| |
| |
|
|
Investing Information |
|
Options Education: Financing the Calendar!
As a trader, one of the key things that I try to consciously do is to cultivate my instincts by talking with other traders and investors as often as possible. It still amazes me how large the divergence of opinion that exists regarding what people believe will unfold as we enter the new millennium. Many very respected names are literally predicting an economic earthquake that will measure a 10 on the Richter scale while others having looked at the exact same research claim that the consequences will be very mild. As a trader I have to evaluate the data and develop a strategy that I feel not only gives me an edge but allows for a great deal of error while still being low risk! In his book, "Business Without Economists" author William J. Hudson submits a theory worthy of every traders consideration. (Particularly now with Y2K just around the corner) He states: 1) The demand for answers will always be greater than the supply. 2) Therefore, the price for answers will be high. 3) Therefore, a very large supply of answers will emerge. 4) Therefore, most answers will be false, especially when tested against reality. I have this STATEMENT posted on my computer as a reminder to myself that markets are very humbling mechanisms. The key question that we as traders must continuously ask ourselves with regards to whatever trading strategy we enter into is, "What if I am right? And What if I am Wrong?" As I assess the economic landscape and scan the marketplace for trading opportunities there is one fact that I must pay attention to: The NAME of the GAME is Managing RISK! With this in mind, let's evaluate some of the important facts: Many of the Commodity Markets have bounced sharply from their twenty to thirty year lows. When I cross reference this FACT with the REALITY that INFLATION is back in the economy, it creates some very interesting trading opportunities for the OPTION savvy trader. The key to any trading strategy in my opinion is that it HAS to be low risk because there are so many possible outcomes that may occur. The purpose of this strategy is to eliminate the need for timing the market by developing a method minimizing my exposure to loss. Before I provide you with the mechanics of this tactic let me illustrate an outlandish possibility so that we can get clear on a traders definition of RISK. Let's say that you are convinced that on March 1, 2005 that you think that Gold is going to be trading at $3,000 dollars an ounce. (I did say outlandish!) Based upon this scenario even if you wholeheartedly disagree, how could you trade this viewpoint and still take very little risk? Most people think that RISK is defined as BEING RIGHT or WRONG on the outcome of a trade. However, a risk sensitive trader is only concerned with their exposure to chance of LOSS. If you thought that Gold was going to be trading $3,000 an ounce you could enter into the marketplace and very inexpensively purchase a couple of Call Options that would give you the right to purchase Gold at $500 an ounce. In this instance, the most that you could lose is the money that you put up to purchase the options and you would have the RIGHT but not the obligation to purchase Gold at $500 between now and March. However, just because you have LIMITED RISK you STILL have a great deal of EXPOSURE to LOSS. Reason being, that if GOLD does not get up to $500 you would lose all of the money that you put up to purchase the options. The way that a professional would trade this scenario is that he would finance the trade through OPTION SELLING. When you SELL an OPTION you are in effect creating an OBLIGATION that you are forced to abide by contractually. For example if you SELL a $500 December Gold Call and receive money you have in effect agreed to deliver Gold to the option purchaser at a price of $500 between now and December 2004. As a seller of this option, the most that you can make is the premium that you collected and your upside RISK is theoretically unlimited. If Gold is trading at $800 an ounce come December 2004 and you have not offset this option you are obligated to make delivery of Gold to the Option purchaser at the originally agreed upon price of $500 an ounce. Should this occur you would in effect have a loss of $300 per ounce on each contract that you sold. Not very attractive, especially since each Gold contract is 100 ounces in size. The loss becomes $30,000 per contract. That is a lot of risk! The way to minimize RISK is to SPREAD it off against other OPPOSITE Options positions. In the above example, let's say that a trader purchased 1 March $500 Gold call Option for a premium payment of $6.00 an ounce ($600). Each Gold contract is 100 ounces so this trader would be paying $600 per option . The RISK here is very clearly defined as $600. However, if this same trader now SOLD (1) GOLD December $500 Gold Call Option (NOTE THAT THE DECEMBER OPTION WILL EXPIRE BEFORE the March Option) and collected a premium payment of $300 they have in effect reduced their initial risk to the difference between the $600 that they paid out and the $300 that they collected, or $300. Let me outline what this trader has done. They have obligated themselves to make delivery of 100 ounces of Gold at a price of $500 an ounce between now and December and simultaneously they have the right but not the obligation to own 100 ounces of Gold at $500 an ounce between now and March. They have established a BULLISH CALENDAR position by SELLING a Call option in a nearby month and using the money that they collected in the sale of that option to finance their purchases of the Call Option in the deferred option expiration month. What this strategy is in effect saying is that it is the traders opinion that Gold will make its move after December but before March. Although it does not appear very exciting now, should this anticipated disruption occur in that time frame a trader that positioned themselves in this style would be sitting in the drivers seat. Essentially they would be looking at a maximum risk exposure of $300 with the possibility of unlimited upside potential. (YES, I realize that with Gold at $430 at present time that possibility appears extremely remote.) However, it is this kind of trading tactic that makes a great deal of sense in markets that are trading at historical lows. The key to successful trading is to minimize your risk as you acquire more information. The closer you get to option expiration the more information you will have regarding the feasibility of this tactic. The key however is that you played the game without exposing yourself to a great deal of DOWNSIDE. That my friends is the path to long term success in any highly leveraged transaction. As William J. Hudson stated, "Most answers will be false, especially when tested against reality!" Worth thinking about. Just one more way to swing for the fences without taking a great deal of risk. STUDY AWAY and let's be careful out there! Dowjonesfully- -Harald Anderson THE RISK OF TRADING IS SUBSTANTIAL, THEREFORE ONLY "RISK" FUNDS SHOULD BE USED. The valuation of such may fluctuate, and as a result, clients may lose their original investment. In no event should the content of this website be construed as an express or an implied promise, guarantee or implication by anyone that you will profit. Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is. http://www.eOptionsTrader.com.
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
The Perfect Economy? The U.S. Numismatics are for Collectors, Not Investors As a precious metals investor, you may heard much about numismatic and "semi-numismatic" coins, particularly the St. Gaudens $20 double eagle gold coin. Your Worst Enemy To Successful Investing - The Media How do you make your investment decisions and where do you get your information? If you're like most of the people I know, you look to the experts.That's fine, however it's important to be aware that for every expert, there's an opinion and for every opinion there's an expert. Investing In or Owning Drug Lab Properties Clean Up (includes the insides and the outside of a building)Air out the buildingRemoval of contaminated materials: Carpets, carpet pads, Linoleum, drapes and blinds, air-filters, refrigerators, range, water heater, all tenant clothing and their furniture.Removal needs to be to a site that accepts contaminated product. Options Education : Opinion versus Fact! The most basic aspect of trading is learning to differentiate between what is FACTUAL and what is OPINION. If you stay interested in the financial markets long enough you will discover that there are a lot of sharks out there who have become expert at making that task very difficult. Focus Your Investments on the Long Term "All human power is a compound of time and patience!" Honore de Balzac (1799 - 1850)Long term investing or "Buy and Hold" is not about hunches, emotions, stock tips, market timing or making quick profits! It's about using proven long-term strategies to accumulate wealth over time!A large part of the daily volume on the exchanges is due to traders who hope to make a small profit by taking advantage of small discrepancies in the pricing of securities, or who are able to buy a stock as soon a favorable analysts report is issued and who hope to profit before the inevitable runup.The instantaneous access to information that financial institutions have gives them an enormous advantage over the individual investor when it comes to short-term trading. Value Investing By definition, value investing is the process of selecting stocks that trade for less than their intrinsic value. A value investor typically selects stocks with lower than average price-to-book or price-to-earning ratios. Stocks, Oil, and Bonds A barrel of oil bounced to over $60 Thu, which triggered a steep sell-off in the stock market Thu and Fri, although oil pulled-back to around $59 a barrel, and closed at $59.84 a barrel Fri. Success Trading: Yet More Basic Terminology for New Traders In this day and age of online brokers for virtually every market out there, there are some very useful tools that will help protect your account and lock in profits when you have them. It is our recommendation that you use a good online broker and take advantage of not only the low commissions they offer, but also the automated tools that are available. Discipline in Investing and Trading Discipline can be simply defined as your ability to follow your investing and trading plan.Discipline is a rather simple concept. Rules for Simplified Employee Pension Plans better known as a SEP Plans A SEP is a special type of IRA. Under a SEP plan the employer creates an IRA account for each eligible employee, hence the name SEP-IRA. DXPortfolio: A Great Passive Investment of 25% to $40% per month First, I need to explain about e-currencies or digital currencies. DXPortfolio are based and supported by the supply and demand of e-currency. What Is A Fair Market Value, Really? If Youre Going To Trade, Be Sure Its Worth It! I've been involved in online trading, specifically with stock and index options, for several years. In this time, I've spent a great deal of time thinking about value and the fact that anything, be it a stock or currency or even a house, is worth exactly whatever someone else will pay for it. Quit and Retire Three Years Earlier! For most people, there is a direct correlation between how worried they are about retirement income, and how much they can actually do about it. This is because the more worried you are, the closer you probably are to retirement, and the less time you have to do anything - like save up. Forex market offers opportunity and information The forex market is what is called an international exchange currency market, where currencies are exchanged on a daily basis. There are five forex market centers around the world - New York, London, Tokyo, Frankfurt and Zurich. Asset Location - Increase Investing Returns & Reduce Your Taxes Location - Once the holy grail only for real estate investors is fast becoming the mantra for every stock, bond, and mutual fund investor. Experts and studies now recognize managing asset location is second only to asset allocation in determining the success of your investment returns. Financial Planners "Financial planners are like dentists: they may occasionally inflict pain, but in the end, you will be better off for following their advice!"Whoever wrote these lines must have either been a financial planner or someone who relied heavily on planners for finance management. We all know that planning our finances is vital. The Past Does Not Equal The Future: Mutual Fund Returns! A way that investors get ripped off and in a sense rip themselves off is based on the culture of performance in the mutual fund industry. If you stop and think about it there is absolutely no reason that the past has to equal the future. How to Buy to Let Find out everything you need to know about buy to let. Learn what to buy, where to buy and what not to buy. Consolidation Period The economic data reported Fri showed continued above trend growth with disinflation (at the core level, excluding food and energy) in the second quarter. Real output growth has slowed from about 4% in 2003 & 2004 to just over 3 1/2% so far this year, while a core inflation rate fell from 3% last quarter to 2%.
|
|||||||||||||||||
