Butterfly Options » Online Trading

So You Think You Know Option Trading?

admin — Tue, 19 Jan 2010 23:42:22 +0000

We all know that many opportunities exist in Option Trading today. Wherever you turn, someone is waiting to inform you of the tremendous profits to be realized within the stock and the futures markets. Nevertheless, many people are unaware of the derivative trading possibilities that are available within and across several different markets.
Option Trading is just one of the leading many ways to participate in such type of secondary markets. And in contrast to the popular belief, this potential trading arena is not limited strictly to the practice of selling or writing options.
Option Trading is an important element of investing in markets, serving a function of managing risk and generating income too.
Contrasting to most other types of investments today, Option Trading provides a unique set of benefits to its clients. Not only does Option Trading provide an economical and effective means of hedging one’s portfolio against adverse and unexpected price fluctuations, but it also offers a tremendous exploratory dimension to trading.
One of the foremost primary conveniences of Option Trading is that an option contracts enable a trade to be leveraged, allowing the trader to control the full value of an asset for a fraction of the actual cost.
Then since an option’s price mirrors that of the underlying asset at the very least, any constructive return element within the asset will be met with a greater percentage return resource within the option provides limited risk and unlimited reward.
With Option Trading the buyer can only lose what was paid for the option contract, and not a penny more, which is a fraction of what the actual cost of the asset would be. However, the profit potential is unlimited because in Option Trading the option holder possesses a contract that performs in sync with the asset itself.
If the outlook turns out to be positive for the security, so too will the outlook be for that asset’s underlying options. Option Trading also provides their owners with numerous trading alternatives. Option Trading can be customized and combined with other options and even other investments to gain the benefits of any possible price dislocation within the market.
Option Trading enables the trader or investor to acquire a position that is pertinent for any sort of market outlook that he or she can have, and then be it bullish, bearish, choppy, or silent. It doesn’t matter at all.
Risks Involved In Option Trading
While there is no disputing that Option Trading offers many investment benefits, it also involves risk and is not for everyone. For the same reason that one’s returns can be large, so too can the losses.
Also, while the potential for financial success does exist in Option Trading, the means of realizing such opportunities are often difficult to create and to identify. With dozens of variables, several pricing models, and hundreds of different strategies to choose from, it is no wonder that Option Trading and its pricing have been a mystery to the majority of the trading public.
Quite often, in Option Trading a wonderful deal of information must be processed before a knowledgeable trading decision can be reached. Computers and sophisticated trading models are often relied upon to select trading candidates.
However, as humans, we like things to be as simple as possible in Option Trading. This often creates a conflict when deciding what, when, and how to trade a particular investment. It is much more easier to buy or sell an asset outright than to challenge with the many extraneous factors of these derivative markets.
If an investor thinks an asset’s value will appreciate, he or she can simply buy the security; but if an investor thinks an asset’s value will depreciate, he or she can simply sell the security. In such scenarios, the only thing an investor must worry about is the value of the investment relative to the value of the prevailing market. If only Option Trading were that easy!
Generally, Option Trading is more awkward and complicated than stock trading because here the traders must consider many variables aside from the direction they believe the market will move.
The effects of the passage of time, variables and delta, and the underlying market volatility on the splendid price of the Option Trading are just some of the many items that traders need to gauge in order to make informed decisions. If one is not prudent in one’s investment decisions, one could potentially lose an enormous number of money trading options.
Those who actually ignore cautious and sound money management techniques often find out the hard way that these factors can promptly and easily grind down the value of their Option Trading portfolios.
Due to the risks and benefits, Option Trading offers tremendous profit potential above and beyond trading in any other device, including the underlying security itself. This is the moment at which theoreticians enter the picture. Once the benefits have been defined, it is then just a matter of determining how to matchlessly attain them.
Up till now, the vast majority of Option Trading techniques have been elaborate mathematical models designed to help identify when option writing or selling opportunities exist.
On the other hand, we hope to break used ground by introducing simple market-timing techniques to Option Trading that will enable the traders to buy options with greater confidence and with greater success in Option Trading.

Options Trading – Calls and Puts

admin — Sat, 09 Jan 2010 12:34:03 +0000

Options are contracts on an underlying trading instrument such as shares of stock, bonds, a commodity, a mortgage loan and many others. However, there are common features among all options. It does not matter if it is a share of stock or a mortgage loan; they all have certain things in common. One such commonality is the contract feature that specifies what the option owner has actually contracted.
Options traders have two situations that may influence their buying and selling: calls and puts. There terms are used to indicate specific behaviors of options at various points of the option’s life.
CALLs
A call bestows on the contract holder the right to purchase an asset at a particular price on or before the option’s expiration date. This is only a right to buy, it is not an obligation. The call owner always has the choice to allow the option to expire. This does mean that all the initial money that was invested in purchasing the contract is lost, but the choice still stands.
Call buyers are gambling on the underlying asset’s behavior; that it will increase in price before it reaches its expiration date. Also that it will not only rise, but will rise significantly enough to show a profit.
In order to show a profit, the price must rise enough to cover the difference between the market price and the strike price. The strike price is that price at which the stock must be bought. But, because the option has a cost attached to it, the price must exceed that amount enough to cover the additional amount. This cost is referred to as the premium.
The premium of an option, whether call or put, is determined by a variety of elements. These include, but are not limited to, the price of the underlying asset, the strike price and the time remaining on the option.
The time remaining on an option is vital. The shorter the time remaining, the greater the risk and vice versa. For example, if there are 90 days left to exercise an option, the risk is somewhat lower than if there was only 1 day left. This is because within that 90 day period the price could rise enough to show a profit. With just 1 day remaining, however, the odds are considerably lower.
For example, on April 1, MSFT (Microsoft) has a market price of $27. Call options for June 30 are selling for $3 with a strike price of $30. One contract for 100 shares is purchased.
If the contract is held until the expiration date, the trader either loses $300 ($3 X 100, the initial price of the contract not including commission) or the trader can purchase the underlying stock at $30. If the current market price was $35, then the trader has profited by $200 ($35 – ($30 + $3) = $2 per share X 100 shares, sans commission).
When the market price of a share rises above the strike price, the option holder is “in the money.” If the market price drops, then the holder is “out of the money.”
PUTs
A put gives the option buyer the right to sell an asset at a particular price by a specified date. Again, like a call, this is a right, not an obligation.
Put buyers are anticipating the stock prices to fall before the option’s expiration date. Therefore, in such cases, the market price must drop below the strike price in order to show a profit from exercising the option. For simplicity purposes, the cost of the put is ignored. Under those circumstances the option holder is in the money.
Still using the previous example, maintain the same situation, but this time the option is a put. If the market price falls to $25, the profit would be as follows:
First, $3 x 100 = $300 = Cost of put, excluding commissions.
Purchase 100 shares at $25 per share = $2,500 this is to repay the broker ‘loan’ (this broker loan is a part of shorting stock which is borrowing shares you don’t own, then repaying later).
Sell 100 shares at Strike price = $30, 100 x $30 = $3,000
Profit = ($3000 – $2500) – ($300) = $200.
It is the broker who handles the underlying mechanics. All the investor has to do is order the trades at a given time and date.
Wise investors do their homework and research their strategies, no matter if they are investing in calls or puts. Options trading does present risks and is rather complicated when compared to simple stock trading, although all trading contains an element of complication and risk. But investors in this line should study the history, volatility and other vital factors of both the option contract and the underlying asset.
A trader should never enter the market blindly and trade without doing the proper research first. The failure to do adequate research and go into the trade informed puts the trader at a must greater risk of losing money and not showing a profit.

Options Trading – The A,B,C Of Options Trading

admin — Wed, 06 Jan 2010 00:51:00 +0000

Like futures trading, an option gives a trader the right, but does not obligate him, to buy the underlying stock at whatever the specified price on a preset time in future.
You make profits if the stock value ends up higher than what you purchased at. On the flip side, if the prices drop, then you lose out on your investment.
There are 2 kinds of options: the put option and the call. When you purchase a call option, you expect that the value of your investment will rise and you buy a put option when you expect the prices to fall.
In either case you make a profit, provided your foresight was correct, unlike other derivatives where you get a profit only when value of shares increases.
You could use the hedging strategy when you are unsure if the price of your stocks is going to go up or fall down. What you should do in such case is go for a put option. If the price dips, you make a profit and if it goes up, at least you do not lose the investment, only the profits.
If you are sure your stocks are going to dip in value, it would be better to sell out and re invest in put options.
Another strategy could be to sell out before the expiry date of your options so you can purchase the underlying profitable stocks. Selling on the options is not a problem because there are bodies responsible for the purchase of so as to maintain a balance in the system.
Do take the time to be a part of forums and online discussions on the possibilities of options trading. You will find up to date information there that no book can provide. Some websites can offer free training material as well, which is a great boon for beginners.
Like any investment, options trading requires you to be updated with regularity, on the economy and businesses of different trading companies, if you would like to buy stock options on their company. It is great when you have a good idea of who you will need to trade with.
When you have the adequate information on the goings-on of the market, you are best equipped to make your self a good profit. Secondly, the timing with which you make your moves is vital, so make sure you make regular observations of the market if not continous in your business day.
To conclude, although trading with options can be a risky business, it can give you good returns when you play your cards right. So make sure you are getting regular information updates and that you have a strategy to work with.

Options Trading 101

admin — Mon, 04 Jan 2010 23:38:41 +0000

The individual investor will typically include some stocks in their investment portfolio. And whether they are a long term trader or in it for much quicker returns, many investors understand and feel somewhat comfortable with the concepts and techniques of trading stocks.
Options tend to be much less understood – and therefore avoided. But Options can form an extremely valuable part of your trading strategy as they can provide tremendous returns!
So here I will try and give you some of the fundamental concepts behind trading options.
Options are a contract conferring the right to buy (a call option) or sell (a put option) some underlying instrument, such as a stock or bond, at a predetermined price (the strike price) on or before a preset date (the expiration date). Options officially expire on the Saturday after the third Friday of the contract’s expiration month but because the markets are typically closed on Saturdays, the Friday is commonly used as the expiration date.
A key concept to grasp is that, when you buy an option, you don’t actually own the underlying security. You simply own the right to buy (or sell) at a specific point in time. But, of course, the price of the underlying instrument and the time remaing before expiration both affect the value of the option itself.
So in trading options you have two main ways to make money on them:
- You can hold to maturity and then exercise the option (with the expectation that the underlying instrument is then worth more than what you are entitled to buy it at – your “strike price”)
- You can sell the option itself prior to expiration (in the expectation that the value of the option itself has risen above what you paid for it)
A great many investors do in fact hold until maturity and then exercise the option to trade the underlying asset. Assume the buyer purchased a call option at $3 on a stock with a strike price of $30. (Typically, options contracts are on 100 share lots.) To purchase the stock the total investment is:
($3 + $30) x 100 = $3300 (Ignoring commissions.)
So if, at expiration, the stock is worth more than $33 you’ve made a profit (You can sell your 100 shares for more than $3300 right away).
Speculating on the actual value of the option itself is the second alternative.
Let’s use the same example above.
You bought your options for $3 with a strike price of $30.
If the price of the underlying stock goes above $33 at any time prior to expiration, then naturally more people will want to try and get a hold of that option you own, because they see a high likelihood of making a profit off the underlying security. With the increased demand for that option, the value of the option itself will likely go up. So you can sell the option to that higher bidder for a profit.
For example, if the price of the underlying stock rose to, say $35 then the option itself may become worth, say $4 on the open market. So you sell your options for $4 and make a nice 33% return. Without ever having owned the underlying stock itself.
Those are the kinds of returns that make options so attractive.
Many brokers offer trading accounts to individual investors that allow options trading and frequently at very competitive commision rates.
It really isn’t very difficult to get started.
Options trading is risky, so manage your risk and your assets wisely and only use a small percentage of your overall portfolio for trading options. But do consider them as an additional component of your investment strategy, as they can yield tremendous returns when traded correctly.

How to Profit from a Market Correction: Diversified Trading Strategies

admin — Sun, 03 Jan 2010 23:45:13 +0000

What happened to the stock markets these past two weeks?
Anyone at all involved in investing or trading no doubt personally experienced it- the stock markets went through a major correction! And in these days of the “World Economy” such a correction can be triggered by news from anywhere in the world. As it did this time. Poor economic news from China prompted a sharp world decline in stock prices in just a few days.
And many investors, especially long term investors made big losses.
And they’re probably asking:
“Is there some way I could have avoided making losses during that period?”
Well, the answer is absolutely Yes.
Obviously trying to predict such a correction and get out before it happens is extremely difficult, and honestly more a matter of luck than anything else.
But by diversifying your trading strategies you can definitely avoid losses during such times – and in fact make healthy profits instead!
The key is to employ a mix of trading techniques that take advantage of a variety of trading timeframes.
Avoid putting all your eggs in the “long term” basket and look at complementing your trading with styles that make returns over the shorter term as well:
- Swing trading is an excellent way to capitalize on market movements over a period of just a few days or weeks.
- Day trading of course, allows you to make returns on stock movements within just one day.
And, mix up how and what you trade:
- Include Short Selling in your trading techniques. By selling a stock or index short, you are looking to profit from downward moves. This is just as valid as trying to buy low and sell high. And offers an important hedge against a market correction
- Also, there are now Inverse and even Double-Inverse indices that can be traded quite easily. DOG is the symbol for the Inverse Dow 30 Index and DXD is the Double Inverse Dow 30. By owning these, you are essentially short selling the major stock indices.
And, contrary to popular belief, it is not difficult to begin trading in this manner.
Over the years online trading has exploded in popularity and, as a result, the resources, tools, strategies and infrastructure available to the ordinary investor have become enormous.
- Online brokers offer trading accounts with extremely low commissions that allow investors to trade all kinds of different instruments (stocks, options, futures, forex) over all kinds of different timeframes (day trading, swing trading, long term trading).
- A large number of trading strategies and systems are also available online. And many such systems, offer a spectrum of short term and longer term strategies in a single service.
- And online trading platforms have become very sophisticated, offering complex analysis tools and even the ability to develop and back test trading strategies.
So, what simple steps can you take to profit during rising markets AND market corrections?
- Long Term trading: Allocate a portion of your trading funds to long term investments (over many months). Make your profits from the overall market trends – remember to take those profits periodically so that you’re not caught by a sudden downturn. And look to include some of those Inverse Indices in your portfolio. They can act as a tremendous hedge against market corrections.
- Medium Term trading: Allocate a portion of your trading funds to Swing Trading. In this way you capitalize on the medium term trends in the markets or individual stocks. Practically all financial instruments go through these medium term swings as traders are constantly trying to determine the right longer term price by buying and selling at support and resistance levels. And by taking both Long and Short trades on these swings you stand to profit in both directions!
- Short Term trading: Allocate a portion of your trading funds to Day Trading. This allows you to completely take the longer term market factors out of the equation. By trading within a single day, it really doesn’t matter that there was a long term correction. You profit anyway. With the right strategy, you would undoubtedly recognize the selling opportunity presented on the day(s) when there is a market correction. And by selling short you stand to make enormous gains that day!
- Ask your broker how to set up an account that allows you do trade in this way. You’ll be surprised at how simple it can be to get setup.
Much is written about diversifying your investments. But don’t just look at diversifying your holdings. Diversify your trading strategies too.

How to Get Access to Mobile Financial Spread Betting

admin — Mon, 28 Dec 2009 12:55:50 +0000

Today mobile phones and personal assistant devices have become popular for people who want to handle business affairs on the go. This has become the case for people who follow financial spread betting too. If you are interested in working with a group that offers financial spread betting services you should look to see if mobile services are offered.

To get access to mobile trading you will first need to sign up with a group that offers financial spread betting services. You will need to set up an account so that you can start trading spreads.

Next you will need to submit information to the group you are working with on the phone or other type of mobile device that you will be using for handling your financial spread betting needs. You should look to see that the specific model number of the device you are using is provided so that you will be able to get the right software that will work for what you have.

After you send the information on your device or phone along with the phone number that your device is connected to the group you will be working with for spread trading will send you a message on your device. This message will include the software that is needed to help you to start trading spreads through your phone.

What makes this important to do is that markets can change at any time of the day. Having a mobile device with you for handling mobile financial spread betting will be important because with a good device you will be able to receive data on how your spreads are doing and also to send info on what positions you want to open or close. Many programs can work just like standard programs you can access on a computer.

In fact more companies are working to create programs that can be used for more types of mobile devices. This includes iPhone apps that can be used for financial spread betting.

Be sure to use mobile financial spread betting if your mobile device or phone capable of handling it. It is easy to get access to this option of mobile trading. No matter what type of device the odds are good that you can get a program from your trading group that you can use to help with handling your spread trading needs.

Commoditiy Trading – Financial Indexes

admin — Thu, 17 Dec 2009 23:58:36 +0000

Although it might not stand to commonsense, stocks and bonds can indeed be traded as commodities. Especially if you’re novice investor, you probably don’t see that the statistical measurements of changes in price are similar to those of gold, wheat or oil. However, these trade in the form of futures and options contracts; this is because stocks and bonds, and the indexes that measure price changes, trade within the form of futures and options contracts. Therefore, they can be traded just as other commodities are.
Oil is still the most traded physical commodity. It is the largest of all contracts traded in the financial futures market today. One of the most popular of these is the contract for the Standard & Poor’s 500 Index, or the S&P 500.
The S&P 500 is the gold standard of indexes. Therefore, it gives traders a broad view all the entire stock market. The companies listed within the S&P 500 represent 80% of the entire market capitalization. The top 40 stocks in the S&P 500 represent 50% of the total market.
This means that traders can be confident that there will be no problems with liquidity, as can sometimes happen within other commodities.
In general, this also means that risk is easier to assess. The tools used to predict the S&P 500 are more reliable than others; this is because stock prices are generally easier to predict that commodities prices. The S&P 500 stocks included therein also have offered the highest return over a 30-year period, historically, when compared to other types of investment. Generally, return has been around 12%, depending on the range selected.
Stock prices can most certainly be volatile. There have been a few large single day price drops. However, by design, indexes typically move less and not as rapidly as other prices do. When one uses of broad-based index, this “smooths out” the fluctuations of individual stocks, so that it’s easier to see an assess the direction of the market in its entirety.
Kept this is beneficial because along with reduced risk and better predictability, traders have the same advantages they find when they use futures and options as trading vehicles. Margin percentages generally run in the 5 to 7% range, so that high leverage is still available. This makes it comparable to other commodities futures and options contracts.
Commodities trading is typically oriented to the short-term; here, day trading the typical set up. However, with index trading, investors can use those sharp swings to their advantage; even so, they can still have a long-term view of the horizon, just as they would if they were doing stock investing.
One common trading strategy is called the rollover. With rollover, traders can take a long position on a futures contract. As the expiration nears, they can transfer their position to another contract; the new contract as an expiration date that is beyond the one in their current contract.
By using this type of “spread” strategy, traders can take advantage of price differentials and low commissions even as they exert control over the liquidation date. The trade is executed when traders predict that prices will soon move in the preferred direction, meaning just beyond the expiration date.
S&P Index futures are traded on the Chicago Mercantile Exchange, or CME. There’s also an S&P 500 “E-mini” contract available; a set of contract carries a much smaller commitment, with a size that is one fifth of the standard contract. The trade unit is $50 times the S&P 500 index. The trade unit for the standard contract is $250 times the S&P 500. In addition, everything is traded electronically, with no open outcry or pit trading. This means that trading hours have been extended from those typically limited to the hours of the stock exchange to a 24-hour trading day.
The CME web site, at http://www.cme.com, has more information, including contract specifics and current prices.

Options Trade Tutorials – 3 Popular Videos

admin — Sun, 13 Dec 2009 11:32:37 +0000

Thanks to the ever rising popularity of the trade market, it is but inevitable that info on the core concepts of options trades and good ways of engaging the industry are widely available in different types of media.
Apart from the net, options trade samples and simulators are also now available in videos and DVD. It is generally believed that these products are made for the people who are constantly on the move and would want to check out the options and learn trading strategies while on the road or while traveling, using their laptop.
Here are the most popular options trading videos you can get on DVD:
1. A Complete Course in Option Trading Fundamentals , by Joseph Fray
This video discusses options trading insights by a professor of the Options Industry Council, Joseph Frey. It offers a complete overview of the options in the commercial sector, from the most basic of the most sophisticated.
Topics include options market behavior trends, and how they are different from stocks, and how market volatility affects the movement of options . Notables in his analysis are his three reasons why the options traders may fold, four major options trading strategies, and how the time affects the profits of options trading and then his popular fifty % rule for pricing options quarters.
2. Picking The Best Stocks And Strategies For Every Option Trade, A Complete Course ON Option Trading Fundamentals, by James Bittman
Apart from the generalized concepts that surround options trading, this author also examines straddling technique, interpretation of complex bull and bear spread, and even the possibility of directional programs that he taught his classes in recent years.
It explains how the rates of options are arrived at, the causes of price trends, when you may employ the use of a particular strategy, and even gives case studies to help you get a greater understanding of financial tactics used by investors all over the world.
3. The Volatility Primer: Insider Methods For Option Trading , by Larry McMillan
In this video tutorial, McMillan addresses in a large part on how the volatility of the market influences underlying securities, and some options on how you can significantly boost business results based on such knowledge.
It is essentially a crash course about the fluctuating trend in the markets and also how you can deal with it to make the most out of whatever investment you may have madet. This video has already bagged the coveted Traders’ Hall of fame award.
You could get many other courses of negotiating options and advice available on video. A quick search on Google will bring hundreds of videos to your screen , and all you would have to do is sift through them to find the ones that suit your immediate needs.

Options Trading Strategies: the “up” Scenario

admin — Fri, 04 Dec 2009 01:41:14 +0000

The up scenario

In the up scenario, the maximum gain that can be attained is the stock finishing at $10.00 or higher.

At $10.00, you would profit from the full value of the extrinsic value of the option which is $.50 and you would also have $.50 of capital appreciation from the stock for a total of $1.00. This represents a 10.52% one-month return or an annualized return of 126.32%.

It is not realistic to expect this type of return every month but remember, recent studies show that premium selling works approximately 80% of the time, which is still very good.

We stated earlier that the maximum return of this buy-write will be actualized when the stock reaches $10.00 or above and the maximum return will be $1.00, and no more than $1.00. As the stock goes higher, the option will earn less in direct proportion with the increase in capital appreciation.

For example, if the stock closes at $10.30 you would receive only $.20 from the option. The option would now be worth $.30 because with the stock at $10.30, the 10 strike call would have $.30 of intrinsic value.

Since you sold the option at $.50, you would see a $.20 profit ($.50 – $.30 = $.20). Since you bought the stock at $9.50 and it is now $10.30 you have $.80 of capital appreciation. Combine the two and you have a $1.00 profit.

Lets look at what happens when the stock trades up to $12.00 and see if you again have a $1.00 return on the position. At $12.00, the option will have $2.00 of intrinsic value (stock price strike price) because it is in the money.

You sold the option at $.50 so you have a $1.50 loss. However, you bought the stock for $9.50 therefore you have a $2.50 capital gain. Combined, you have a $1.00 profit.

In a third example, if the stock trades up as little at $.10 you still have a $.60 gain. You will receive $.50 from the sale of the call which would expire out of the money thus worthless plus $.10 of capital appreciation. $.60 represents a 6.3% one month return.

Please refer to the chart below for examples of total dollar profits per number of contracts, remembering that each contract controls 100 shares of stock.

Observe that if the stock closes over $10.00, then your stock will be called away because your short calls will be exercised. This is correct but we will talk about position management later. For now, lets get back to our three scenarios.

In the up scenario, you would profit with the buy-write when the stock is up as little as a penny, but you are also limited on our maximum profit.

You are limited on your maximum profit as defined by the formula below:

Maximum Profit = Strike Price + Option Price Stock Price.

This method of calculation will work every time. As you see, the buy-write has a positive but limited upside potential.

Options Trading Strategies, Basic Concepts

admin — Tue, 01 Dec 2009 23:33:30 +0000

When venturing into the options market, the best way to get the lay of the land is to be acquainted with at least some of the more elementary concepts. These will aid the new investor in successfully executing basic trading strategies.
Two basic terms, the call and the put, are the epicenter of the trading strategies. To buy a call confers the right, not the obligation, to buy at a price that is pre set. Conversely, puts give the buyer the right to sell at a pre set price. Options are both sold and bought, meaning that the seller grants the buyer the right and takes on an obligation to fulfill the other side of the trade.
The variations to this maneuver include:
Long Calls
The long call is the easiest to understand and is the most basic concept. MSFT (Microsoft) traded at $28 with June 31 options that were to expire on the third Friday of June. The strike price was $31, meaning that it was pre set so if exercised it had to be bought at that price.
Short (Naked) Calls
When the writer, the person selling the option, does not own the underlying stock and the option is exercised, then he or she is obligated to sell. Under those circumstances, that action is considered a naked call. Because the person is on the selling side of the contract, his position is considered to be short.
The short call status incurs the most profit by the amount of the premium if the market price of the underlying asset decreases. When the price exceeds the strike price by more than the premium, then the short position takes a loss.
Long Put
When a trader anticipates that the future market price of an asset, such as a stock, will fall before the expiration date is able to sell the stock at a fixed price. The buyer, put buyer, is not obligated to sell the stock, but he or she does have the right.
If the market price does drop below the strike price before the option expires and the decrease is more than the premium paid, then the seller profits. If the price increases or fails to drop enough to cover the premium then the trader will allow the contract to expire worthless.
Short Put
When a trader speculates that the future market price will rise, they can sell the right to sell an asset at the predetermined price.
If the asset’s market price increases, the short put position incurs a profit that is equal to the amount of the premium. This amount excludes any transaction costs and commissions. However, if the price drops below the strike price by more than the premium amount then the writer loses the money.
There are several trading strategies that are basic to the market. These strategies employ the characteristics of four basic trading positions. These strategies have one of several outcomes: pure profit plays, speculating on gaining a profit or creating a combination of speculation and hedging.
When positions move in opposite directions, it is called hedging. Hedging bears a profit less that sheer speculation, but they do compensate by offloading a certain degree of the risk.
Bull spreads and bear spreads are common strategies that can help the trader manipulate the market, depending on the market emotion. Bull spreads utilize a long call with a low strike price and combine it with a short call at a higher strike price and a short put with a higher strike price. On the other hand, bear spreads use a short call with a low strike price and a long call with a high strike price. Alternatively, the short put can be used with a low strike price and a long put can be used with a higher strike price.
There is a great deal of software on the market that can aid in these types of trades. Options trading software can offer users concrete demonstrations of the how these strategies work. They show how they behave under different assumptions regarding future prices, volume and other factors, combined with various expiration dates and strike prices to show how these different scenarios can result in a profit or a loss.