Friday, October 31, 2008
Saturday, October 25, 2008
Trading Rules
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- Never risk more than 10% of your trading capital in a single trade.
- Always use stop loss orders.( Here you should know your loss you can give in a situation where the trade starts going against you.)
- Never do overtrading.
- Never let a profit run into a loss.
- Don't enter a trade if you are unsure of the trend.
- When in doubt, get out, and don't get in when in doubt.
- Only trade active markets.
- Distribute your risks equally among different markets.
- Never limit your orders. Trade at the markets.
- Extra monies from successful trades should be placed in a separate account.
- Never trade to scalp a profit.
- Never average a loss.
- Never get out of the market because you have lost patience, or get in because you are anxiously waiting.
- Avoid taking small profits and large losses.
- Never cancel a stop loss after you have placed it.
- Avoid getting in and out of the market too soon.
- Be willing to make money from both sides of the market.
- Never buy or sell just because the price is low or high.
- Never hedge a losing position.
- Never change your position without a good reason.
- Avoid trading after long periods of success or failure.
- Don't try to guess tops or bottoms.
- Don't follow a blind man's advice.
- Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.
- When you lose don't blame it on luck.
Thursday, October 23, 2008
Monday, October 13, 2008
Option Strategies
- Buying In-the-Money Options - A Hidden Benefit.
- Rolling Naked Put Options For a Credit - A “Down and Out” Option Strategy!
- How I Trade Diagonal Spreads!
- What Is A Diagonal Spread?
- Trading Back Month In The Money Options!
- All Options Were Meant To Be Sold - Not
- Delta Neutral Trading - Unplugged
- Non-directional Trading - Defined
- Delta Neutral Trading
- Put Writing Beats Covered Calls
- The Problem With Debit Spreads.
- Selecting A Put Writing Strategy
- My Favorite Option Strategy!
Monday, October 6, 2008
Straddle Option Strategy for Nifty Index
Unlimited Profit Potential :
By having long positions in both call and put options, straddles can achieve large profits no matter which way the underlying stock price heads, provided the move is strong enough.
The formula for calculating profit is given below:
- Maximum Profit = Unlimited
- Profit Achieved When Price of Underlying > Strike Price of Long Call + Net Premium Paid OR Price of Underlying <>
- Profit = Price of Underlying - Strike Price of Long Call - Net Premium Paid OR Strike Price of Long Put - Price of Underlying - Net Premium Paid
Maximum loss for long straddles occurs when the underlying stock price on expiration date is trading at the strike price of the options bought. At this price, both options expire worthless and the options trader loses the entire initial debit taken to enter the trade.
The formula for calculating maximum loss is given below:
Max Loss = Net Premium Paid + Commissions Paid
Max Loss Occurs When Price of Underlying = Strike Price of Long Call/Put
Breakeven Point(s) :
There are 2 break-even points for the long straddle position. The breakeven points can be calculated using the following formulae.
Upper Breakeven Point = Strike Price of Long Call + Net Premium Paid
Lower Breakeven Point = Strike Price of Long Put - Net Premium Paid
Spread Trading - The New World of Trading
If you are looking for a trading style that is easy to trade,
has very low margin requirements, and produces up to 10
times more return on margin than your current trading, then you should
definitely learn more about spread trading.
Spread trading is probably the most profitable, yet safest way to
trade futures. If offers many advantages which makes it the perfect
trading instrument for beginners and traders with small accounts
(less than $10,000) and for professional traders who use
spreads to optimize their trading profits.
Hard to believe? Take a look at the following Unleaded Gas Spread:
Example: Long December Unleaded Gas (HUZ)
and Short August Unleaded Gas (HUQ)
Trading this spread you could easily make 933% on your
margin in less than 30 days. Before we show you all the other great
advantages of spread trading, let us answer the basic question first:
What is a spread?
A spread is defined as the sale of one or more futures
contracts and the purchase of one or more offsetting futures contracts.
A spread tracks the difference between the price of whatever it is you are long
and whatever it is you are short. Therefore the risk changes from that of price
fluctuation to that of the difference between the two sides of the spread.
The spreader is a trader who positions himself between the speculator and the
hedger. Rather than take the risk of excessive price fluctuation, he assumes the
risk in the difference between two different trading months of the same futures,
the difference between two related futures contracts in different markets,
between an equity and an index, or between two equities.
For example, a spreader might take the risk of the difference in
price between August Soymeal and December Soymeal (see picture below),
or the difference in price between December Kansas City wheat and December
Chicago wheat, or between the strongest stock in a sector and the weakest stock
in that sector.
Example: Long August Soy Meal (SMQ)
and Short December Soy Meal (SMZ)
A spread trader can just as easily trade the difference
between MICROSOFT and IBM (see below). Or he can trade the difference
between two Exchange Traded Funds.
Example: Long Microsoft (MSFT)
and Short IBM (IBM)
Basically there are 3
different kinds of spreads:
Intramarket Spreads
Officially, Intramarket spreads are created only as calendar spreads. You
arelong and short futures in the same market, but in different months. An
example of an Intramarket spread is that you are Long July Corn and
simultaneously Short December Corn.
Intermarket Spreads
An Intermarket spread can be accomplished by going long futures in one
market, and short futures of the same month in another market. For example:
Short May Wheat and Long May Soybeans.Intermarket spreads can become calendar
spreads by using long and short futures in different markets and in different
months.
Inter-Exchange Spreads
A less commonly known method of creating spreads is via the use of contracts
in similar markets, but on different exchanges. These spreads can be calendar
spreads using different months, or they can be spreads in which the same month
is used. Although the markets are similar, because the contracts occur on
different exchanges they are able to be spread. An example of an Inter-exchange
calendar spread would be simultaneously Long July Chicago Board of Trade (CBOT)
Wheat, and Short an equal amount of May Kansas City Board of Trade (KCBOT)
Wheat. An example of using the same month might be Long December CBOT Wheat and
Short December KCBOT Wheat.
Discover the incredible potential of spread trading
and learn more about all the great advantages
Spreads have low time requirements
You don't have to watch a spread all day long. You do not need
real-time data. These great advantages make spread trading the
perfect trading instrument for professional traders and
beginners.
The most effective way to trade spreads is using end-of-day data. Therefore,
spread trading is the best way to trade profitably even if you do not want to
watch or cannot watch your computer all day long (i.e. because you have a
daytime job).
Even those who daytrade use these advantages to optimize their trading results
at the end of their trading day.
Spreads are easier to trade
Take a look at the Unleaded Gas Spread again (see below).
Do you see how nicely this spread starts trending in the last week of
May? Whether you are a beginner or an experienced trader, whether you
use chart formations or indicators, the existence of a trend is obvious. Spreads
tend to trend much more dramatically than outright futures contracts.
They trend without the interference and noise caused by computerized trading,
scalpers, and market movers.
Spreads have lower margin requirements
Spreads have reduced margin requirements, which means that you can afford
to put on more positions. While the margin on an outright futures
position in Unleaded Gas is $4,750, a spread trade in Unleaded Gas requires
only $405 - 10% as much. That's a great advantage for traders with a
small account. With a $10,000 trading account you can easily enter 4-5
spreads, instead of only 1 outright Unleaded Gas futures trade.
Spreads give a higher return on margin
Each tick in the spread carries the same value ($4.20) as each tick in the
outright futures ($4.20). That means that on a 100 tick favorable move in
unleaded gas futures or a 100 tick favorable move in the spread, you would
earn $420. However, the difference in return on margin is extraordinary:Unleaded gas futures - $420/$4,750 = 9% return on margin
Unleaded gas spread - $420/$405 = 104% return on margin (!!!)And keep in mind that you can trade 10 times as many spread contracts as
you can outright futures contracts. In our example you would achieve a
115 times higher return on you margin.
Spreads give countless trading opportunities
Spreading has gone much further than its original intent. You can spread
one commodity against another (e.g. SMQ-SMZ). You can spread one stock against
another (e.g. MSFT vs. IBM). You can spread one index against another (e.g.
Dow Jones vs. Nasdaq). You can spread the strongest share in a sector against
the sector index. There are dozens of trading opportunities each day,
and you can choose the best ones.
Spreads offer a lower risk
Spreading is one of the most conservative forms of trading. It is much
safer than the trading of outright (naked) futures contracts. Obviously, the
risk taken for the difference in price among related contracts is far less
than the price risk taken in an outright speculation. This is because related
futures will tend to move in the same direction.This spread was entered not only on the basis of seasonality,
but also by virtue of the formation known as a Ross hook (Rh). The spread
moved from -2.29 to 3.03 = $1,850 per contract. The margin
required to put on this spread was only $473, thus the return on margin is
more than 390%. Please note that the spread never retraced more than
$225!
Spread trading does not need live data
The most effective way to trade spreads is using end-of-day or delayed
data. You can save up to $600 per month in exchange fees.And you can save all
the money you would have had to spend for real-time data systems (which can be
up to $600 per month).
Spreads trend more often than do outright futures.
Spreads often trend when outright futures are flat. Look at the following
chart: Would you want to have been long live cattle from mid-April until end
of May?
But, what about a spread between Live Cattle and Feeder Cattle?The spread moved from 13,450 to 19,980 = $6,530 per
contract. The margin required to put on this spread was only $1,013. The
return on margin is more than 600%.Spread trading is so fantastic
Well, it is not true that hardly anybody trades spreads - the
professional traders do, every day. But either by accident or design, the whole
truth of spread trading has been hidden from the public over the years.
While spreading is commonly done by the market "insiders," much effort
is made to conceal this technique and all of its benefits from
"outsiders," you and me. After all, why would the insiders want to
give away their edge? By keeping us from knowing about spreading, they retain a
distinct advantage.
The concept of trading seasonal trends and seasonal spreads has
been almost entirely overlooked by the hordes of daytraders who
today riffle the markets with their almost frantic noise. It is also
overlooked by the fund traders. By fund traders I mean those massive
pools of managed money residing in hedge funds, commodity pools, pension funds,
bond funds, securities funds, etc. In fact, with the exception of the large
commercial and institutional interests, the whole concept of seasonal trend and
seasonal spreading has been overlooked by most traders.
So far, so good.
By now you already know more about spread trading than
95% of all traders out there. You have taken the first step by learning
about the lost art of spread trading. But why is spread trading a lost art?
The reason is quite interesting: In the 1970´s and 80´s,
capital gains tax laws changed and computers came into the picture, which effectively
killed spread trading for the general trader. Current market conditions
dictate that traders who wish to minimize their risk have to learn to trade
spreads. So, if you are serious in getting started in spreads - I have
good news for you!
I have decided to share my knowledge of spread
trading because I realize that most current traders have never been exposed to
it!
Here is
how to take advantage of all the benefits of spread trading to optimize YOUR
trading results
Get started in Spread Trading
with simple
and effective trading techniques and tactics
Let me stress that it is not difficult to learn how to
successfully trade spreads. Unfortunately, there are some people who claim that
spread trading is difficult to learn, and that it is even dangerous to trade
with spreads. We know that some people just don't want to reveal to others how
simple and promising it is to trade spreads, and others are just repeating what
they have heard without verifying their information for themselves.
From my almost 50 years of successful trading experience, I can
say with assurance that spreads are neither difficult to understand nor
dangerous to trade. It is quite the contrary: trading spreads
is for the beginning trader with a small account, as well as a being a technique
that should be in every trader's toolkit.
Learn how to trade spreads to reduce risk
You already know that trading spreads entails less risk than does trading
outright futures, but you still need concepts and techniques about how to
trade them to keep the risk low.Let me show you an easy way to hedge yourself and minimize the risk. This
is also very useful for a daytrader who wants to hold a position overnight.
Position trades can be held considerably longer at less riskby spreading,
allowing you to participate in a big market move.
Learn all you need to know about Seasonal spread trade selection
Seasonal spreads are among the best trades possible for those who are
willing to wait for these excellent opportunities to come along. They have the
advantage of a very high degree of reliability over a period of many years.
Trades that work 80% or more of the time are certainly worth taking. Many of
these trades work 100% of the time for periods spanning 15 years or more. Yet
seasonal spreads must be filtered in order to obtain the very best results. A
lot of money can be lost by blindly taking these trades based upon
computer-generated dates for entry and exit. You will learn how to identify
the best spread for you and how to filter these seasonal spreads in order to
get best results.
Specific entry and exit signals
No longer have doubts about its being the right time to enter, or even more
importantly, the best time to exit a trade. I´ll show you specific signals
about where to enter and when to exit a trade to achieve the best results.
Trading spreads using technical indicators
Not all traders enjoy trading only from chart patterns. You will learn how
to properly use technical indicators to filter highly profitable trades.
The Secrets of Options Trading
You have probably heard that trading Options is a “very risky” business, and you may even know people who have lost money by trading Options. It's also possible that you know people who regularly make money by trading Options, and you may think it's “Lady Luck” more than anything else that makes them winners in this seemingly hazardous occupation. So what is it that makes some Options traders “Lucky”? What do these traders have that others don't? The answer in fact, is really very simple. As a group, successful traders have two things in common: First, they have adopted sound and sensible methods for analyzing Options. Second, they have acquired the proper tools for undertaking accurate analysis in support of their strategies. If that's called Luck, so be it! In the articles that follow, I want to show you my own fast and easy route to this elite group of “Lucky” traders. This series of articles will show you step by step how to build profitable trades. I will not use any complicated formulas to define any subjects. I will try to explain in plain English all correlations between different parameters and how they reflect on the final results. I spoke to a lot of traders who wanted to be options traders, but was scared to death after reading some options series of articles with complicated mathematical stuff in it. They are thinking that all these “options stuff” is above their heads and too risky to be involved with. And it is hard to blame them for this, because people usually afraid doing something that they could not comprehend the basics of. In reality options trading is far from rocket science. It is pretty simple after you learn the basics and understand relationship between the main components. I am strongly believe that option trading does not required knowledge of standard deviation or normal distribution and especially how to calculate some of them. Now days with the Internet and PC at your disposal you do not have to have scientific calculator and equations to perform calculations. You can easily find all these on the Internet. What I think each option trader must know is how to build and analyze trades. What market conditions to look for and how to take advantage of them by using appropriate option strategy. I am a mathematician and I enjoy all maths behind option trading. I think option trading is more structured and more science than stock trading that I consider more art than science. Look at the market “gurus” that you can sea on TV or read in the newspapers. How many times you witness the situation where their analysis and predictions for the same company were going into two different directions. I do not want to criticize them for this. I just want to emphasize that their fundamental and technical analysis is more Art than Science. It based on their subjective interpretation of the facts and not supported by real scientific analysis. There is a big difference in the way you trade underlying stocks and commodities than Options. When you trade the underlying you are trying to predict the direction in which the underlying will go. Many novice Option traders use the same attitudes in Option trading, trying to Buy Calls or Puts based on their assumption of market direction. This is the main reason most people lose money by trading Options. Let me explain why they are loosing money. From mathematical (scientific) stand point there is a 50% probability that underlying price will go up or down, unless you have some “inside information” on it. Any option has so called “time value”. We will learn about this and other component of option price later in this series of articles, but for right now let me define it as a price that option buyer agrees to pay for this option above its real (intrinsic) value. Now lets analyze your probability of success in “option trade”, where you are trying to buy Call option on a stock that you think will go up. Your profit zone will start at least at current Stock price plus “Time value” you paid for this option (in many cases it will be even further from the stock price, if you bought out-of-the-money option) What it means from the probability stand point? It is 50% chance that stock will move up and, let say, it is 10% probability that stock will move from its current price into your profit zone. The simple calculation is showing that you have only 40% to be profitable. When you are trying to buy Call (Put) you have to predict not only the direction of the move, but also its magnitude. Option trading is a completely different “ball game”. In many cases you do not care which direction the underlying will go. You are only looking for a big move in the underlying price. In Option trading there is also a way to build Option strategies with 80% or more probability of success and positive expected profit/loss (we will talk about this parameter a lot later in the series of articles). If you are in a market for just a couple trades and want to employ “Hit and Run” tactic this series of articles is not for you, because I do not know scientific way to succeed in this type of trading. For me it is combination of Art and truly luck. But if you want to be in the market for a long time and be profitable that is something I can teach you how to do. I do not promises you will always win, but I can guarantee if you follow my steps, you will be overall profitable. Las Vegas is a living and prospering example, which makes me so confident in this basic idea. Casinos are using the same mathematical theory of playing odds and expected profit/loss to pull money from their guests, as I will teach you. You probably know the only way to make money in casino is to own the casino. I will show you how to “build” your own casino, where You are setting the odds in your favor and than playing against the other traders (your casino guests). Volatility analysis is the critical key to Options trading. It has been written about and discussed in hundreds of series of books and manuals. Recognized professional traders and brokers know this and it is the goal of my series of articles to unlock this key to Options trading.
Options Learning Resources
www.cboe.com
Options education trading and strategies. OIC is one of the best resource available
http://www.optionseducation.org
Options clearing council- How options clear and contracts work.
http://www.optionseducation.org
Yahoos financial education and information.
http://finance.yahoo.com/education
Market News and commentary- General market conditions
http://www.bloomberg.com/index.html?Intro=intro3
Market commentary and Stock analysis . William O Neil’s best of both world.
http://investors.com
Stock ratings and evaluations
http://moneycentral.msn.com/investor/StockRating/srsmain.asp
Sunday, October 5, 2008
Option Trading Book List
- Sheldon Natenberg, Option Volatility AND Pricing
- George Jabbour, The Option Trader Handbook
- David Caplan, The New Options Advantage
- William Gallacher, The Options Edge
- Kenneth Shaleen, Technical Analysis AND Options Strategies
- Paul Forchione, Trading Options Visually
- Charles Cottle, Options Trading:The Hidden Reality
- Allen Baird, Option Market Making
- Saymon Vayn, Options. A complete course for professionals.
- K.Konnolli, Purchase and sale volatilnosti
- L.MakMillan, MakMillan about options
- L.MakMillan, Options as strategic investment
- M.Tomsett, Trade in options
- M.Chekulaev, Risk management. Management of financial risks on the basis of the analysis volatilnosti
- M.Chekulaev, Management of financial risks on the basis of the analysis volatilnosti
- M.Chekulaev, Riddles and secrets of optional trade
- M.Chekulaev, Trade volatilnostyu
- A.Balabushkin, Options and futures
Thursday, October 2, 2008
Understanding Position Delta - by John Summa
Delta and the other "Greeks
- Vega : Measures the impact of a change in volatility.
- Theta : Measures the impact of a change in time remaining.
- Delta : Measures impact of a change in the price of underlying.
- Gamma : Measures the rate of change of delta.
Keep in mind that these call delta values are all positive because we are dealing with long call options, a point to which we will return later. If these were puts, the same values would have a negative sign attached to them. This reflects the fact that put options increase in value when the underlying asset price falls. (An inverse relationship is indicated by the negative delta sign.) You will see below, when we look at short option positions and the concept of position delta, that the story gets a bit more complicated
Hypothetical S&P 500 long call options.
Strike Delta
950 0.25
900 0.50
850 0.75
Note: We are assuming that the underlying S&P 500 is trading at 900
At this point you might be wondering what these delta values are telling you. Let me offer an example to help illustrate the concept of simple delta and the meaning of these values. If an S&P 500 call option has a delta of 0.5 (for a near or at-the-money option), a one-point move (which is worth $250) of the underlying futures contract would produce a 0.5 (or 50%) change (worth $125) in the price of the call option. A delta value of 0.5, therefore, tells you that for every $250 change in value of the underlying futures, the option changes in value by about $125. If you were long this call option and the S&P 500 futures move up by one point, your call option would gain approximately $125 in value, assuming no other variables change in the short run. We say "approximately" because as the underlying moves, delta will change as well. (To understand this relationship, Getting to know the Greeks.)Be aware that as the option gets further in the money, delta approaches 1.00 on a call and –1.00 on a put. At these extremes there is a near or actual one-for-one relationship between changes in the price of the underlying and subsequent changes in the option price. In effect, at delta values of –1.00 and 1.00, the option mirrors the underlying in terms of price changes. Also bear in mind that this simple example assumes no change in other variables like the following: (1) delta tends to increase as you get closer to expiration for near or at-the-money options; (2) delta is not a constant, a concept related to gamma, another risk measurement, which is a measure of the rate of change of delta given a move by the underlying; (3) delta is subject to change given changes in implied volatility. Long vs. Short Options and Delta As a segue into looking at position delta, let me say a few words about how short and long positions change the picture somewhat. First, the negative and positive signs for values of delta mentioned above do not tell the full story. As indicated in figure 3 below, if you are long a call or a put (that is, you purchased them to open these positions), then the put will be delta negative and the call delta positive; however, our actual position will determine the delta of the option as it appears in our portfolio. Note how the signs are reversed for short put and short call.
Long Call Short Call Long Put Short Put
Delta Positive Delta Negative Delta Negative Delta Positive
The delta sign in your portfolio for this position will be positive, not negative. This is because the value of the position will increase if the underlying increases. Likewise, if you are short a call position, you will see that the sign is reversed. The short call now acquires a negative delta, which means that if the underlying rises, the short call position will lose value. This is getting us closer to an actual discussion of position delta.Position DeltaPosition delta can be understood by reference to the idea of a hedge ratio. Delta is in effect a hedge ratio because it tells us how many options contracts are needed to hedge a long or short position in the underlying. It is a very easy concept to grasp.For example, if an at-the-money call option has a delta value of approximately 0.5 - which means that there is a 50% chance the option will end in the money and a 50% chance it will end out of the money - then this delta tells us that it would take two at-the-money call options to hedge one short contract of the underlying. In other words, you need two long call options to hedge one short futures contract. (Two long call options x delta of 0.5 = position delta of 1.0, which equals one short futures position). This means that a one-point rise in the S&P 500 futures (a loss of $250), which you are short, will be offset by a one-point (2 x $125 = +$250) gain in the value of the two long call options. In this example we would say that we are position-delta neutral. By changing the ratio of calls to number of positions in the underlying, we can turn this position delta either positive or negative. For example, if are bullish we might add another long call, so we are now delta positive because our overall strategy is set to gain if the futures rise. We would have three long calls with delta of 0.5 each, which means we have a net long position delta by +0.5. On the other hand, if we are bearish, we could reduce our long calls to just one, which we would now make us net short position delta. This means that we are net short the futures by -0.5. ConclusionThis article explains the concept of simple delta and then proceeds to explain how position delta is a measure of how net long or net short the underlying you are when taking into account your entire portfolio of options (and futures). There is risk of loss in trading options and futures. Trade with risk capital only.
Wednesday, October 1, 2008
Why trade the nifty - Kapil Marwaha
For all the technical analysis I do, I rarely trade in stocks...I trade the nifty.
Years of trading experience has taught me one simple thing...it is far easier to take a directional call on the broader market than individual stocks. If the economy is doing well, the market (nifty) will anyway do well (and vice versa).
Stock movements tend to cyclical, news driven or rangebound for considerable periods of time. Not only do you have to identify the sector correctly, you should also be able to pick the right stock. And then there is this possibility - everything else rallies except what you have bought.
From a fundamental perspective, this means you don't have to worry about crude oil, interest rates, FII inflows (or outflows), quarterly results, sectors, analysts talk and whatever you can think of.
Some advantages of trading the nifty:
Index is the barometer of the stock market. If the market does well, Nifty will anyway rise (and vice versa)
All FIIs and Mutual funds have an exposure on index and index stocks
All good and bad news is reflected in index (nifty)
You can play both sides of the market and profit from rallies as well as corrections
You can daytrade in nifty (not recommended) or carry forward positions till expiry
Low brokerage / nil demat costs
Excellent liquidity: The daily turnover of nifty futures and options is 2-3 times that of ALL stocks traded on BSE.
Low volatility: no wild swings. Because the nifty index is made of 50 stocks, it is always less volatile than the individual stocks. Check latest volatility statistics.
Low investment: as nifty is least volatile, NSE margins are lowest. This reduces investment amount substantially.
- Kapil Marwaha