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Posts Tagged ‘Stock Market’

The Difference Between Stock and Option Trading

December 6th, 2018 Comments off

Let’s discuss the complexities of options and how they differ from trading stocks. First of all stocks are simply one-dimensional trading vehicles, the dimension of “price movement.” For example, one can go long a stock if he/she is forecasting a rise in the price of the underlying asset. The stock trader doesn’t need to worry about time or changes in volatility affecting the outcome of his trade. The stock trader only needs to focus on the asset’s price movements.

So those are the basics about stocks, but what about trading options? Options are like trading 3 dimensional vehicles…direction, time and volatility. Let’s look at a real-trading example to clarify the difference in the trading world:

What if Google moves up 25% in 2 years? Well, those stock owners would have just made 25% by holding on to their investment all that time. However, if an option trader held on to his Call options for 2 years, most likely there would be very little if any gain on the trade.

We know why the stock holder made money, but why would the option buyer lose money? Everyone thinks there is leverage in options, and it’s true, but in this case, the leverage didn’t work out for 2 reasons. One, the asset took too long to move, so the option time value decayed. Secondly, the asset moved up, causing its volatility level to fall, and this also helped the option price to move down.

This is why we need to be educated in order to trade options. Simply buying Calls and Puts makes option trading very difficult because of the elements of time and volatility. Remember, options are three-dimensional vehicles, and if we don’t understand how to manage these 3 complexities, we shouldn’t trade them. After we understand options more in depth, these investment vehicles can make money in any type of market. Options are very adaptable and allow investors to be very creative once the understanding is there.

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Trading Volatility and Adjustments with Options

November 11th, 2018 Comments off

Within this article we’d like to discuss management tactics which can be beneficial in the organization of an options account. This important concept can be functional to each type of option spread such as the Condors, Calendars, Butterflies, Diagonals, and the rest.

At the time that this article is being presented (the latter part of 2008), the VIX is presently in its higher range of the previous couple years, making options inflated in value. So while making adjustments nowadays, each trader must make it his duty to know where volatility is and forecast where it is leading to. Should we acquire expensive, inflated options or do we persuade somebody else to buy them? What is the latest volatility forecast on the major markets?

A very common mistake that option traders make is buying or selling options at the wrong time. If we buy options when the volatility is at a high, we are entering a trade with odds against us. Option traders that do this don’t realize why their options lose value so fast. Every option trading adjustment should be made by thinking of the option Greeks and volatility. We really need to understand these fundamentals to succeed in the options market.

LOOKING AT A HYPOTHETICAL OPTIONS POSITION

Let’s say that we have on an Iron Condor, and the market has been in an uptrend for two weeks. If this is the case, then we might be looking at an adjustment right? We are getting close to our short strike, and we need to do something to manage our risk. In this situation the IV of the asset has probably been dropping, since the IV normally moves the opposite direction of the underlying being traded. So, what do we do? Well, if the IV is at support and the technicals indicate that it might rise again, then we’d be looking at doing a positive Vega adjustment.

Ok, so now we have determined that the IV is on support, and we think it’s going to rise. Well, this means that the market might come back down also. So, do we do nothing at all? Well, that might not be such a good idea because our current position is at risk. So even though we forecast the market is coming back down, we still put some insurance on our trade. We have to avoid catastrophic losses if we want to be successful in the long run. So, in this case, we hedge our portfolio or position with a positive Vega strategy, one that will benefit from a rise in IV.

Some positive Vega strategies include Broken Wing Butterflies, Debit Spreads and Calendars. There are many more techniques which we discuss in our mentoring program.

To conclude, if the stock market moves against you when you are in an option spread, then always study the IV of your underlying asset. Knowing what is going on with volatility can really help you make better decisions on managing your portfolio. This will definitely reduce your exposure to risk while increase your chances of being a profitable trader.

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How to Make up Your Mind Where to Invest

September 11th, 2018 Comments off

There are several different kinds of investment vehicles on the market, and there are many factors, which you should use to determine where you should invest your money.

Of course, determining where you will invest begins with checking out the various kinds of investment on the market, determining your risk aversion, and determining your investment style and your financial aims.

If you were going to buy a new car, for example, you would do a fair bit of research before taking a final decision and a making a purchase. You would never think about purchasing a car that you had not fully looked over and taken for a test drive. Investing your money works in very much the same way.

You will, of course, learn as much about the investment as possible, and you would want to see how past investors had fared as well. It’s just common sense!

Does researching the stock market and investments take a lot of time? Yes, but it is definitely time well spent. There are hundreds of of books and websites on the topic, and you can even take college level courses on the topic, which is what stock brokers do. If you have access to the Internet, you can actually play the stock market with fake money in order to get a feel for how it all works.

You can make simulated investments in a pretend portfolio often called a ‘Wish List’ and see how they fare. Do a search with any search engine for ‘Stock Market Games’ or ‘Stock Market Simulations’, although almost every online stock broker provides these facilities. It really is a great way to start learning about investing on the stock market.

Other types of investments outside of the stock market do not always have simulators, so you will have to learn about those types of investments the hard way – by reading.

As a potential investor, you should study thing you can possibly get your hands on about investing, but start at the lowest level of investment books and websites to start with, otherwise, you will find that you quickly get confused.

Finally, speak with a financial adviser. Tell her your aims and ask them for their suggestions. This is what they do! A good financial adviser can easily help you determine where to invest your money, and help you set up a plan to reach all of your financial goals. Many adviser will even teach you about investing along the way, so make sure to pay attention to what they are telling you!

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Money Management – The Focus Of Expert Investors

August 13th, 2018 Comments off

Many people have been through it all, they’ve lost money and made money in stocks, they’ve lost and made money in poker, and they’ve lost and made money in options, and they’ve even lost money and made money in gold. What separates the winners from the losers and the haves from the have-nots? What do people that go through those experiences ultimately learn from? What do the experts focus on, that the beginners do not?

The fact is that it almost doesn’t matter at all how good the method is, if you cannot manage your money well. In stocks although people who can read financial statements and charts, and understand if a stock is likely to go up, or do back testing on certain method and estimate a probability that stocks using that method went up in the past, it is difficult to pin point the exact odds. That makes managing your money more difficult. However, just because you can’t know the exact probability, doesn’t mean you can’t use past results to estimate a probability range, and manage your money well. Lets just assume for a while that you could know the exact probabilities. If you know that you will win 3 times as much as you lose when you win, and you know that the win will take place half the time, do you know for sure that you will make money in the long run?

This is a trick question, you can never know with certainty that you will make money, but is it probable? Again, that still depends. How can this be? It’s easy to say that if you invest $100, you will turn it into $200 (gaining $100) half the time, and you will lose $33 the other half, that in 100 one hundred dollar investments you can expect to make $5000, lose $1667 and net $3333. However, this fails to take into account how likely you are to be able to afford the $1667 in losses and maintain that $100 investment every time out of 100 times.

In other words, the $3333 net gain is theoretical, and takes absolute no consideration on how likely you are to be able to afford those 100 investments. What if you only had $100 and you bet it all, you have a 50% chance that you lose $33 of that 1000… what then? You can’t simply make another $100 investment, So instead you have to make a $66 investment, now your win will be significantly less. If you lose yet again it will become even more difficult to get back to even. Although on paper this is a good investment, it is not a good investment without proper money management. You may have built a very safe car that drives straight, but if you are a bad driver you still could crash.

Unfortunately many people don’t learn how to drive their financial investment vehicles, and instead rely on money managers, financial advisors, mutual fund owners, and company CEOs to do everything for them. This isn’t a bad thing for those unable or unwilling to learn. However, the risk is not only that these people won’t manage your money well, and not only that if they do, you still may pay them so much in fees and expenses that it’s not profitable, but also that by handing the keys to your investment vehicle over to someone else, you lose control and you fail to learn anything. Although you may accomplish your goals with the help of these people, you also could do this yourself with a good trading system that uses good money management.

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Forex Trading – Your Easy Way to Make Money

August 8th, 2018 Comments off

Today lot of people venture into Forex trading as it brings easy money. With the internet it becomes very easy to deal with the forex market as all transactions can be done through your computer. However one needs to know the basics of forex trading in order to be able to make money. If basics are not mastered one may suffer loss. This avenue to make money involves financial risk due to the unpredictable nature of the trade.

If you would like to venture in to forex trading you must have speculation skills. You should be able to observe, analyze and draw valid conclusions regarding the foreign currency trends. If you learn to have your investment in promising currencies at the correct them then you will be able to make money. Forex trading is similar to the share market in many respects however the risk factor is here is at much lower scale.

One can make money through forex trading in two ways depending on the trading strategy employed. It can be either through short term trading or it can be through long term trading. It is totally up to the individual to decide on their trading scheme at any given point of time.

Those who can spend a considerable amount of time daily on trading will benefit from short term forex investments. With short term forex trading the money invested in one currency is quickly moved to the other currencies that grow stronger without waiting for the primary currency to reach the peak. The trader decides on a smaller percentage of profit before each transaction is made. Short term trading requires an expert make money without loss.

Long term is ideal for beginners who want to make money through forex trading. Here the trader stays with a particular currency that increases in strength and waits until it reaches the peak before any form of exchange is done. Unlike the short term trading, daily transactions does not happen here.

Today, there are literally hundreds of Forex trading training courses available for beginners. These training courses will provide the students with all the basic information regarding the Forex trading and how to avoid risks, handle loss and every thing they need to make money in this field. You will also be introduced to some of the tools those are available in the Forex trading market that can be used to see better profits.

Before venturing into forex trading you should analyze your options so as to ensure that you will not put yourself to financial risks. This is a field that involves certain amount of risk. This should not be made your only or prime source through which you will make money. To start with, forex trading should only be considered as a source of secondary income. It requires a great discipline to stay contented with low profit margins that will allow you to trade safely without risk.

One of the best ways to start is to select a stable currency that grows stronger gradually. As forex trading is dependent on a number of factors, beginners should learn to pay attention to factors those are not that easily evident. The traders should have a specific trading strategy while approaching the currency market to make money. One also should have excellent analysis skills to keep a close watch on the global currency trends. One must not be too hasty to make money through forex trading as soon as they start, they should give themselves some time to learn the trade.

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