Examples of Why Hedging Can Be Important
The rules and regulations governing futures, developed by the CFTC, occurred over time. Several scandals along the way have hurt speculators tremendously. These events happened behind the scenes and were discovered only after much of the damage had already been done.
Rules for Money Management
It is said that the game of golf is not played on the green but between your two ears. The same can be said of trading. Your mind-set and the preparation of your mind are all important. You must be focused on the who, what, when, where, why, and how of a situation in order to formulate your course of action. While it is not easy, it is simple.
Strike Price, Premium, and Synthetic Options
When you purchase an option, you must decide whether you are going to purchase an in-the-money, at-the-money, or out-of-the-money option. Depending on which option you purchase, you will pay either an expensive or a low-cost price for your premium. The price that is paid for the option premium plays a significant role in how successful an option can be in the long run.
The Elegance of a Synthetic Option
A standard option has one risk management objective, to limit loss to the premium paid. That’s it. It is not designed to follow the market’s rhythm or flow. When you are wrong, your trade ends. For a synthetic option, things are not quite the same. Being wrong is just the beginning of something great.
Pros and Cons of Day Traders
There is nothing more important to a day trader than being flat the market at the end of the day. No matter the circumstances (win, lose, or draw), making sure that no capital is at risk of being exposed to overnight market gaps defines what day traders are all about. This attitude is both good and bad. The good is that it keeps traders focused on their activities, making sure they take no opportunity for granted as well as teaching them the discipline to exit losing trades quickly and efficiently. The bad is that many winning market decisions are cut off at the knees.
Using Options As a Primary Alternative
When a swing trader uses an option as a primary alternative to a stop loss, the intent is to reduce or diminish any exposure to loss while at the same time staying one step ahead of the market. This is directly tied into the money management plan that is already in place. Large money managers will have in place a standing risk of loss that can’t exceed 2 percent of their account value, while individual traders may be more liberal, allowing as much as 5 to 10 percent of their accounts to be at risk at any given time.
Options: An Alternative to the Stop
There is no other way to say it. There is no other way to look at it. No matter how clever you are at placing a stop loss, if it is triggered that simply means that you are on the losing side of the market. This can be frustrating, particularly when swing traders thrive on the exact type of market scenarios that stops are weak in.
Getting the Right Options for the Job
Understanding option selection, having an idea about delta, and being able to calculate the savings, values, and gains of the various options form the essential foundation needed to utilize any of the ideas presented here. By beginning with straddles and strangles you are able to play around with using puts and calls as a risk management strategy without feeling like you are betting the farm. It is important that you have a grasp of choosing the right options to work in tandem with your spot, futures, or margined position.
Strategies That Can Protect Your Trading Position
When it comes to the stock market, there are many ways to protect your trading position. You can purchase a stock that doesn’t follow the S&P 500 and short the S&P 500. Single stock futures can be combined with stock options or stocks to create synthetic or collar opportunities.
Option Hedge Into a Collar Position
Options can be an alternative to using a stop loss. The goal is to show the difference between a pure synthetic option, an at-the-money option and a futures position versus an option hedge, and an out-of-the-money option and a futures position. Using an option as a hedge is a great way to lock in your money management strategy.
Becoming an Option Seller Is Easy
It is exciting to hear that “90 percent of options expire worthless.” It gives you the feeling of being an insider and the hope of finding a magic bullet with which to win the so-called trading game. Only once you attempt it do the numbers not add up to the hype.
Retreat, Recovery and Opportunity for Traders
The information throughout these articles has been broken down into basic and advanced strategies to highlight the differences between concepts that are solely designed to manage risk and ideas designed to also generate income. By themselves the basic and advanced concepts presented here are not inherently more difficult from one another. Nor are the basic and advanced strategies really required to be operated on their own.