Trading Futures: The Wise Are Wary
No doubt you’ve seen the late night commercials extolling the virtues of trading commodity futures. People have made millions with small investments almost overnight. Read the fine print: Results are not typical. Trading commodity futures can result in enormous profits but it is a tricky business. Only those with money they can afford to lose should consider dallying in this market. That said, trading futures is a fascinating and high profit endeavor which those with a high risk tolerance may find to their liking.
The term futures actually refers to a futures contract. Buying a future means entering into a contract to buy or sell a commodity for a specific price at a specified time in the future.
Futures emanated from the 1800s when farmers began selling their crops before they had actually been brought to market. A future was essentially just an agreement between the farmer and the buyer as to the price that would be paid when the crop came in. Obviously, depending upon weather conditions while the crop was in the field the value of the crop might go up or down. If a hail storm destroyed most of a certain crop then the value of the future might go up because there would be less of the commodity to go around. On the other hand, a bumper crop might cause the value of the future to fall. Over time people who owned these agreements or contracts began to sell them prior to the harvesting of the crop. Thus, a market in futures was born.
The modern futures market has become much more complex and deals not just in crops but in all sorts of sorts of precious metals as well as crude oil, gasoline and even electricity. Futures are sold throughout the day on a variety of exchanges including the Chicago Mercantile Exchange (CME) and the New York Mercantile Exchange (NYMEX). Trading commodity futures would be complicated even if only actual farmers and those interested in using their crops were involved. Today’s commodity markets, however, encompass an enormous variety of traders.
Many large institutions trade options and speculators are also rampant. Speculators are in the commodities market only to make money and often buy and hold positions for just hours or even minutes. They trade on scraps of information and hints gleaned from the news. Sometimes they make trades on the basis of volume alone. Both institutions and speculators also hedge options which simply means they try to protect their positions by “hedging their bets”. Hedging in the simplest terms refers to the practice of taking a futures position that is in opposition to a position taken in the stock market. By doing this a person is covering himself/herself no matter which way the market moves. In truth, hedging can result in enormous losses. Hedging is only once of many devices which are used in trading commodity futures. So called futures derivatives can become so complicated that not even traders with years of experience are entirely sure what is being sold.
If you are considering trading commodity futures it is imperative that you read and study extensively before making any investment. After a period of study you should investigate the commodity options brokerage houses. Commodities cannot be traded on the exchanges directly by individuals. They have to be traded through people and firms who are registered with the Commodities Futures Trading Commission. Carefully read through the disclosure information which is provided by the brokerages you are considering.
Once you have decided to trade commodity futures, think again. Part of the reason futures trading can be so profitable is because trading is done with a leverage account. Leverage means you are only putting up a portion of the money and borrowing the rest on margin. If the futures go up your account pays the leverage costs out of the profits. If the futures you have bought go down you will have to pay the difference out of your own pocket. When futures fall precipitously you may be called upon to pay the money you owe immediately sometimes within an hour. It bears repeating that trading commodity futures is only for those who have capital they can afford to risk and lose.
Bear the following in mind.
Do not deal with anyone who will not provide disclosure documents. Do not allow anyone to pressure you or intimidate you into opening account. Do not use money you cannot afford to use to trade commodity futures. Do not borrow money to trade commodity futures. Do not be lured into opening an account by promises of quick, easy profits.
Trading commodity futures can be lucrative and exciting. Conversely, it can cause the loss of every penny invested and liability for any money borrowed on margin. Therefore, for anyone considering trading commodity futures the motto is truly, “Buyer beware.”
Author: Christopher Luck
Article Source: EzineArticles.com
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Learn Day Trading Secrets – Don’t Ignore Your Choice of Broker
For those who want to learn day trading, one important step that you’ll have to take is selecting a broker.
This is a very important component to your overall day trading success, and yet many people fail to really due the necessary due diligence in their selection.
So often, people will simply default to the large brokers, like eTrade, or Scottrade, or a similar broker, without really looking around.
But if you crave day trading success, then you’ve got to put more thought and research into the broker of your choice.
Smaller brokerages may offer much better terms, and more tools and resources.
If you are trading individual stocks or funds, then you might be best going with a Scottrade or something similar.
But if you are trading futures, there are much better options available out there.
Once brokerage that I use for trading futures contracts is Global Futures. They have an easy to use and understand platform, and also have excellent customer service, and competitive margins ($500 contracts, sometimes as low as $300!)
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A day trading training course will give you the foundation that you need to develop into a successful trader. Of course, when you get serious about learning how to trade, you’ll need to pay to learn from a professional. But signing up for a free video training course will provide you with the foundation that you need to begin your trading education.
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Online Futures Trading – Is It Right for Everyone?
Are you interested in making money? If you are, you may want to take the time to familiarize yourself with online futures trading. The trading of commodities for currency is a business venture that many are able to profit from. Although online futures trading is a great way to make money, you may be wondering if it something that you can do, particularly while making a profit.
Online futures trading is defined as the trading of commodities, online. What you may not necessarily know about online futures trading is that many who are doing trading online, are experienced traders. There is a difference between online futures trading and futures trading with the assistance of a futures broker. Many beginners or those who do not have time to fully examine the current market on their own, rely on the assistance of a futures trading broker. That broker will not only advise their client, possibly you, on their trades, but they will also make them. Online futures trading typically involves making your own trades.
Since online futures trading involves handling your own account, you may be wondering whether or not it is something that you could handle. First, before jumping right to online futures trading, you may want to take the time to research it, inside and out. There are a number of futures trading or futures investing resource guides that you can buy online, locally, or even find in your local library. You can also take futures trading training programs. One program that you may want to look into is a futures simulated trading program. These programs are run by most futures brokers and they allow you to do your own online futures trading, but without using your own, real, money. This may give you a good idea as to whether or not you are ready for online futures trading.
As a reminder, if you are unsure as to whether or not online futures trading is right for you, you may want to think about consulting with a futures broker. Many futures brokers can give you their own personal tips and suggestions. In fact, you may even want to start out using the assistance of a futures broker, when you first start trading. If that is would you would like to do, you may want to opt for a professionally managed trading account or a full-service account. Yes, these accounts will cost you a little bit more money, but it may end up being money well spent. Should you later decide that you are ready to handle your own trades, account, and portfolio, you should be able to change you account to an online futures trading account.
In short, online futures trading isnt right for everyone, but, as outlined above, you dont have to start with online futures trading. There are a number of others accounts that you can create to start making money with futures trading.
Author: Ulysses Faust
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5 Tips for Fighting Day Trading Burnout
If you are like me, you get to see a good number of charts everyday, sometimes hundreds. In addition, you may be actively day trading the ES Emini contract, perhaps in dual times frames, or a host of other configurations. Why do I go through this routine everyday? Day trading is my passion, and I suspect if you are reading this short article, trading is a passion for you, too.
But having a trading passion does have a downside. Too many charts. A couple of poorly thought out trades. More charts…you can suffer from day trading burnout. It has happened to me on a regular basis, at least once a year. I feel like I am just worn thin as a result of looking at charts and trading indicators and sitting in front of a computer for hours.
And I don’t think there is anything terribly unusual about becoming burnt-out, even with a activity you love. As a matter of fact, it is to be expected. I find my decision making process is greatly impaired when I am not excited about trading, and the results are usually indicative of that fact.
So what do you do? That’s easy to talk about, but tough to implement:
1. Stop trading for a few days. This is one of the toughest things to do. For many, trading is the way they make a living, so stopping trading stops the income. However, if your trading effectiveness is suffering as a result of burnout, stopping day trading is the smartest course of action. Read some books, exercise, or spend some leisure time in the manner you enjoy most. The important point is simple, stop trading until your state of mind is correct.
2. No matter how hard we try, day traders often get into bad habits that can result in unacceptable losses. This is where the trading journal (with the days charts saved) can be very crucial. Look at your trades with an open mind, as if they were someone else’s trades. Do the entries and exits make sense? Even more important, are the entries and exits compatible with the parameters of your trading system? Be honest and thoroughly examine your trading results.
3. Take a close look at the market from an objective viewpoint. Has something changed? Often times you will become accustomed to day trading in a trending market and the markets demeanor will change from the trend. Since you may have your mind set fixed from months of trading a certain market, the change in market fundamentals may be sabotaging your trades. Is the market still trending? Take a look at the market from different time frames for a realistic point of view. Look at daily, weekly, monthly charts and see what information you may be able to glean. Has the VIX changed drastically? These are all questions you need to answer before you resume trading. The market can change personalities quickly yet subtlety, if you have been counting on a trending marketing and possibly entering trades of higher risk because you assume a certain trend, you need to reconsider your strategy. Get back to the parameters of your personal trading system.
4. If you burnout is debilitating, take a week vacation and go somewhere and don’t even think about trading. I love to fish, and there is nothing more relaxing than a nice trip to a remote part of the country and test my skills against salmon, or trout, or bass…you get the idea. Don’t give trading a thought. Many times on trips of this nature I lose track of the day and date; that is when I know that I have reached a nice relaxed state, especially if I haven’t given trading any thought. When I am fixated on fishing or hunting, not trading, I know my mind has cleared some of the muddle I have accumulating over many months of trading. Or take a great family vacation, or take your wife or significant other to an exotic beach resort…all these things are wonderful ways to break the monotony of day trading for months on end. Clear your pipes out.
5. I think this is the most important step, call your mentor and ask for his advice. Perhaps he will want to review your trades. If you trade the same contract, he will be familiar with the trades he took that day and the market action of the day. He may be able to shed some light on what he thinks you may do to improve. If you decide on a break in trading, call your mentor before you start trading again.
Ultimately, trading is about confidence, and when you are burnt out you have generally lost your confidence. It is very difficult to trade when you are indecisive. This is not a business that lends itself to indecisiveness. You can get your confidence back, and that is an important point to remember. The secret is realizing when things are not going well and taking time to analyze the cause of your burnout.
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What to Consider When Choosing a Futures Broker
Are you interested in making money through the trading of commodity futures? If you are, you are advised to do business with a futures broker. A futures broker can assist you, in more ways that one. For instance, a futures broker can give you professional tips, as well as even do your trading for you!
While it is advised that you use the assistance of a futures broker, you need to proceed with caution. In the United States, there are a number of futures brokers who would love to acquire you as a client. The only problem is that not all futures brokers operate in the same way or provide their clients with the same level of service. That is why it is important that you dont just choose any futures broker to do business with. Instead, you will want to take the time to research all of your options and find the futures broker that is perfect for you and your needs.
When it comes to choosing a futures broker, particularly the one that is best for you and your needs, you need to examine reputation. You will want to do business with a futures broker that has an outstanding reputation; one that includes providing the utmost level of service available. To examine the reputation of a futures broker, you may want to ask to speak to past or even current clients, just to ask their opinion. If that is not possible, you can use the internet. You can do this by performing a standard internet search, with the name of the futures broker that you would like to research.
Experience is also another important factor that should be taken into consideration, when looking for the perfect futures broker. Yes, new futures brokers may be able provide you with outstanding service, but do you really want to take that chance? Futures trading is a great way to make money, but if you are not careful you can end up losing a considerable amount of money. Doing business with an established futures broker, one that has been a futures broker for some time now, may produce better results. In addition to better results, you are likely to feel a little bit more safe and secure when doing business with an experienced, established futures broker.
Accessibility is another important factor that needs to be examined, when looking for the perfect futures broker for you and your needs. A large number of futures brokers operate online, as it is easy and convenient for both them and their customers. The only problem is that it can sometimes make contact difficult. When choosing a futures broker, you will want to examine the ways that you can go about contacting your futures brokers. For instance, are you able to communicate through emails, over the phone, or both? Multiple methods of communication is ideal, as it will increase your chances of being able to get a hold of your futures broker if you have an questions, comments, or concerns.
The above mentioned factors are just a few of the many that you should take into consideration, when choosing a futures broker to do business with. As a reminder, doing business with a quality, well-known, or well established futures broker is likely to improve your chances of success.
Author: Ulysses Faust
Article Source: EzineArticles.com
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Managed Futures and Hedge Funds
Are you in the market for an alternative investment? If you are one of the prudent investors who is seeking to allocate a portion of assets to strategies not normally employed by the investing public this article is a must read.
There are primarily two forms of alternative investment management, hedge funds and managed futures. Hedge funds are invested in a vast number of products, both exchange listed and Over-the-Counter (OTC) derivatives. Managed futures are generally only invested in exchange listed commodity futures contracts, regulated by the Commodity Futures Trading Commission (CFTC). Be careful! If the wrong investment is chosen the investor may be left with a bad experience of alternative investment products. This article will focus on the very important issues of transparency, liquidity, lock ups, returns and taxes in regards to the alternative asset class. Readers should leave with a better understanding of a few of the primary issues involving any alternative asset investment.
TRANSPARENCY
Transparency is an issue with any investment. Most investors want to know exactly what their money is doing at all times. Giving money to someone who claims to have returns of X without knowing what the manager is actually doing is generally a bad idea. Transparency is becoming more and more of an issue as the universe of investable products grows exponentially. The recent hedge fund “blow-ups” are a case in point.
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Hedge funds are alternative investment vehicles that can be invested in anything from Johnson and Johnson common stock to over the counter derivatives based in Zimbabwe. The universe of products is virtually limitless. When an investor becomes a limited partner of a hedge fund, in most cases he/she is giving it free reign over the funds they have invested. If the manager chooses to, he/she could invest in waffles and chances are the investor would never have any idea. Hedge funds are not required to tell investors exactly where capital is being deployed. To make matters worse, many of the products do not have a closing value at the end of the day, so even if the investors knew what the funds were invested in they would have no idea what their investment was actually worth on any given day. There is absolutely no transparency. All the investors get is a quarterly statement informing them of gains or losses and maybe some commentary if the manager is not too busy. In some cases investors hear that, virtually overnight, more than 50% of their funds have been lost. Long-Term Capital Management is the most infamous case of a hedge fund “blowing up,” but recently there have been quite a few more that are going down in history, such as Amaranth’s $6 billion loss in 2006, Absolute Capital Groups’ 30-40% loss and Focus Capital’s 80% loss in early 2008.
The story is much clearer if the investor is involved in a managed futures product, or with a Commodity Trading Advisor (CTA). A CTA generally has a very specific strategy that is defined in the investor’s disclosure document, which is similar to a prospectus. The CTA is required to state exactly what products the investor’s money will be invested in as well as exactly how the manager plans to invest. What’s more, once invested with a CTA investors will receive a statement every time a trade is placed. At the end of every day the products in which investor capital is deployed are marked with a closing price determined by the exchange. This allows the investor to know exactly what his/her investment is worth.
It is really up to the investor as to what makes him or her comfortable. If one person does fine not know where his assets are invested then the transparency issue may not need to be considered, but for most of us it is of the utmost importance.
LIQUIDITY
Liquidity: a business, economics or investment term that refers to an assets ability to be easily converted to cash through an act of buying or selling without causing a significant movement in the price and with minimum loss of value. (defined by wikipedia.org)
Liquidity can be an issue with both hedge funds and managed futures, but a good manager will tend to avoid instruments that are illiquid or difficult to trade in and out of.
As stated previously, hedge fund managers can and do invest in a vast array of products. Many of these products are OTC derivatives or products that are traded between banks and the hedge funds directly. If the hedge fund buys an OTC derivative from a bank, and later decides it needs to sell that particular product back, the bank alone determines what they will buy it back for, or worse, if they can buy it back at all. In that case the hedge fund may not be able to get out of a losing position.
Liquidity is an issue that has gripped a number of hedge funds lately. Many have been forced to shut down because they were invested in highly illiquid derivatives linked to sub-prime mortgages. When the counter parties began to refuse to buy the products back the funds had no choice but to liquidate their portfolios at extremely discounted prices and shut their doors, or refuse investors’ requests to withdraw their money.
Unfortunately liquidity can be an issue for managed futures as well. Most managers only trade in highly liquid commodities; however, there are times when even the most liquid commodity can become illiquid very fast. Illiquidity can be caused by many factors, from politics to supply and demand imbalances to general investor fear and greed. A prudent manager will prevent investors from being too exposed to liquidity risks by implementing some sort of hedge, diversification or proper position sizing of the account.
When dealing in listed markets, as most managed futures products do, the counter party to any trade usually has a number of other counter parties willing to buy or sell at specified prices. This kind of open auction system generally allows for prices to be fair. To give investors even more comfort each account is guaranteed by the exchange clearing house through customer margin deposits, meaning that the chance of a counter party defaulting on any given transaction is drastically reduced. However, when dealing with obscure OTC markets, as many hedge funds do, most of the time there is only one counter party to the trade, meaning it is not guaranteed by anyone, which not only makes the chance of default higher but at the same time makes the likelihood of getting a fair price on any given trade much less.
When investing in a hedge fund or managed futures product it is important to understand how liquidity can affect the investment. If a manager is using too much leverage or is consistently involved in thinly traded OTC products that are less liquid it may be a sign that investing in that vehicle at that time is not wise.
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LOCK UP PERIOD
A lock up period is the time after the initial investment in which the investor is not allowed to withdraw funds from that particular vehicle. After the specified lock up period investors are free to withdraw funds as defined in the disclosure document of each hedge fund.
Almost all hedge funds have a lock up period. This period can range from as little as three months to longer than two years. Generally the more established the fund the longer the lock up period. A lock up period is generally good for managers and not so good for investors. If a manager has a lock up period of one year and immediately after making an investment the trading starts to go poorly, that manager has a right to continue trading that money until the lock up period is over; because the investor has previously agreed to the terms and conditions in the disclosure document he or she is not able to request redemption until the specified time period is up.
Managed futures products are different. Most managed futures products do not have lock up periods. There are a few that have lock ups ranging anywhere from three months to a year, but this is not the status quo in the industry. If an investment in a managed futures product needs to be redeemed it can generally be taken care of within a few hours. This is very beneficial if you have taxes due, college tuition that needs to be paid or any unexpected expenses that comes up.
Lock up periods will be foreign to most investors who have not invested in alternative investments before. Make sure when reading the disclosure document that the lock up and withdrawal periods are properly discussed. Also, note that in many cases the lock up period is an area that can be negotiated to the investor’s benefit.
RETURNS
Returns are returns, right? Wrong! Returns are a very deceiving form of analysis for any alternative investment. Most investors make investment decisions based on previous returns, but this is a flawed concept. The main issue is that past returns have absolutely nothing to do with future returns. This has been proven time and time again as managers that were once out-performing begin to under-perform and managers that were struggling rise to the top. Wise investors will not base their investment decisions on past returns or assumptions made about future returns.
The fact of the matter is that no manager really knows what returns will be from year to year. Managers can target a certain return but there is absolutely no guarantee that the goal will be achieved. If any manager, whether hedge fund or CTA, specifically promises a return that is a sign to seek a different manager. Likewise, if a manager touts his/her past returns it is a sign he/she does not fully understand that returns are completely unrelated to each other and have no bearing on the future.
There are numerous databases in which managers can post monthly returns and potential investors view them, but this is completely the wrong way to make any investment decision. Chasing returns leads investors down the wrong path and can have devastating effects on their capital (see “Transparency”).
What investors need to do is search through these alternative investment managers by strategy, not by returns. The investor should pick a few advisors from each category after reading about the managers’ approach to the market. Once a few are decided on, the investor should call each manager and request more information and/or a meeting. All managers will have a disclosure document and possibly some marketing material that can be given to potential investors. Meeting the manager of a hedge fund can be a difficult task unless the investor is placing a very large sum. CTAs, however, are generally much more open and willing to meet with investors, so getting a meeting with them is entirely possible.
Once the proper due diligence is done and the investor likes the manager’s strategy and approach, an investment can be made. Be careful not to invest too many assets with any one manager or specific style, as that is not proper diversification. It is wise for the investor to build a portfolio of alternative asset managers over a wide range of strategies, as this may reduce the risk of any one particular manager or style.
TAXES
Hedge funds often provide the investor with very unfavorable tax treatment because they are invested in many different products all over the world. This may have a vast array of consequences on the investor’s overall taxes. Hedge funds uniformly report investors’ gains or losses in August after each tax year, forcing an extension of filing. Additionally, the tax returns are very complex, often over 30 pages for each fund invested in. To try and explain all the possible tax consequences of a hedge fund would probably require an entire book. In the interest of time the entire spectrum of hedge fund tax accounting simply cannot be delved into at this point.
For managed futures products the tax accounting is very simple. Since most trades take place within Regulated Futures Contracts (RFC) regulated by the CFTC, contracts receive Internal Revenue Code Section 1256 treatment. In this case 60% of profits are taxed at the long-term capital gains rate and 40% are taxed at the short-term capital gains rate. For a profitable managed futures product this effective tax rate of 23% provides a 12% advantage over hedge funds that trade frequently. This can, however, be a stumbling block in the case of large losses. When a loss is recorded and 60/40 treatment has been elected the investor is only allowed to carry forward $3000 of those losses every year. If the investor’s loss is large this can be a real headache, as he/she will be carrying forward losses indefinitely. There is a bright side, and that is if the investor has created a portfolio of managed futures products and another manager has produced gains the investor can write off the loss against the gains of that other manager.
In the end calculating taxes for a managed futures product is much simpler than for a hedge fund. For some investors this may not be an issue, as their CPAs will manage everything, but it would be important to consult with the CPA prior to investing to make sure he/she fully understands the implications involved with the new investment.
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A Futures Trading System Will Serve You Well
There is a risk of loss in trading futures. An important way to minimize your risk is to treat your trading as a business. Just as a business plan is important to a successful business, a futures trading system is a vital part of your futures trading success.
I had a great uncle who was a stockbroker years and years ago. He always used to say that there were some brokers who just knew what to buy and sell and when to do it. They had hunches and followed them and some of them had very good reputations as brokers.
Following hunches and calling it a futures trading system is not exactly what we are talking about here. Following hunches is not any kind of futures trading system. It is merely speculation. Using a futures trading system will be more effective than speculation over time.
What is a futures trading system? It is simply a systematic method you use to do your futures tradingits a system. In other words, your futures trading system defines your approach to trading futures.
Your futures trading system should be your methodology that you write down in detail on paper. Your system should deal with all aspects of making a trade, including entry and exit conditions and money management.
Your futures trading system should leave no room for speculation or human judgment. This is one of the best reasons to have a futures trading system. Taking human emotion out of your trading equation will serve you well.
Your futures trading system should have precise details about what to do in every circumstance you can think of. It will be your guide as to what to do and when to do it based on the guidelines you have set up.
Without a futures trading system, some experienced traders believe you are doomed to fail at futures trading. With a good futures trading system in place that you have tried and tested to your satisfaction, you can go far. Of course, once you go live with your futures trading system and start making live trades, the money management aspect of your futures trading system must come to the fore. Over-trading has been the downfall of many a trader.
Knowing when to take a loss without making emotional decisions based on fear and/or greed is something a futures trading system can do for you. With tried and tested guidelines in place, making decisions based on facts rather than emotions is perhaps the most important benefit of implementing a futures trading system. Of course, no futures trading system will give you winning trades every time. But a good futures trading system in place and adhered to will, over time, prove its worth.
Take your time finding the futures trading system that works best for you. Once you find it, follow it faithfully and chances are your profits will grow over time. Stick to the guidelines in you futures trading system and if it is based on sound principles and good judgment, you should reap profits.
Author: Aaron Goldsmith
Article Source: EzineArticles.com
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- It’s NOT a hyped-up robot.
- It’s NOT in any other $2K+ seminar.
- It’s NOT in a cheesy ebook.
Rob Trader – Forex Expert Article Source:http://www.articlesbase.com/day-trading-articles/get-a-free-copy-of-enlightenment-forex-1609217.html
http://tradingtoollist.co.cc/
Big-Game Hunting for Maximum Profits with Options
Even if you just started to research options as a potential addition to your portfolio, you’ve probably seen some the advertisements that talk about how options allow investors to “control” hundreds or even thousands of shares of a company’s stock for just a fraction of the price of buying the shares directly. That bit of information may have you scratching your head and wondering how is it possible to play with the big boys for just a small slice of the normal cost. Well, that’s a reasonable question and the answer is why so many investors have found their way to options in recent years. Let’s take a look at why options investing is the place for giant returns.
Leverage, Leverage, Leverage
Leverage has become a four-letter word of sorts as its abuse had a hand in the collapse of a few major financial institutions, but leverage is not a bad thing when investors understand it and know how to limit their risk. Here’s how leverage works with options. Let’s say you want to buy the August 25 calls in Microsoft. Remember that each equity options contract grants you control of 100 shares of stock. Microsoft is trading at $23 a share and the calls are trading for $1. That means that when you purchase one contract of the August 25 calls, your costs AND your risk is $100. (The price of the contract is $1 x 100 shares). If you had bought 100 shares of Microsoft in the market, your cost and risk would’ve been $2,300.
Now you’re starting to see one of the biggest attractions of options investing. If your Microsoft shares go up $1, you make $100. Great, but you’ve also exposed $2,300. If your calls leap to $2, your investment has doubled with very little risk. This is how leverage works in the options investor’s favor. Lots of profit potential, at a more rapid pace than with stocks, all with a very low risk profile. The worst thing that can happen when buying puts or calls is that the contract expires worthless and you lose the premium paid to enter the trade. You’d lose a lot more if a stock you owned directly fell to zero.
More Options Advantages
As you can see, options are far more cost-efficient than stocks. If you have $20,000 to invest and you are interested in a $50 dollar stock, buying just 400 shares would eat up all of your funds. On the other hand, you could buy three $10 calls for $3,000 ($10 X 100 shares = $1,000) and still have plenty of funds left over to diversify your investments with.
Options are also superior to stocks in that once you graduate to more advanced options strategies you’ll see the versatility of this asset class cannot be beat. When we trade stocks, we really only have two choices: Go long, which means we buy a stock in the hope that it will go up, or sell short, which means we want the stock to decline.
Sure, we can go do that with options, too, but we can also profit with options during range-bound markets. We can also use options to generate income by selling covered calls on stocks we already own. More advanced options traders use strategies like spreads, collars, straddles and others to profit from a variety of market conditions. It’s even possible to add a new options position to an existing one to bolster your chances of profitability. Try doing that with stocks!
Don’t Forget Higher Potential Returns
Obviously, investors love options because the chance exists to make more money faster than with many other asset classes. Hence the beauty of leverage. Evaluating an options contract’s profit potential means we have to look at its delta. Delta is the measure of how much the contract will move in relation to the underlying stock. Let’s say that we’re looking at buying some Pepsi calls that have a delta of 0.8. This means that for every dollar Pepsi stock goes up or down, our calls will increase or decrease by 80 cents. That’s a high delta contract. We buy those calls at $5 a contract ($5 x 100 = $500) when Pepsi is trading at $50 in the open market. Then the stock shoots to $55, so while the stock investors made 10%, our options with a delta of 0.8 went up $4 in value, or 80%. We made $400 on a $500 investment. That’s a tough return to beat.
Versatility, Profits and More
We’re not saying that you should completely pass on other investment vehicles because options are so wonderful. Yes, they’re great tools, but at the end of the day, you want your portfolio to be diversified. That said, the versatility options offer combined with profit potential that is impossible to ignore make this asset class worth learning about. Take the first step into the world of options. Your portfolio will thank you.
Article Source:http://www.articlesbase.com/day-trading-articles/biggame-hunting-for-maximum-profits-with-options-1599950.html
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