is a derivative, meaning its price is based on an underlying asset. These underlying assets can either be stocks, Indexes or ETFs. An options trade involves giving someone the “right to buy or sell” a certain stock at a certain price by a specific time. Options help the investor to purchase stock at a lower price and to gain from a stock price’s rise or fall. If you buy an option to purchase securities, then it’s called a “call” option. If the option you buy is to sell securities, then it’s a “put” option. There is also a put and call option, whereby traders purchase both calls and puts on the same stock, with agreed prices and by an agreed date. Buying an option gives you the right, but not the obligation to purchase the asset at a specific price (called the strike price).

The hardest part of options trading is understanding all the jargon. But once you understand all the technical names, you’ll soon find out that basically what you really need to know is which way you think the stock price is going to go in the near future. Once you have an idea what’s going to happen, then all you need to do is use the right option trade to profit. For instance, if you expect a stock’s price is going to increase, then you would purchase a call option on that stock.

Options are not issued by companies like stocks are. All options that exist are “written” or sold by another trader somewhere. Therefore, you are directly betting against that person if you buy an option.

For Call options, if the price of the underlying asset is below the strike price of the option then it is “out of the money,” when the price of the asset crosses above the strike price it is called, “in the money.” This too works the opposite way for Put options. The price of the option has the greatest percentage moves when it crosses from out of the money to in the money but out of the money options also have the most risk.

So if you don’t want to risk large amounts of capital, but still want to use a smaller amount of money to gain from price variations, options trading can be the answer. There are very few risks and an option buyer cannot lose more than the price of the option, the premium.

There is much more involved with trading options, but these are just some of the most basic concepts to help you get started. The bottom line, is that options trading is something that you should only try once you’ve spent some time learning about the stock market, and if you can make decisions calmly when the pressure is on. A lot of information must be learnt before an educated trading decision can be arrived at.

One must look inward to determine which type best suits you. How high is your tolerance for risk? What are your investment objectives? Each person has different goals while at different stages of their life. A suitable strategy needs to be derived fitting your circumstances.

Many advise that the best time to take additional risks is when you are young. When a long life of earnings lay ahead, losses are easier to absorb. This is not the case as one begins to approach retirement. Advice from a financial advisor is often helpful when making these decisions.

If you end up seeking to be a long term investor this entails viewing things with a patient mind set. Buy and hold investors must ignore the everyday swings of the market and allow their portfolios to flourish over the course of years, not months. There are several methods to buy stocks if you seek this style.

One prominent such method is called dollar cost averaging. To employ this strategy one invests an equal amount of money in a given stock on a monthly basis. This investment is made no matter what the stock is doing at that time. It can be going up or down. This removes emotion and serves to reinforce discipline. It also translates to a basis equating to the stock’s average trailing trading price.

If you aren’t blessed with this level of patience then maybe trading is more for you. As opposed to investing, a trader is looking to exploit shorter term movements in a given stock. Many active traders use technical analysis to help guide their decisions. Others rely on an increasing array of automated trading programs on the market.

Some in this class hold stocks weeks to months. Others, referred to as daytraders, hold for minutes. A brokerage account with very low commissions is paramount for this class of trader. Great profits can be made, however studies have shown the majority of daytraders end up losing money in the end.

Stock market trading can be done in many different styles employing varying strategies. Some are passive investors who buy stocks for the long term. Others are hyperactive traders turning over positions several times within one day. Whichever path you choose do your research and trade intelligently.

The underlying probability calculation assumes that the stock price movements are random events, like throwing dice. Of course, stock price movements are not purely random, but are affected by news, rumors, crowd psychology and many more factors. But it isn’t a bad approximation for the reality, especially when averaged over many stocks and over long periods of time.

The essence of the problem derives from the old financial adage, there’s no free lunch. If you were to establish trades with these probabilities, the returns will be rather small, of the order of 7% to 10%. But the losses would be huge, of the order of 90% to 100%. The bottom line is that the one or two losses each year would be large enough to wipe out all of the gains for the year. Thus, there is only a small probability of a losing trade, but when it happens, it will be a devastating loss.

Some traders will readily acknowledge that these high probability trades don’t make sense, and will sell the idea of so called “low risk” trades, where the potential loss is small, hence the label of low risk. These trades are simply the mirror image of the high probability trade. The low risk trade is characterized by a huge potential gain, of the order of 200% or more, but there is a very small probability of that successful outcome. In this case, one would lose a small amount on the trade 10 or 11 months out of the year and then have 1 or 2 large gains. The problem is that the large gains would not compensate for the large number of small losses.

In either case, the outcome is the same, a small net loss, especially after commissions and other costs of trading. So is options trading inherently a losing game? No, not necessarily, there are many examples of successful, long term options traders. They succeed by paying attention to two critical factors: 1) keeping one’s ratio of winning trades to losing trades as high as possible, and 2) minimizing the losses on the inevitable losing trades. But those topics require a much more extensive treatment than can be done in a short article.

One’s choice of either the high probability trade or the low risk trade is not a financial issue – neither is inherently superior. Neither trade will be successful long term without other considerations. One’s choice of the high probability or the low risk trade is primarily a matter of matching one’s trading style and risk tolerance with the right trade.

Forex is derived from the words FOReign EXchange and involves the trading of currencies. Until relatively recently trading forex has been the preserve of banks and other large financial institutions. In the last 5 years forex trading has literally exploded among ordinary traders. When the advantages of forex trading become apparent this is not surprising. The forex market is the largest financial market in the world with an estimated daily turnover of $1.5 trillion dollars. This is 30 times larger than all the US stock markets combined. Further more the forex market is open 24 hours a day 5 days a week.

The size of the forex market is one of its first benefits. The forex market is very liquid and has high volume. Liquidity is a great asset many traders look for because it means a deal can always be done. Forex is a continuous 24-hour market. This is very desirable if you wish to trade part-time as you can choose what time you trade unlike stock markets that are open only 8 hours a day. This 24-hour market almost removes the problem of gapping. Because most stock markets are only open 8 hours a day often-overnight events can cause stocks to gap up or down. Large gaps can especially cause large losses for people who trade derivative products like futures or options. In the forex market the problem of gapping is very much reduced.

Currencies are always traded in pairs. Usually currencies are traded in pairs against the US dollar. The main pairs are US dollar Vs EURO ( EUR), British Pound (GDP), Swiss Franc (CHF), Japanese yen (JPY), Australian Dollar (AUS), New Zealand Dollar (NZD) and the Canadian dollar(CAD). There are other currencies pairs but most traders prefer to trade the pairs above. These currency pairs are known as the majors. Currency traders have plenty of trading opportunities from these 7 major currency pairs. Compare this against the stock market where more than 8,000 stocks trade on the three primary US stock exchanges and currency traders can focus just on these 7 pairs and still make plenty of money.

Unlike the stock market there is never bullish or bearish market conditions. Currencies go up or down against each other according to how the world financial markets perceive the value of the currencies. You can sell a currency (go short) just as easy as you can buy a currency( go long). Currencies go up and down and you can trade either direction just as easily ensuring there is always plenty of trading opportunities.

Forex brokers don’t charge commission or brokerage. This can be quite a large overhead in other financial markets. Forex brokers make their money on the difference between the bid/ask spread of a currency pair. As the forex market is very liquid the spread between the bid/ask is very small. As many stock traders know brokerage can be a significant transaction cost.

You can start trading forex for as little as $300 dollars. There are two types of accounts a mini forex account and regular forex account. Most forex brokers offer 100: 1 leverage which means a in a mini account you can control $10,000 currency position with $100.

In a regular account $1000 controls a $100,000 currency position. This provides great leverage and an extremely efficient use of trading capitol.
Trading a mini account is a great way on how to learn to how to trade forex. When you paper trade you are having a comfortable armchair ride. You are trading without the emotions of putting real money on the table. When you trade a 1 mini currency lot you can set your stop loss so the most you lose is $100. This is a great way to learn how to trade effectively without risking much money. In most other trading products even when trading with the smallest trading lot possible you would have to risk much more. Forex provides trading opportunities for people without much trading capitol.

Many traders have overlooked forex trading. It has many benefits that all traders can use to their advantage. It offers the benefit of trading 24 hours a day in any country in the world. The forex market is a very lucrative market no trader can overlook it.

Economists use the term “global labor arbitrage” to refer to the tendency of manufacturing jobs to flow towards whichever country has the lowest wages per unit output at present and has reached the minimum requisite level of political and economic development to support industrialization. 

Sports arbitrage – numerous internet bookmakers offer odds on the outcome of the same event.  One problem with sports arbitrage is that bookmakers sometimes make mistakes and this can lead to an invocation of the ‘palpable error’ rule, which most bookmakers invoke when they have made a mistake by offering or posting incorrect odds.

 Exchange-traded fund arbitrage – Exchange Traded Funds allow authorized participants to exchange back and forth between shares in underlying securities held by the fund and shares in the fund itself, rather than allowing the buying and selling of shares in the ETF directly with the fund sponsor.  When a significant enough premium appears, an arbitrageur will buy the underlying securities, convert them to shares in the ETF, and sell them in the open market.  When a discount appears, an arbitrageur will do the reverse.As a result of arbitrage, the currency exchange rates, the price of commodities, and the price of securities in different markets tend to converge to the same prices, in all markets, in each category.  More generally, international arbitrage opportunities in commodities, goods, securities and currencies, on a grand scale, tend to change exchange rates until the purchasing power is equal.   At the heart of the Arbitrage philosophy is the belief that a man must capitalize on opportunities and take calculated risks in order to be successful.  In the end, we all must engage in Arbitrage.  ” In this sense, any trader who buys something in one market—whether it is a commodity like grain, financial Securities such as stock in a company, or a currency such as the Japanese yen—and sells it in another market at a higher price is engaged in arbitrage.  In economic theory, arbitrage is a necessary activity in any market, helping to reduce price disparities between different markets and to increase a market’s liquidity (ability to buy and sell). 

 Triangular arbitrage is a trading strategy involving placing three concurrent trades in three markets in an attempt to profit from imbalances between the markets.  Triangular arbitrage forces the cross-rates to be internally consistent.As indicated above, triangular arbitrage is a specific trading strategy that involves three currencies, their correlation, and any discrepancy in their parity rates. Thus, there are no arbitrage opportunities when dealing with just two currencies in a single market. Their fluctuations are simply the trading range of their exchange rate.

Triangular arbitrage opportunities do not happen very often and when they do, they only last for a matter of seconds.  Triangular arbitrage among currencies, once only a theory, is now common practice for those with access to large amounts of money

Using triangular arbitrage strategies on forex market has one salient advantage: Predetermined profits can be realized if the trades are executed smoothly. Unfortunately, the disadvantages of this strategy are numerous:• Higher Transaction Costs• Higher margin requirements• Precision timing is required• Complexity• Advanced monitoring techniques are usually required

***This article is strictly for  informational proposes  and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detaileddisclaimer can be found at http://www.prolificinvestment.com/prolific.php?page=riskwarning