Articles

Option trading can be a great way to make money, offering strategies for traders from beginner level to the most advanced. Before we can begin to make it work, though, there a few basic things that we need to understand. What You Need to Understand About Options Trading A listed stock option must be one of only two things: Call option – A right to buy 100 shares of a stock at a fixed price, good through a definite future date Put option – A right to sell 100 shares of a stock at a fixed price, good through a definite future date It sounds simple with only two elements, but then so do the numbers 0 and 1. And with just those two digits, in different combinations, anything and everything in the universe can be represented (that’s...

A “Risk Reversal Strategy” offers a big potential pay-off for very little premium. While risk reversal strategies are widely used in the forex and commodities options markets, when it comes to equity options, they tend to be used primarily by institutional traders and seldom by retail investors. Risk reversal strategies may seem a little daunting to the option neophyte, but they can be a very useful “option” for experienced investors who are familiar with basic puts and calls. Risk reversal defined The most basic risk reversal strategy consists of selling (or writing) an out-of-the-money (OTM) put option and simultaneously buying an OTM call. This is a combination of a short put position and a long call position. Since writing the put...

Welcome to the wonderful world of equity options. You may have heard that option trading is high risk, and indeed it is, for much the same reasons that spread betting is high risk. The instruments themselves are derivatives from the cash markets, and are highly geared, but options themselves were originally introduced to the US markets in the mid 1970s as a tool for hedging risk. In other words they were a form of insurance. You paid a premium, a bit like car insurance, which covered you in the case of an accident. In the financial markets you bought some protection in case the market went in the opposite direction. In this article we look at equity options, which are those derived from the cash market share or stock. In the early...

Having been trading stocks and options in the capital markets professionally over the years, I have seen many ups and downs. One story told to me by my mentor is still etched in my mind: "Once, there were two Wall Street stock market multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their stock market forecasts in newsletters. Each charged US$10,000 for their opinions. One trader was so curious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say about the stock market's direction. When they asked their friend, he was fuming mad. Confused, they asked their friend...