Options are attractive to the private trader due to their special advantages. By buying options, you are given the opportunity to participating in the market with limited known risk. Besides, the capital that you need to invest is just a small fraction of the price of the underlying shares. Option buyer need to pay a premium when buying options, which is very much less than the stock prices.
For those who are not familiar how actually options work, it may be a little bit confusing in the beginning. Options actually share a lot of same characteristics like insurance policies, which most people should be able to understand. We will get a clearer picture of how literally options work by checking through the features that options and insurance policies have.
For an insurance policy, the policy is actually a contract between the purchaser and the underwriter of the insurance policy. Underwriter of the insurance policy is the company, whose sells the policy. Whereas; option is a contract between the option buyer and seller when there is an initial transaction taking place. Stated in the contract, option buyer has the right to buy an amount of stock from the seller at an agree price within a specific period of time; whereas, seller has to obligate to sell an amount of stock to the buyer at an agree price within a specific period of time. This agreed price is called strike price.
For insurance policy, purchaser pays a premium to the insurance underwriter. The probability payout is influenced by a number of factors, which the premium is dependent. Premium will be charged higher if the risk payout is higher. Whereas for option; purchaser of the option contract pays premium to the writer of the option. A number of factors, which will affect the overall likelihood of a particular stock price being reached, will also affect the amount that needed to be paid as a premium. When the premium for the option is higher, the likelihood of a stock price can reached also higher.
In term of time period, the validity of the insurance policy is within a specific length of time. The passing of time works in favour to the insurance underwriter but against to the purchaser of the insurance policy. For option, it works exactly same as the insurance policy, that is option contract is valid within a specific length of time. When the time passes, it does not favour to the option buyer but favour to option writer.
Upfront is the risk for the purchaser of the insurance contract. The policy is paid by the premium. The insurance underwriter risk is open-ended depending on the terms that are insured. In options trading, the options buyer risk is also known as upfront. The option is paid by the premium. Here are the differences between insurance policy and the option. The option buyer can gain more than premium that he or she has paid for the option but not less than the premium. On the other hand, option writer has open-ended risk potential, which may cause unlimited loss.
In term of payout, if there is any event that has been stated in the insurance policy has occurred, the payout from the insurance company will be a lot more than the original premium paid. If the market direction favours the option buyer, then he or she has unlimited profit potential. The option buyer may make a lot of money, which is many times more than the premium that he or she has been paid.
Alexander Chong -
Author of “Workable Option Trading Strategies”
http://www.makemoneystocks.com/
Sunday, November 30, 2008
Monday, October 13, 2008
Options trading edge
Many private traders deem that options are thought to be traded by experts with good mathematical skill. There are two reasons why many private traders think so, that are. trading options are too risky and difficult. Many private traders think that it is easier to just trade stocks or futures. So, a simple question, if trading futures or buying stocks looks so much easier and less complex to do, then why options are available to be traded? The actual reason is that options, which are unlike other trading vehicle, can offer a trading edge to the private traders and allow them to cover almost any investment strategy and risk profile with flexibility. In many ways, options are the most superior trading vehicles that many traders use nowadays. To trade options, you certainly do not need to be an expert in financing.
In the book "The New Market Wizards" written by Jack Schwager, concludes that nobody can win without an edge, even you have the world greatest discipline and money management skill. If you trade futures on the All Ordinaries Share Price Index (SPI), you have to know exactly what is your trading edge; particularly, if you are a professional floor trader. With the trading edge, you should able to see the buy and sell orders that coming into the trading pit and also who is buyer and seller. Besides, the speed of execution of your orders and the transaction costs also should able to see. The popularity of the stocks, options and futures is increasing; therefore, many people trade these products. Only a small proportion of these traders apply a real trading edge. The main reasons for the unsuccessful of many private traders in the financial markets are due to the lack of a trading edge, poor risk management and insufficient capital. The key point here is to find an edge, utilize it consistently and use the right risk and money management techniques. When the odds are in your favor, it is better that you learn how to trade options. It is also importantly when the odds are not in your favor, make sure you stand aside. You are doing yourself with the best possible chance of success if you doing so. Trading systems are as many as traders. We won't trade a system if it doesn't provide us with some sort of edge. If you have a system, which is able to give you an edge, why not further enhance your edge by trading options in a right circumstance. Before placing a trade, try to get as many factors that going in your favor as possible. By practicing this, you provide yourself with a much greater chance to success in the long run.
Without doubt, with any form of trading, there are no absolute guarantees. You can't help compared to the many of the people who do not know anything about options and trade without an edge. But, you have a better chance to succeed in the long run and reach your financial ambitions. Flexibilities that can be offered by options are as follows:
i) Profit gained from an accurately anticipating rising or falling market.
ii) With a relatively small disbursement, your potential returns can be greatly magnified.
iii) If the market goes to the way that you anticipate, you have unlimited profit potential, whilst you limit your risk by choosing an amount that you afford to risk.
iv) Profit still can be gained by correctly picking options where the market will not go.
v) Profit gained from flat or non-trending phases markets.
vi) Profit gained by letting the time passes by.
vii) Profit gained at an increasing rate when the market moves further in your favor.
Extremely flexible trading tool is option. You can use options trading strategies that are precisely suit your view of market, whilst sewing them closely to your personal risk tolerance level.
People who trade options for a living and as their business will try to understand and apply the principles, which have been outlined in this article. They do so because they know that there is an edge for then to be gained compare to the people who don't. They are similar to the typical casino gambler if they do not trade with edge; their money will be destined to be lost ultimately. They are exactly like the casino itself if they trade with trading edge. For those people who trade the markets to make their living, you probably don't have the chance to talk with them. Their occupation looks exotic and these people are imagined as weird mathematical geniuses who could give their money to Kasparov to run it in a chess tournament. The flair of occupational options traders couldn't be going beyond from the veracity. Although many of the professional options traders who involve in the financial markets are intelligent people, they were not in the genius category. Nevertheless, they have one thing in common among them. They knew and applied certain unique principles in their options trading. The principles that they utilized offered then an edge to successfully trading in the market. Therefore, throughout their options trading life, they earn a good living.
You don't have to be a professional options trader. The edge offered from the principles to the professional options traders also available to the private traders as well. Practically, these principles can be learnt and applied by yourself and the odds can be helped to put it more squarely in your favor. All the advantages that most of the professional options traders have may not be possessed by you. By using the same principles that they used, you can learn to make your trading more selective. In this way, you too can benefit from a trading edge.
Alexander Chong -
Author of “Workable Option Trading Strategies”
http://www.makemoneystocks.com/
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In the book "The New Market Wizards" written by Jack Schwager, concludes that nobody can win without an edge, even you have the world greatest discipline and money management skill. If you trade futures on the All Ordinaries Share Price Index (SPI), you have to know exactly what is your trading edge; particularly, if you are a professional floor trader. With the trading edge, you should able to see the buy and sell orders that coming into the trading pit and also who is buyer and seller. Besides, the speed of execution of your orders and the transaction costs also should able to see. The popularity of the stocks, options and futures is increasing; therefore, many people trade these products. Only a small proportion of these traders apply a real trading edge. The main reasons for the unsuccessful of many private traders in the financial markets are due to the lack of a trading edge, poor risk management and insufficient capital. The key point here is to find an edge, utilize it consistently and use the right risk and money management techniques. When the odds are in your favor, it is better that you learn how to trade options. It is also importantly when the odds are not in your favor, make sure you stand aside. You are doing yourself with the best possible chance of success if you doing so. Trading systems are as many as traders. We won't trade a system if it doesn't provide us with some sort of edge. If you have a system, which is able to give you an edge, why not further enhance your edge by trading options in a right circumstance. Before placing a trade, try to get as many factors that going in your favor as possible. By practicing this, you provide yourself with a much greater chance to success in the long run.
Without doubt, with any form of trading, there are no absolute guarantees. You can't help compared to the many of the people who do not know anything about options and trade without an edge. But, you have a better chance to succeed in the long run and reach your financial ambitions. Flexibilities that can be offered by options are as follows:
i) Profit gained from an accurately anticipating rising or falling market.
ii) With a relatively small disbursement, your potential returns can be greatly magnified.
iii) If the market goes to the way that you anticipate, you have unlimited profit potential, whilst you limit your risk by choosing an amount that you afford to risk.
iv) Profit still can be gained by correctly picking options where the market will not go.
v) Profit gained from flat or non-trending phases markets.
vi) Profit gained by letting the time passes by.
vii) Profit gained at an increasing rate when the market moves further in your favor.
Extremely flexible trading tool is option. You can use options trading strategies that are precisely suit your view of market, whilst sewing them closely to your personal risk tolerance level.
People who trade options for a living and as their business will try to understand and apply the principles, which have been outlined in this article. They do so because they know that there is an edge for then to be gained compare to the people who don't. They are similar to the typical casino gambler if they do not trade with edge; their money will be destined to be lost ultimately. They are exactly like the casino itself if they trade with trading edge. For those people who trade the markets to make their living, you probably don't have the chance to talk with them. Their occupation looks exotic and these people are imagined as weird mathematical geniuses who could give their money to Kasparov to run it in a chess tournament. The flair of occupational options traders couldn't be going beyond from the veracity. Although many of the professional options traders who involve in the financial markets are intelligent people, they were not in the genius category. Nevertheless, they have one thing in common among them. They knew and applied certain unique principles in their options trading. The principles that they utilized offered then an edge to successfully trading in the market. Therefore, throughout their options trading life, they earn a good living.
You don't have to be a professional options trader. The edge offered from the principles to the professional options traders also available to the private traders as well. Practically, these principles can be learnt and applied by yourself and the odds can be helped to put it more squarely in your favor. All the advantages that most of the professional options traders have may not be possessed by you. By using the same principles that they used, you can learn to make your trading more selective. In this way, you too can benefit from a trading edge.
Alexander Chong -
Author of “Workable Option Trading Strategies”
http://www.makemoneystocks.com/
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