There was a breed of trader that in times gone by would trade options excluding any fundamentals or research, and based purely on the mathematical model and adaptation thereof. However, as options and stock markets became more competitive, and the spreads narrowed, the so called risk free options income was no more. In truth, this competition reflects the perfection of markets; all the more prevalent in markets reliant on technology for their research and implementation.
The tide has turned and the options trader intent on survival will do well to resort to undertaking research on their underlying stock instruments. Certainly opportunities will present themselves that are mathematical gifts, however by analogy, the same is true of the most common of two horse races and yet totalizator agencies are only too keen to these seemingly gratuitous prices. They do so due to the underlying realties in the real world that defy the pricing model. So it is with options and their underlying stock instruments.
When the collective knowledge of the stock market insists upon a premise, this may well suggest that fundamentals and research are responsible, and that art should imitate life instead; the model has failed. At any length, it is far more secure a seat to occupy when the underlying stock is well understood. It is only then that an options strategy can be executed with confidence, for all that is needed for success is the rational application of informed reason. Any system that is adopted will only perform for a certain period of time, and so it is research, and knowledge of the fundamentals that will serve as a hedge against ignorance, and a barrier to financial demise. This is most relevant with respect to the subjection of many, to a mindset of undivided attention, paid to annualized returns of available option strategies, with none paid to the workings beyond the corporate veil.
When an informed opinion on a stock is arrived at, and it lends itself to an options writing strategy, some circumspection ought to be applied to any reversion to an annualized return options strategy. For example, in order to exploit the acceleration of time decay, the choice of options strike to write will depend on a view of the underlying stock. If low volatility is expected, the greatest annualized return will be provided by at-the-money options, and under this objectivity, research, and authoritative view of the stock, one would not easily expect the threat of early exercise, and so the return can be calculated excluding the risk of being exercised.
Ideally, written options will be most effective at the point where the stock will reside in the future. Particularly when stock markets rise, they routinely do so at a slower rate to that when they fall, and so volatility invariably falls in a rally. Still, the market will incorporate this incident into its pricing and it will only be the knowledge of the underlying fundamentals that will give the trader any tangible edge on the competition. Similarly, when the underlying stock is expected to suffer a retracement, an educated view will enable a trader to write put options at exceptionally high volatility and still retain confidence that value has been captured.
Compounding is the ability of an asset to generate income, and that income to generate further income. As attractive as the concept appears it is still a double edged sword to the investor, who can only consider compounded returns as the fruits of the market.
Of course in a bull market that endures for a lifetime, it is difficult to see the truth of this allegation. Particularly when consistent returns are made year in and year out, the sheer weight of the numbers will show the benefits and power of compounding.
However, in most markets, returns are not linear and certainly not always positive. Indeed, reality demands that at times returns will be volatile, while at other times they may even be negative. In the same manner that compounding in consistent environments builds wealth exponentially, varying or negative returns will have the commensurate compounded effect on investment capital.
Returns that vary dramatically from year to year and also negative returns will erode the principal invested through not only a comprising of the compounded return, but also establishing a greater return that is demanded in order to simply breakeven. It seems the slings and arrows of life show no mercy to capital investment either.
Far from the investment rhetoric often heard to extol the virtues of compounding, these types of claims are based upon average returns and not compounded returns. Considering that only the latter are available to investors, this line of argument is quickly revealed to be the misleading diatribe that it is.
Quite contrary to what many would have investors believe, the art of compounding is more than simply not withdrawing from the investment any returns that it may produce. In order to ensure security of tenure, an investor needs to not only be active, but actually productive in asset management.
In an attempt to reduce the volatility in returns and maintain consistency, unnecessary expenses need to be eradicated. This necessarily means actively monitoring positions and taking such decisive action as implementing stop loss orders. Trailing stops on profit will ensure that favorable moves are not squandered back not the market due to inattention. The prioritizing of investment choices and relocation of capital is essential, particularly when profits need to be realized.
Gone are the days of passive investors that reaped the benefits of compounding. In a dynamic and increasingly competitive financial market place, the power of compounding is only achieved through active pursuit of sound capital management.
Excellent webinar by Richard Muller, Reuters Equity Analyst, senior instructor at The Trading Prism, and long time AIQ TradingExpert Pro user. Richard covered the Expert Ratings on the US markets before moving onto group/sector rotation using AIQ Reports. His stock selection process was geared toward possible options trades.
and is currently free of capital gains tax. Spread betting agencies tend to sell their service on the basis that one of the advantages of using this method of trading is the lack of transaction charges or fees. However
The transaction charge is firmly embedded in the spread
These apparently superfluous costs can have a dramatic effect on profitability over-time particularly if the trader tends to do a lot of short-term trades. Another often overlooked disadvantage of spread betting is that
The funding cost @ LIBOR +1-2% is charged on the entire position
This usually this applies even where the client has been required to deposit some funds as margin with the bookmaker.
Many spread betting markets are very volatile
Unless you place a ‘guaranteed stop loss’, you can incur very large losses if events go against you.
Spread betting is an artificial market
This means that the price quoted by a spread betting company may differ from the price of the underlying. Traders who participate in spread betting do not directly trade with other traders in a transparent market place. They are trading with the spread betting firm. There is no depth of market or time & sales information. Bear in mind there are other disadvantages to spreads.
Wider spreads than provided in the underlying market
Slower execution than in the underlying market
Losses cannot be offset against capital gains on other ordinary investments
AND YOU NEED A MARGIN ACCOUNT
Why Buying Calls and Puts is a safer Bet
Buying Calls and Puts is a wonderful way of making huge profits with small amounts of money. It is exhilarating to watch a trade double…then triple…and sometimes even quadruple….all within a few days or even hours.
No margin account required
When buying options, you only need a cash account, no margin required. You make full use of leverage to capitalize on a move in an underlying. That is, instead of purchasing the underlying for a large amount of money, you can acquire the rights to the same amount of the underlying for a fraction of the cost. The profit potential for options is unlimited, but more importantly the loss potential is limited only to the amount of money that you put into a particular trade.
100:1 leverage
By buying a put or call option you can control 100 times the value you put into the position. So if you invested £500 in a call option on an underlying, you are effectively controlling £50,000 of the underlying. Your maximum profit potential is unlimited, your maximum loss? £500.
Huge liquidity with good fills on major markets, ETFS, stocks, currencies and more
With US options you are trading in a highly regulated and liquid market. The liquidity ensures low spreads and quick entry and exits on trades. Plus all the regular tools of a brokerage account are available for you to control entry and exit into the position, like limit orders, stop loss, and market orders.
Losses can be offset against ordinary investments
If you lose money on other investments you can offset these losses against gains in your options trading.
Low commissions
Commissions have dropped drastically over the last 2 decades, so much that the cost has become minimal. $1 per option contract is very typical.
The Fibonacci number sequence was introduced into Indian mathematic history and into Western mathematical lore around 200BC. Essentially, it is represented by the following relation:
With seed values F0 = 0 and F1 = 1 Fn = Fn-1 + Fn-2
As a mathematical progression, Fibonacci numbers occur in many instances throughout nature. The cross section of a plant, the manner in which leaves are distributed, the patterns on a snail or sea shell, and even the distances between the spirals within a wave, are all subject to the magic that is a Fibonacci sequence.
With this level of interaction in the natural world it comes as no surprise that human beings too are not free of its influence. A series of naturally occurring numbers the Fibonacci sequence also leaves a clear trail in technical analysis of financial markets. Technical analysis searches for support and resistance levels; patterns within the plotting of data that will reveal future movement in financial markets.
When Fibonacci numbers are plotted alongside price levels, key pivotal points emerge as reliable sources for entry and exit points. Of course the above series merely populates the beginning of the progression but simple extrapolation to produce the Fibonacci members further along the series is all that is required to address more complicated prices.
In respect of the DOW Jones Index, in September 2008 the market appeared to move with decided certainty through the 10,946 level (Fibonacci number), yet a close below that level will indicate considerable weakness. Similarly, a close above that level on the commensurate market recovery is also a significant indication that the bull market returned in October 2010. When used in conjunction with traditional technical analysis the Fibonacci number system proves to be a powerful trading tool. Mindful of the fact that pre- empting absolute troughs and peaks in the markets is more often the exception than the rule, when combined with Stochastics, Moving Average Convergence Divergence indicators and volume monitoring, the Fibonacci is well able to provide traders with reliable swing trading confirmation when entering or exiting a trade. Extensions of such markets science to the practical application of fundamental analysis will always offer the investor security and be likely to allow exceptional performance due to a knowledge-centric investment strategy.
Forget about all the complex options strategies, really. I mean what is an iron condor anyway? Take a look at this description. The iron condor is a limited risk, non-directional option trading strategy that is designed to have a large probability of earning a small limited profit when the underlying security is perceived to have low volatility. Huh?
The secret to successful options trading isn’t in the rocket science of complex options strategies
The real key to success in options trading is to first determine where the underlying is going. Once you know which direction a stock, index, or ETF is likely to move, you can determine your profit target and stop loss. Then and only then would you consider using an option to maximize your return using limited capital. Then you would buy puts or calls, but that’s it, no spreads, straddles, iron this or iron that.
Just buying puts and calls at the right time on the right underlying
You need to know something about which options to buy and why. Plus when to buy and when to cover your position, and the effects of volatility and time decay. However the secret to the Trading Prism Option Coaching program is in the strategies you’ll learn. Strategies used by professionals, designed to uncover the best candidates for buying puts and calls. The key to success is to use the leverage of options ONLY when you’ve uncovered the right underlying candidate at the right time.
Aren’t options a risky investments?
Options have been around for more than 30 years, but options are just now starting to get the attention they deserve. Many investors have avoided options, believing them to be sophisticated and, therefore, too difficult to understand. Many more have had bad initial experiences with options because neither they nor their brokers were properly trained in how to use them. There are many advantages to using options:
Options have great leveraging power. A trader or investor can obtain an option position that will mimic a stock position almost identically, but at a huge cost saving
Options can be less risky for investors because they require less financial commitment than equities, and they can also be less risky due to their relative imperviousness to the potentially catastrophic effects of gap openings
Higher potential returns. With a £100 you can control £10,000 of the underlying stock or index.
We received a confirmed up signal on the US markets on October 4th, 2011
Here’s an example of a great option trade following a market buy signal on the US markets, that was confirmed on October 5th, 2011.
To trade the S&P500 index we used the Spyders [SPY] as a surrogate. The SPY is an ETF that trades like a stock at 1/10th the value of the S&P 500 index. As this was a long position, we bought call options on the SPY at the open on October 5th, 2011. We bought in the money calls, two contracts of the November 108 calls for a total investment of £1400. With a straight options cash trading account, there’s no margin required, the total amount at risk on this trade is £1400.
The signal on the US markets worked in our favour. The market climbed steadily in October, and the trade was closed out on October 28th for £4100, that’s a gain of £2700 in 23 days!
There was no ‘rocket science’ in this SPY trade. All the analysis was based on the underlying. Combine this analysis with basic option knowledge, and you have everything you need.
Richard Muller, Reuters TV Equity Analyst,
senior Options Coaching instructor
Learn how to make wining trades with The Trading Prism Options Coaching program
The Trading Prism three month coaching programs are designed to help you to develop your own trading plan and execute every trade according to your plan. These comprehensive programs will provide you with a road map to trading success. You’ll know what to do and when to to do it for any market condition. Our senior instructors provide face-to-face seminars and webinars to guide you through the entire process.
What you will learn
How to trade with peace of mind, securely with options
Remove your fear of investing and drastically reduces your personal risk
Gain the edge with leveraged protection using options
Simple, effective, strategies
Plain language will remove all the secret mysteries of options trading
Steve Hill, President AIQ Systems,
senior Options Coaching instructor
Your Options Coaching Program is actually four distinct courses all in one program!
1. The must know options theory
An Introduction to options
Options basic terminology
Options Greeks, and their importance
Understanding volatility and its implications on options prices
2. The Strategies
The five most powerful options strategies
High focused training on how and when to use them to trade both
stocks and index options
Understanding the risk and return factors of options trading
3. Practical application of options trading strategies
Understanding and implementing the trading process
The big picture analysis: know when to trade and when not to
trade, and what to wait for
Sector rotation analysis: Know which sectors to trade and which
not, and when
Individual stock selection strategies: 7 of the best stock
screening strategies to identify potential options trading candidates
Risk and trade management of the options positions
4. Live market analysis options webinars
Practical application of the options trading strategies in a live market environment
Monthly market review
Step by step trade guide to identify a potential trade
How to execute the trade
Your 3 month Options Coaching Program begins with a live seminar in London
on February 11, 2012
This is where you’ll learn the foundation of our trading strategies, and meet your instructors face-to-face. In the following three months, you’ll attend two live webinars each month with a senior instructor where you learn all the requirements of trading success. At the end of the program you’ll attend a second face-to-face seminar on a Monday that will include live trading on the US markets
What happens at the end of the Options Coaching Program?
Once you have completed the course, we don’t just cut you loose on the trading world. For a very reasonable monthly fee, we provide ongoing webinars and access to our instructors via e-mail to provide you with assistance when you need it the most.
Do I need a laptop or trading software to attend the Options Coaching program?
You don’t need a laptop to attend the live seminar, however it is recommended. You will need a PC, MAC, pad or tablet to attend the webinars. Our recommended trading software, software that our instructors use is AIQ TradingExpert Pro. We can also provide this software for a special monthly rate, exclusive to attendees. The package includes US and UK data, real-time and end of day. Monthly fees for the software and data also includes access to our ongoing support program, with webinars and access to our instructors via e-mail.
Basic economics dictates the premise of supply and demand and their ramifications on price. This theory holds that when demand exceeds supply price will appreciate, and when supply overshadows demand asset prices will fall. Indeed this holds true when markets rise and fall as it reflects the urgency of one side of the market to trade as opposed to the other. Yet every trade has a counter party; a buyer and a seller. On the face of it, this clearly indicates that demand and supply are equal, yet that price is rarely static reports to a further dynamic lending itself to momentum, inertia and urgency.
Markets are able to fluctuate somewhat freely on light volume as prices are pushed around by one or two big orders on a quiet trading day. Yet when trading volumes show a significant increase from the norm, this indicates substantial market interest. Here, buyers and sellers of varying points of view are increasingly interested in divesting each other of their respective positions.
While 80% of all trading activity has been found to be stop loss oriented, this alarming fact points to the variety of motivations that market participants adopt to investment decisions. Some are long term some short term; some are taking profits, some losses. Amid the confusion, one thing can be certain. When trading volume experiences a sharp increase – a dramatic market shift is imminent as the price has motivated substantial participants to become involved in decision making. At the end of a prevailing trend, volume will increase markedly, and so the market confirms this by participation. Rarely would this occur mid-trend as by definition a trend needs urgency of either supply or demand to outweigh one the in order to maintain its course.
Proponents of other indications such as technical analysis’ support and resistance, momentum’s MACD index, and mathematics’ Fibonacci numbers will all seek confirmation with an increase in volume prior to extending a signal. Primarily as the market needs to be supporting or rejecting a certain price, the absence of volume can hardly suggest that is the case. Indeed dwindling volumes are more an indication that the trend has met a natural end and that a retracement is imminent. A retraction in trading volume indicates that momentum is slowing and will find much profit taking entering the market, which will itself perpetuate movement back to true value.
In this sense, volume is rarely an indicator applied in isolation and is keenly attuned to other indicators and in particular, momentum. Still volume must be adjudged with relative comparison as some markets have typical volumes that would astound others. Volume ought never to be ignored as it indicates the bastion of trading activity – participation.
