Hedging Options » Online Trading

How to Profit from a Market Correction: Diversified Trading Strategies

admin — Mon, 25 Jan 2010 18:54:54 +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.

The Modern Way to Trade the Stockmarket and the Differences Between Cfd Trading and Spreadbetting

admin — Sun, 17 Jan 2010 19:13:49 +0000

The rise of CFDs (contracts for difference) and spreadbetting over the last decade has naturally impacted on the amount of trading in physical shares using a traditional stockbroker. There is no doubt that the internet has altered the share trading process to the benefit of private clients in terms of cost and access to information and markets, and with broadband and efficient streaming this really is a boost for those looking to capture real time movements using online trading. The first part of this paper discusses why CFDs and spreadbets are now so popular, and then the subtle differences between the two will be explained.CFDs and Spreadbetting – the best way to trade the stockmarket

In the old days, what now looks a very cumbersome system involved phone based dealing with the client having to wait for a dealing report from the broker, and this would be followed up with a paper based settlement and certification system. The introduction of nominee accounts and the crest settlement system was a great step forward, and in terms of deals carried out for investment, rather than trading, the system works well.

But for traders, this reduction in certification has gone hand in hand with the biggest change in the industry, the explosive growth of CFDs and spreadbetting, which have principally three main benefits over traditional share dealing:

First, there is no stamp duty to pay under current tax laws, so there is an immediate pick up of 0.5% on all UK based trades. The reason is simply that with a CFD, the client is contracting to pay the difference between the opening and closing prices of the position taken – essentially the profit or loss. Delivery never takes place and there is no time limit on the CFD, therefore there is no stamp duty. Spreadbets are treated as bets and are not currently subject to duty likewise.

Second, clients have the ability to take long or short positions on the underlying share, commodity or index. This is an option that many traditional stockbrokers still prohibit, and is useful both as a speculation and for hedging purposes. CFDs offer a simple and effective way to protect against a potential fall in the stockmarket or for that matter any instrument, without having to sell shares in a portfolio and then buy them back.

Third, traders can utilise generous margin rates, which by using leverage, enable large position sizes to be opened using a relatively small amount of deposit. It goes without saying that there is an associated risk which mirrors the amount of leverage, but for experienced traders this to some extent bears some similarity to traditional physical trading for extended settlement. For CFD traders, margin rates of as low as 1% are available, which again is very attractive for hedging purposes.

For share trading it is usual for clients to place funds on margin, but positions have to be closed within the trading settlement period, or the full cost of the purchase has to be made. The client usually pays a premium for not having to settle for up to 25 working days. Again this option is not allowed universally by brokers, and CFDs solve this problem, as they have no time limit, which makes them far more flexible. Spreadbets can be taken out with a wide range of expiry dates, so again it increases the choice for clients.

With these benefits, and the undoubted cost advantages, the natural question is why clients would wish to use a traditional stockbroker. The answer of course lies in the added value services offered by a broker, which include portfolio analysis and management, advice on collective investments, taxation and other financial products. For clients seeking perhaps a longer term perspective on investments, and for buying and selling shares on a longer term view, stockbrokers have an important role to play.

Buying shares outright also gives clients the benefit of shareholder voting rights, which is not the case for CFDs and spreadbet positions, although holders of long CFD positions do receive corporate dividends, and short CFD positions are debited with dividend payments on the ex-dividend date.

It is for shorter term trading and longer term hedging that CFDs and spreadbets have a clear edge, and they are both beneficial for those who wish to ‘go it alone’ in terms of costs. This benefit can be quantified in terms of the length of time each trade is open.

With CFDs, the additional cost of holding a long CFD position over a traditional purchase is only the interest cost. The interest charged on a long CFD is usually at a premium to LIBOR (London InterBank Offered Rate), typically LIBOR plus 2%, but it should be noted that if a client takes a short position, then interest is actually credited to the CFD position at a comparative discount to LIBOR. The amount the client lodges by way of margin is held to secure the performance of the contract and is not available to be set off against the Contract Value.

Conversely, a traditional share purchase incurs stamp duty at 0.5%. The crossover will occur at the time that the interest charged on the long CFD matches the saving made against stamp duty, and this point is usually reached on or around 28 days after the position is opened. Consequently, for trades outstanding for less than this period it is economically more viable to trade the CFD rather than the underlying stock, working on current interest rates. For those going short of a stock or index, there are clear benefits as interest is received each day while the position is open, so time is not a factor.CFDs against spreadbetting

The terminology is slightly different for CFDs and spreadbets, but both offer the same degree of leverage and potential risk/reward for online trading. If a client wishes to open a CFD position, this is quoted in the same way as if a normal share purchase/sale was being made i.e. ‘buy 1000 Lloyds TSB CFDs’. With spreadbetting one is technically betting on the price movement of a share, index, commodity or whatever measured in pounds per point of movement. So the equivalent trade here would be ‘buy Lloyds TSB at £10 a point’, but the exposure is essentially the same. In both cases, you simply ‘buy’ if you think that the price is set to rise, or vice versa.

In spreadbets, all profits are free from UK capital gains and income tax, which is not currently the case for CFDs. (Tax law can change or may differ if you pay tax in a jurisdiction other than the UK). The other main difference is that for spreadbet long positions there is no daily funding but as each bet has a defined expiry date the interest cost to the broker is built into the spread in the same way as a futures price might be constructed.

In terms of use, CFDs have the edge for stockmarket trading, accounting for 40% of LSE volumes, and many investment banks tend to use CFDs simply because they tend to track the underlying price more than spreadbets.

There is no question that CFDs and spreadbets have revolutionised short term and online trading if one does not aim to hold any long position for more than a month, and they are valuable for longer term hedging.

So You Think You Know Option Trading?

admin — Mon, 30 Nov 2009 07:27:31 +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 Strategies, Basic Concepts

admin — Sat, 28 Nov 2009 19:04:32 +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.

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

admin — Sat, 28 Nov 2009 04:30:26 +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.