TheOptions.net

Calling All Call Spreads

admin — Sun, 25 Sep 2011 03:43:20 +0000

Call spreads are a type of strategy used by options investors in all kinds of markets. It is applicable in sideways, bear and bull markets so it’s a good strategy to master. In call spreads you will buy and sell call options at the same time. The spread limits profit but it also limits risk and that is why this strategy is used so frequently.

There are variations of the call spreads. For example, the bull call spreads involve buying a call option at a lower strike price and then selling a call option at a higher strike price. The buying and selling of call options spreads the profit potential with actual profit depending on whether the strike price is reached.

Risk in the bull call spreads is limited because the short call option is offset by the long call option. The bull call spread is one of the most commonly used trading strategies because you can limit risk with the purchase of the call option and lower costs by selling the option and earning the premium. You can also limit the effects of time decay because the long and the short option are subject to time decay as the option moves towards expiration.

The main disadvantage of the bull call spreads is the fact that profit potential is limited by the short call.

The bull call spread is used when the price of the option’s underlying security is expected to rise. Some traders will use this strategy when the market is expected to undergo seasonal fluctuations for example. It is also used when market fundamentals indicate a rising market.

Fast Paced World of Commodity Option Trading

admin — Sat, 17 Sep 2011 03:41:58 +0000

Commodity option trading has come a long way from the days when hog sellers and buyers met at an open auction and placed bids. Once called hedgers, the people in the transaction actually took possession of the commodity or had a direct business interest.

Computerized Markets that Turned Everything into Commodities

Today commodities in commodity option trading are bought and sold in slick computerized markets where buyers and sellers usually don’t meet. Commodities include just about anything you can think of too including agricultural, minerals, metals, weather, foreign currencies, financial products, energy and food. And hedging has become a strategy where a single trader buys and sells options to minimize risk.

Trading Derivatives

With the advent of the Great Recession, the term “derivative” became a bit of a dirty word after the housing market collapsed. But commodity option trading is actually trading derivative contracts. Derivatives are merely contracts that have an underlying asset, but it is the contract that is originally bought and sold. The contract outlines the agreement for the exchange of the commodity should the contract be exercised.

Derivatives are also called futures. Commodity option trading involves futures contracts that are anticipating a price on the underlying asset by a certain point in the future which is the expiration date. The option is the contract while the price is the rate at which the option can be exercised. When you are doing commodity option trading, an exercised option is replaced with a futures position meaning the option has been exercised into an underlying futures contract.

Currency Option Trading as Another Type of Transaction

admin — Thu, 08 Sep 2011 03:39:56 +0000

Though currency option trading and Forex option trading are terms used interchangeably, they are not always the same type of trade. Currency option trading is often used by businesses that are operating internationally as a way to reduce the risks associated with fluctuating currency market rates when buying international goods and services.

Fixing an Exchange Rate

Currency option trading can be used for both hedging and speculating, but it is often used to set the most a fluctuating exchange rate could cost the businesses during a business transaction. For example, a company in Spain sells products to a company located in the United States. The payment in U.S. dollars won’t take place for 30 days. In those 30 days the currency exchange rate for dollars and euros can fluctuate leading to a more expensive product order.

You can buy a currency option that creates a contract for a specific currency exchange at a specific time and by a specific date. If the exchange rate were to change in favor of the buying company in the U.S. the option will be allowed to expire. If the exchange rate changes in a way that hurts the U.S. company then the option is exercised.

Commercial or Private Investors

Though the example use is for commercial purposes, an individual investor can certainly do currency option trading. Currency option trading usually involves a sizable investment up front compared to other types of options trading. And currency markets can change frequently meaning you must be willing to track the market regularly to know how to manage your options.