Finding the right strategies for future option trading depends on whether you are hedging or speculating. Hedgers are relying on investment strategies that will minimize risk of loss. Speculators want to maximize profits and will take risks in order to do so.
Hedging in Future Option Trading
Hedging is a process whereby you offset the risk of a price failing to perform as expected by implementing a position in the option market that is opposite to the original transaction. For example, you may buy calls and puts. When you are working both sides of the price potential the risk is of maximum loss is “hedged” or minimized.
When you hedge in future option trading, you are assuming a balanced investment or a neutral position. A loss on one side is reduced or eliminated by a gain on the other. Obviously it is necessary to maintain the right ratio between the two options by relying on an analysis of the deltas of the options.
Speculating on Profits
Speculators try to make as much money as possible and are willing to use riskier strategies to do so. While the hedger is trying to maintain the appropriate ratio between the two options so that risk is minimized, the speculator does not focus on transaction balancing. The future option trading speculator will use strategies that are aggressive and have unlimited risk. On the other hand, the strategy chosen, like the risk reversal spread, can also have unlimited profit potential.
Speculation in future option trading should only be undertaken after you have gained experience in the options market.
Filed under General by on Aug 10th, 2011. Comment. 
FX options trading takes place in the Forex market. Forex is an acronym for “foreign exchange” and is the world’s currency market. Currency trading involves exchanging two currencies at a time with the goal of making a profit as a result of currency rate changes. The Forex market is the only financial market with a 24 hour trading day.
In FX options trading, you are actually buying two options so you are in effect using a spread strategy at all times. You have to buy one option and then sell another when FX options trading so that means you go long on one currency option and short the other.
When writing the option, you have a lot of flexibility in that you can choose the strike price and the expiration date and you can even choose a pricing style.
There is the standard call put options contract, but there is also a second type of FX options trading. This version is called a STOP option. STOP is an acronym for single-payment options trading. In STOP transactions you choose a currency pair and form an opinion as to the direction the market will take. You define the trade and then ask for a premium quote. Once you get the quote, you can decide if you want to buy the option or pass.
In SPOT FX options trading, there are different ways the SPOT will pay or be converted to cash. They are called one-touch SPOT, digital SPOT, no-touch SPOT, double no-touch SPOT and double one-touch SPOT. The names reflect how often the price is reached or whether the price goes above or below a specifically stated price.
Filed under General by on Aug 2nd, 2011. Comment.
The long option is one in which you have taken a long position which means you are buying the option. You can buy a long call which is the right to buy an underlying asset or you can buy a long put which is a right to sell an underlying asset.
Buying Calls
Buying call options is one type of long option. When you buy the call option you are purchasing a right, but not an obligation, to buy the underlying future at a strike price as defined in the option contract. The value of the option increases when the underlying asset price increases. If the underlying asset price were to fall, time decay would erode the premium in addition to the loss of the asset value.
In other words, for the value of the long option to increase when buying calls, the market price of the underlying asset must be rising. That means you would be watching for a market that is trending upward.
Buying Puts
Buying put options is a second type of long option. When you buy the put option you are purchasing a right to sell an underlying asset at the strike price. The long put places you in a short position. In other words, you are buying the right to be short. To make money, the underlying asset has to move towards the strike price in the options contract.
The long option is commonly used by traders because there is limited loss on both the long call and the long put. The most you can lose on the long option is the premium plus any transactions costs.
Filed under Option Trading Strategies by on Jul 29th, 2011. Comment.