Trading Options – Good Or Evil?

You have probably heard people refer to options as a risky enterprise, akin to gambling. And it is true that options trading can be very risky, especially when engaged in with minimal knowledge and preparation. The average stockbroker or financial planner does not have sufficient options knowledge to guide you in the use of options in your portfolio. But that doesn’t mean options cannot play a role in a conservative portfolio of stocks.

The majority of today’s options trading volume derives from institutional money managers who use options to protect their clients’ stock portfolios. They are using options as insurance. Options may also be used to boost the income that may be derived from a conservative stock portfolio.

Options written on stocks are referred to as equity options and come in two forms: calls and puts. A call option gives the holder of the option the right to buy the underlying stock at the strike price of the option at any time before expiration. A call option is similar to a grocery store coupon for a five pound bag of flour at an attractive price; but the coupon is only good for 30 days and is limited to the purchase of one five pound bag. Similarly, a call option gives you the right to buy 100 shares of stock at a specific price and it is only good for a particular period of time.

Put options are opposite in character to calls and are more like insurance; a put option gives the owner the right to sell the underlying stock at the strike price of the option any time before expiration. Put options are often purchased when one expects a stock to decline in price, or it could be used as a form of insurance if I already own the stock; if my stock declines in price, my put option appreciates and compensates for a portion or all of that loss. An excellent analogy is house insurance; if I pay my insurance premium January 1 and nothing happens to damage my house this year, my insurance expires worthless, just as my put option will expire worthless if my stock just continues to appreciate. But if a hurricane damages my house during the year, my insurance pays for some or all of the repairs. Similarly, if my stock declines in price, my put option will increase in value, replacing some or all of the loss in my portfolio.

Equity options expire on the Saturday following the third Friday of each month. It is common to hear or read that equity options expire on that third Friday. While that isn’t technically correct, it is true that Friday is the last opportunity to trade those options. Saturday expiration was established to give the Options Clearing Corporation and the brokerages time to settle their customers’ accounts before the options technically (legally) lose their value.

Consider the hypothetical company, XYZ, as an example. XYZ closed May 28, 2009 at $34.70; the June $35 call option was quoted at $1.00 at the close. In the options quotations on a site like Yahoo Finance, you will see bid and ask prices posted. The Ask price is the price quoted if I wish to buy the option, while the bid price is what I would have to pay to sell my option. Options are quoted per share of the underlying stock, but are sold as contracts that cover 100 share lots of stock. The XYZ June $35 calls are quoted at an ask price of $1.00. Each contract is priced at $1.00 per share of the underlying stock; since each contract covers 100 shares of stock, the contract costs $100 and five contracts would cost $500. I have the right to exercise my options anytime before they cease trading on Friday, June 19, and buy 500 shares of XYZ stock at $35 per share or $10,500. Or I could simply sell my call options at the bid price anytime before expiration.

Options can be used in several very conservative ways in a stock portfolio. For example, if I own 300 shares of XYZ, but I am concerned this market is softening and may take another dive downward, I could buy three contracts of the June $35 puts at $1.40 to protect my position. This put position would cost me $420 and protect me through June 19. As XYZ drops in price, the puts will increase in price, compensating for some or all of my loss on the stock. This is called a “married put” position. However, there is no free lunch in the market; if XYZ trades sideways or upward, I will lose my $420 of “insurance premium”.

Another conservative use of options is the “covered call” strategy. If we continue with our example of XYZ and I think the stock is going to trade sideways or slightly up over the next few weeks, I could sell three contracts of the June $35 calls for $1.00, bringing $300 into my account. If XYZ is trading unchanged at $34.70 on June 19, the $35 call options will expire worthless, and I will have gained $300 or 2.9%. But if XYZ trades upward of $35, my maximum gain is capped at $330, or 3.7%.

Options trading can be very risky when used in a speculative manner, but options may also be used in conservative fashion with a stock portfolio, both protecting the downside and also increasing the income from the portfolio.

Trading in Gold and Silver Commodities

Trading in gold and silver is speculative in nature which means it involves a higher probability of risk but a substantial profit opportunity as well at the same time. Gold and Silver trading becomes viable when there is an economy crisis or downfall in share market. Though trading in commodities is relatively easy but it is kind of riskier trading and you may lose all your hard-earned money if do not trade with strategy and planning.

Majority of people think that investing in commodities, like Gold and silver, is a form of gambling due to its speculative nature. But speculation should not be considered a pure form of gambling as speculation too need a proper strategy to execute a plan and making a decision. Therefore bullion trading can be categorized as hedge trading with speculative nature which is adopted as an alternative to stock trading as a strategy of hedging against inflation and economy crisis.

Commodity trading is based on futures trading so there is no need of exchange and delivery of physical commodities. It also gives you an extra option of margin payment in which you pay only a fraction of whole payment of the contract. Hence trading in commodities like Gold and silver becomes viable to improve your portfolio. This is why more and more retail investors are now turning gold and silver as an investment option.

Though trading in gold and silver provides an opportunity to earn a lot from this market but lack of knowledge and volatility of price movement may result in a loss of wealth at the same time. These precious metals are traded with high volumes as big investors plays the real big role here and as a results, the swings becomes more volatile and unpredictable. So small and retail investors should be careful while investing in precious metals. Remember the lesser you are good at knowledge and experience, the more are the chances of loss. Trading in a commodity market is influenced by supply and demand cycle and inventory. This is also one of the major obstacle to track the direction of the market as availability of this demand and supply information is not as robust as equity market. Therefore keeping an eye on these factors to predict the future price becomes necessary to avoid unnecessary losses.

How to Keep Yourself Updated-

Keep an eye on the global commodity market. Stay connected with news websites providing latest updates and data for the commodity market. Many research advisory firms are there which provides daily research reports for the data of demand and supply along with the market prediction. They also generate commodity trading tips after conducting detailed study and research on these commodities. And these tips are provided to their clients through various mediums like SMS or email.

Conclusion-

Although trading in gold and silver commodities throws up an opportunity to earn significant profit but this involves substantial risk also. Experts with adequate knowledge suits this market the best. So make yourself fully prepared before entering into this risky trading segment.

Is CFD Trading Like Gambling at the Race Track Or Casino?

When people first hear about trading Contracts for Difference it is not uncommon for gambling to be associated in the same conversation. Today we going to have a look at the opportunities that trading Contracts for Difference presents and remove the idea of gambling from your vocabulary altogether.

Do you trade CFDs like a gambler?

The reality is you could trade CFDs like a gambler by trading at excessive levels of leverage. If you trade your account at more than 7 to 10 times your account size then I would suggest you are gambling. This means if you had a $10,000 account and you took total positions of $70,000-$100,000 then you are leveraged way too high.

You see the product of CFDs is only as risky as the person who was trading the account. For example, you could trade your $10,000 CFD account and have total positions that do not exceed 2 to 3 times your account size and this for many would-be trading well within their means. The trick with CFDs is to start very small and build your way up.

Make sure you are trading a positive expectancy trading system

A positive expectancy trading system simply means that for every dollar you risk you expect to make that dollar back and earn a little bit more. You see the casino is very smart and they have a number of positive expectancy games that are in favour of the casino and not the person playing. This means that the longer you play at the casino the more you should expect to lose.

When it comes to trading the way to remove the gambling like nature is to ensure you have a positive expectancy trading system. This is the one element that differentiates trading from gambling at the casino or the racetrack.

Can you afford not to become the casino owner?

Over time, your goal as a trader is to develop several positive expectancy trading systems enabling you to trade different market types over different time frames enabling you to in effect be the casino owner with several casino games. This will ensure your long-term profitability and enable you to reduce your drawdown’s considerably.

Tips from taxi drivers will not suffice

Another way to identify whether your CFD trading business is gambling or not is to work out if your trading tips are coming from taxi drivers, gym instructors or next-door neighbours. If the majority of your entry signals are generated from hot tips then it’s probably a fair indication that you don’t have a trading plan.

Spend quality time developing a robust trading plan

When you first starting out it is important in any business to have a well laid out and clearly defined business plan and trading is no different. When building your CFD trading plan you need to take into account your entry, exit, risk management strategies and run through several possible contingencies that could happen.

As you can see creating success with CFDs is a result of building a sensible trading plan and ensuring you have a positive expectancy trading system.