Posts Tagged ‘option trading system’

Importance of Options trading strategies

Monday, February 8th, 2010

 The contracts of sale and purchase is popularly known as option contract.  There are wide varieties of option strategies which use multiple legs at the structure. The long call option is a investment plan the other option known as put option is very popular and helps to analyse the market movement

The call option comes handly when the market is trading higher. Once the customer broke even from the break even point his poison has the potential to earn unlimited profit. In a selling market the call becomes worthless as traders opt for the put option which becomes increasingly profitable The investor must be clear about the Market direction for the better return about from the call option instrument. If the market price of the option contract implies if 50% more expensive than the historical prices than the investor may decide against buying the option and may make a move to sale it instead. In call option if the inverse observes growth of more than 50% than the investor would sell the instrument.

Option strategies can favour underlined stocks if they are bullish or bearish or neutral. In case if the strategy is neutral they can be further classified into those are bullish on volatility and those that are bearish on volatility.  The option call can be taken up anytime for short position and long position in the market.

Bearish option strategy are the opposite of the bullish strategies they are taken up when the option trader expects the stocks to move downward.   For any investor it is must to know when the market will move upward and when it will go down. The anticipation of the market movement is the key to earn profit.

For option trading one should not be   a expert in maths or economics. If we put this simply across option can be termed as contracts which are guided by a pre determined term in a pre specified period.

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Understanding Futures options trading

Monday, February 8th, 2010

Future is a well set process to buy and sell commodity of a quality on a particular date at predefined price. The contracts are traded on future exchange . Future contracts is like direct securities like stocks , bonds rights and warrants. The derivative contract still in the form of security is called the future option. The contract is decided based on the requirements of supply and demand in the market. Traditional commodities are future contracts for financial future. Financial instruments which is intangible asset, or referred to as stock indexes and interests is referred to as currency.

Final settlement date is nothing but the delivery date of the future.The price of the future contract and at the end of the days trading session is called the settlement price for the day of business on the exchange Under the terms of the future contract the holder is obligated to make or take delivery whereas in an option gives the buyer the right to come to a position which was previously held by the seller of the option. Both parties have the obligation to fulfil the contractual obligation of the settlement date. The asset is delivered to the buyer in case it is a cash settled futures contract. The cash under these cases is transferred from the future trader to the one w To exit the commitment ho made a profit. Prior to the settlement date the holder of the future options has to offset his position by either selling a long position or buying back short position which would effectively close the future option and its contract obligation.

ETF’s are also known as future contracts. The clearing house of the exchange acts as a counter party on all contract which sets margin requirements and crucial mechanism for settlement.

On a future date the asset would be delivered at a pre agreed price in case of future and forward contract. The only difference is future are exchange traded and forwards are traded over the counter. Futures and forwards have another small difference which is that futures are standardised and forwards are customised one faces an exchange and the other one does not.

 

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How To Trade Options?

Monday, February 8th, 2010

Learning how to trade options requires learning basics right. The right to buy and sell an asset at a pre agreed price before the timeline of expiration of the option feature is the option feature. The buyer after receiving the option from the seller makes the payment to the buyer.  The call and put option define the following for the buyer and the seller, the buyer can the asset  in a call option and the seller can sell in a put option. Once the call option has been received by the buyer the underlined asset can be sold to the seller at a pre agreed price if the seller chooses to use his right.

The buyer has the right to choose  if he wants to exercise his rights or allow it to expire in which he can take over the asset which can be a security, derivative instrument or futures contract.

The value of option is evaluated according to several models. Qualitative analysis has helped in the development of the model which can evaluate the value of an option under changing circumstances. Risk of association with granting or trading options can be quantified and managed  with a great degree of accuracy. Two independent parties can facilitate trade through standard features on public exchange which is an important part of the ETF option.   When the trade takes place between two private parties or well capitalised institutions over the counter separate trading and clearing arrangement needs to be made.

There is yet another form of option which is heavily practiced in US which is called employees stock option. This option is given to the employees as an incentive towards the hard work done in the organisation.There are many options which exist in the financial contract for example real estate option which is used to assemble large parcels of land and prepayment option are used in mortgage loans.

Each contract is a financial option which is a contract between two parties with the terms of agreement specified on the term sheet. It says

1. It would state if the option holder has the right to buy call option or sell put option

2. The quality and class of the underlined asset

3. The price at which the transactions will occur will be mentioned.

4. Options can be exercised only till a certain date that date will be mentioned.

As all securities trading option entails risk of the option value changing over time. Traditional securities the investor should take everything into perspective before investing in the trade options.

 

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