Previously, I have tackled directional options trading with Credit Spreads. Directional Trading means trading the markets or a specific stock with a specific view of it going up or down (bullish or bearish). This week, I'd like to focus on a different options trading strategy called Straddles.
A Straddle is a neutral or non-directional options trading strategy. In essence, neutral or non-directional options trading strategies are opted by options traders when he has no idea as to whether a particular stock would rise or fall. In such options trading strategy, the profit potential is assessed on the basis of speculative volatility of a particular stock price. There are 2 types of straddles: a Long Straddle and a Short Straddle. This post will cover the Long Straddle as an options trading strategy.
Long Straddle
A Long straddle is basically comprised of a Buy Call and Buy Put Options. The idea is you are buying a call and a put on same strike price. With this options trading strategy, if the market goes in one direction, one of the options will increase in value significantly, and the other will become worthless. For a long straddle to be effective, the price of a stock should either take a huge jump or go for a steep decline. This is very handy for times when the market is very volatile, and the volatility can enable you to earn unlimited amounts based on how much the stock price has risen or fallen.
Profits are calculated based on where the stock price is. If the stock price is above the strike price of the option, then the profit will be as follows:
Price of the stock - Strike Price of the Call option - Net Premium Paid
If the stock price is below the strike price of the option, then the profit will be as follows:
Strike Price of the Put Option -Price of the stock -Net Premium Paid
For example:
Company XYZ is trading at $40. You do a straddle by buying 10 call and 10 put options of $40. You paid $400 in premium.
If at expiry date the stock price is now at $50, then your profit is as follows:
($50 x 10 contracts) - ($40 x 10 contracts) - $400
If at expiry date the stock price is now at $30, then your profit will be:
($40 x 10 contracts) - ($30 x 10 contracts) - $400
If the stock price did not move at all by expiry date, you lose the premium you would have paid, and both options have now expired worthless.
If you would like to learn more about Straddles and options trading in general, I found that Planet Wealth provides very comprehensive information on stock and options trading, and the various strategies that you can use depending on the market situation.
On my next post, I will be covering short straddles. I hope you've enjoyed this post and learned something from it.
Another sharemarket secret unveiled!
Showing posts with label stocks. Show all posts
Showing posts with label stocks. Show all posts
Wednesday, April 22, 2009
Friday, April 17, 2009
Options Trading Terminologies
Basics on Options Trading
I'd like to get back to basics and explain what options trading is. Options Trading is basically the trading of options contracts that is exchanged between the buyer and the seller of an asset (in the case of the stock market, the stocks). That gives the buyer the right to either buy or sell a particular asset at an agreed date and at an agreed price. In return, the seller of the option receives a certain amount of payment as premium from the buyer. There are 2 types of options: A call option and a put option.
Call Option
Call Option gives the holder the right but not the obligation to buy the stock for an agreed price at an agreed time. If the call option is struck or exercised, the buyer of the call option is then able to purchase that particular stock for the agreed price, and the seller of the call option is then obliged to sell the stock at the agreed price.
Put Option
Put Option gives the holder the right but not the obligation to sell the stock for an agreed price at an agreed time. If the put option is struck or exercised, then the buyer of the option is obliged to sell the asset or stock. The seller of the put option, if exercised, is then obliged to buy the stock or asset.
What does "Exercise" mean?
Exercise means that the price of the stock has hit or exceeded the agreed price on the option on or before the specified agreed date. This means that the options contract has to be executed, and that is what "being exercised" mean.
Options Contract
Options are traded by contracts. A contract is comprised of:
• The quantity and the class of the assets (in the US, a contract is 100 shares , in Australia a contract is 1,000 shares)
• The exercise price at which the options trading happens;
• The expiry date
• The premium price that would be settled to the writer (or seller) of the contract, OR the premium to be paid to the taker (or buyer) of the contract.
Options trading follow different styles. The most common ones are:
• American options trading – In this options style, an option can be comfortably exercised on on any trading day on or before the expiration date.
• European options trading - In this options trading style, the options can only be exercised at the time of expiration only.
These are just the basics of options trading. More information is available with Planet Wealth and the e-books that they offer, which I find are just awesome with explaining the finer details of Options trading.
I hope this has been a beneficial post on Options Trading by Planet Wealth Systems!
I'd like to get back to basics and explain what options trading is. Options Trading is basically the trading of options contracts that is exchanged between the buyer and the seller of an asset (in the case of the stock market, the stocks). That gives the buyer the right to either buy or sell a particular asset at an agreed date and at an agreed price. In return, the seller of the option receives a certain amount of payment as premium from the buyer. There are 2 types of options: A call option and a put option.Call Option
Call Option gives the holder the right but not the obligation to buy the stock for an agreed price at an agreed time. If the call option is struck or exercised, the buyer of the call option is then able to purchase that particular stock for the agreed price, and the seller of the call option is then obliged to sell the stock at the agreed price.
Put Option
Put Option gives the holder the right but not the obligation to sell the stock for an agreed price at an agreed time. If the put option is struck or exercised, then the buyer of the option is obliged to sell the asset or stock. The seller of the put option, if exercised, is then obliged to buy the stock or asset.
What does "Exercise" mean?
Exercise means that the price of the stock has hit or exceeded the agreed price on the option on or before the specified agreed date. This means that the options contract has to be executed, and that is what "being exercised" mean.
Options Contract
Options are traded by contracts. A contract is comprised of:
• The quantity and the class of the assets (in the US, a contract is 100 shares , in Australia a contract is 1,000 shares)
• The exercise price at which the options trading happens;
• The expiry date
• The premium price that would be settled to the writer (or seller) of the contract, OR the premium to be paid to the taker (or buyer) of the contract.
Options trading follow different styles. The most common ones are:
• American options trading – In this options style, an option can be comfortably exercised on on any trading day on or before the expiration date.
• European options trading - In this options trading style, the options can only be exercised at the time of expiration only.
These are just the basics of options trading. More information is available with Planet Wealth and the e-books that they offer, which I find are just awesome with explaining the finer details of Options trading.
I hope this has been a beneficial post on Options Trading by Planet Wealth Systems!
Sunday, March 1, 2009
The Importance of Risk Management
Risk Management - what is it and why do we need to consider it? Risk Management is the ability to handle or manage the risk that you are exposed to in a particular trade. Risk Management is important in trading in order to protect your money or your capital because no one exactly knows for certain what the market will do once you are in a trade. We can only try and tell based on certain analysis and trends what we think will happen to a particular stock, but no one out there (not even the market makers) is certain that a stock will go to the direction that you would trade as or told to trade. Thus, it is only fair that we need to look after our cash and make sure that if things don't go on our favour, we will not have lost everything in our trading account.
Risk Management also involves identifying how much you are willing to risk for a particular trade. For example, if you have $10,000 in your bank account, you might only want to risk 20% of this amount at a time. Thus, when you trade, you may only get into a trading position that will only let you lose a maximum of $2,000. In other words, you are comfortable enough to lose this amount, should the trade go against you.Another aspect of risk management involves looking at a risk-reward ratio for a particular trade. This basically means that you look at how much you are risking in proportion to the reward or potential profit that you will make out of a trade. For example, if a trade is only able to generate $1,000 in profit, and you are risking $10,000, this may not necessarily be a good risk-reward ratio as compared to a trade with $1,000 potential profit and a risk of $4,000.
Prudent risk management is part and parcel of trading, whether it be stocks, options, futures contracts or indices. When I trade using Planet Wealth's recommendations, I always work out how much I'm willing to put into the trade. I never put all of my money into one trade, and before I enter on a trade, I also think if I'm prepared to lose x amount of dollars, should it go against me. More importantly, I also look at the risk-reward ratio that is not less than 20%, and this means that my trades will only let me risk less for more profit.
One good thing about the range of strategies that Planet Wealth offers is the various levels of risk that each strategy entails. This helps their clients decide if it meets their risk management criteria, and if they are also feasible for certain market conditions. This is especially crucial for times like what are experiencing now, where the market is very volatile and tends to go on a downward trend. Planet Wealth has strategies to cater for a downward trend, and also ensures that the level of risk is minimised as much as possible.
In summary, risk management is a very important factor for trading in order to protect your money and allow you to profit in the markets in the long term. Whether you trade stocks/shares, options, futures contracts, currencies or indices, make sure that this is at the top of your list.
Another sharemarket secret unveiled. To the many trading successes.
Thursday, February 12, 2009
"Share Renting" strategy - a great income earner for Bull Markets
What is "Share Renting"?
Share Renting is a term coined by Jamie McIntyre of 21st Century Academy to simplify an options strategy that can be used to generate extra income when you hold physical stocks or shares. Share renting is being used to form an analogy with owning a property and renting it out to a tenant, and making an income from rental. This is one of the strategies that are being taught in more depth by Planet Wealth. Basically, the strategy is this:
1.) Own the physical shares or stocks. If you're investing in the Australian market, you must hold at least 1,000 shares (or multiples of 1,000). In the US markets, you can go for at least 100 shares (or multiples of 100). This is so you can apply the options strategy on top of the stock or share that you purchased.
2.) Sell a Call Option - When selling a call option, you get a premium or "rental income" for agreeing to sell your stock at a certain date for a specified price. Choosing an option to sell will depend on the price level that you purchased the shares, and the expectations/views/predictions that you or the market have on the particular stock or share at a certain date.
The trick is, you should choose a call option at a higher price and with a price that you think it will not reach or hit at the expiry date. Each option has an expiry date, and you also need to look into this to work out if your view is for within the month or within the next 2 months, etc. This is one of the factors that will determine how much income you will make out of the premium.
For example:
You purchased 1,000 shares of Company XYZ @ $2.00
You foresee that this stock, based on existing market conditions, and based on previous movements, will not go up to $2.50 in the next month.
The $2.50 Call Options strike price for next month is paying 15 cents premium.
You can sell 1 call options contract for Company XYZ and earn $150.
If Company XYZ doesn't reach $2.50 at the expiry date, then you get to keep your shares, and you also get to keep the $150 premium! If you continue to have a bullish view of the stock or share in the long run, you might want to keep it. Hence, the strategy is to find a strike price that is more likely not to be hit or reached.
If it does hit the $2.50 strike price, then you would have to sell the shares for $2.50, which then means that you still made money on the stock or share ($500 in this instance, plus the $150 premium). Either way, you win!
Not a bad strategy for a Bull Market! You can still do this on a bear market, but you have to be bullish on the stock that you own and not make a loss on it if the call options are exercised.
I've learned all of this in more detail through Planet Wealth, and more details are on their e-book, so check them out! I hope you've learned another options strategy today.
Another Sharemarket Secret unveiled! Til the next post!
Share Renting is a term coined by Jamie McIntyre of 21st Century Academy to simplify an options strategy that can be used to generate extra income when you hold physical stocks or shares. Share renting is being used to form an analogy with owning a property and renting it out to a tenant, and making an income from rental. This is one of the strategies that are being taught in more depth by Planet Wealth. Basically, the strategy is this:
1.) Own the physical shares or stocks. If you're investing in the Australian market, you must hold at least 1,000 shares (or multiples of 1,000). In the US markets, you can go for at least 100 shares (or multiples of 100). This is so you can apply the options strategy on top of the stock or share that you purchased.
2.) Sell a Call Option - When selling a call option, you get a premium or "rental income" for agreeing to sell your stock at a certain date for a specified price. Choosing an option to sell will depend on the price level that you purchased the shares, and the expectations/views/predictions that you or the market have on the particular stock or share at a certain date.
The trick is, you should choose a call option at a higher price and with a price that you think it will not reach or hit at the expiry date. Each option has an expiry date, and you also need to look into this to work out if your view is for within the month or within the next 2 months, etc. This is one of the factors that will determine how much income you will make out of the premium.
For example:
You purchased 1,000 shares of Company XYZ @ $2.00
You foresee that this stock, based on existing market conditions, and based on previous movements, will not go up to $2.50 in the next month.
The $2.50 Call Options strike price for next month is paying 15 cents premium.
You can sell 1 call options contract for Company XYZ and earn $150.
If Company XYZ doesn't reach $2.50 at the expiry date, then you get to keep your shares, and you also get to keep the $150 premium! If you continue to have a bullish view of the stock or share in the long run, you might want to keep it. Hence, the strategy is to find a strike price that is more likely not to be hit or reached.
If it does hit the $2.50 strike price, then you would have to sell the shares for $2.50, which then means that you still made money on the stock or share ($500 in this instance, plus the $150 premium). Either way, you win!
Not a bad strategy for a Bull Market! You can still do this on a bear market, but you have to be bullish on the stock that you own and not make a loss on it if the call options are exercised.
I've learned all of this in more detail through Planet Wealth, and more details are on their e-book, so check them out! I hope you've learned another options strategy today.
Another Sharemarket Secret unveiled! Til the next post!
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