Bear Put Spread: Bear Put Spread vs. Bought Put Option

Posted on March 5th, 2010 admin No Comments

There are a number of advantaged of implementing the bear put spread instead of buying a put option. A bear put spread has lower risk than strictly buying put options, but limited profit potential. The bear put spread also has a higher breakeven so the share price does not have to fall as far as a bought put option. The advantages of a bear put spread over a bought put is that the strategy reduces time decay and volatility influence on the strategy pricing. This is because we are selling the out-of-the-money options therefore that option benefits from time decay and volatility reducing the opposite characteristic to a bought call option. Bear put spread can be used when volatility is high and buying a put is too expensive as it eliminates the risk of volatility decreasing. Another reason to trade bear puts is that you might have identified a support level; you can sell the out-of-the-money options at that level to reduce the cost and that will be the maximum profit level at expiry. The main benefit to just buying options is large potential profits and a better delta meaning easier to exit the trade earlier. Also if you are expecting volatility to increase significantly a bought positions will improve as a bear put spread would not.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Introduction to Option Trading: Combination Trades

Posted on February 22nd, 2010 admin No Comments

Introduction to Option Trading

These basic option positions when combined create option combination orders. These can be created via buying and selling options either put options or call options. Each of the following seminars and e-books will cover one combination strategy in more detail.

Summary

When buying options look to take advantage of their leveraged nature to allow large return with small capital outlay. When selling options look to sell when volatility is high and expected to decrease to help use time decay in your favour.

The information in this e-book is designed so the following Total Option Education Webinars and eBooks will build on this knowledge. The strategies in this book are used by traders everyday however they are normally used together to try and mitigate risks like time decay and volatility.


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Selection Criteria – Buying Options

Posted on February 22nd, 2010 admin No Comments

When buying call options and put options it is critical to have good timing. When buying call options you don’t only need the stock to increase in value you need it to do so before the time decay in the option starts to affect the option value. Selecting the entry point (timing) of the trade can be assisted through technical and fundamental analysis. You can use technical analysis to identify break-out patterns to trade through buying calls or puts. It is important to make sure you buy enough time for expected movements. Also to make sure you buy your option at a reasonable price, you must analyse the volatility and make sure you are buying when volatility is low and expected to increase. Always make sure the option has enough open interest so liquidity is not an issue. If you stick to the blue chips this should not be an issue. Buying out-of-the-money calls is higher risk but potentially has large percentage returns. However, buying at-the-money calls has a higher delta but costs more so percentage returns are smaller.


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Why Trade Options?

Posted on February 15th, 2010 admin No Comments

Why Trade Options?

Leverage

Options are an investment product used for its leveraged nature. Many traders turn to options because they can start investing with just a fraction of the money that would be required to trade the underlying asset. Trading in options can allow you to benefit from a change in the price of the share without having to pay the full price of the share. The option premium you initially pay is your maximum risk. A bought call option also has potential unlimited returns. The risk vs. reward characteristic of buying options is the primary reason traders use options.

Flexibility

Options can be used for a number of different objectives. Portfolio managers use options to insure or hedge their portfolios. Traders use options to take advantage of market conditions that can not be traded with just the underlying share. If you can accurately analyse the direction of the underlying share, there is an option strategy that you can use to make a profit. These strategies can profit whether the underlying shares goes up, down or sideways. This is exactly what this seminar series will teach and is the reason I trade options.

Share Portfolio Management

Options can allow you to build and manage a diversified share portfolio. You can use options to either buy or sell shares. If a sold put is exercised you are obligated to buy shares. Additional income can be generated by selling calls. If a sold call is exercised you are obligated to sell the shares at the exercise price. Options can also be used as a form of risk management. Bought put options allow you to hedge against a possible fall in the value of shares you hold. This can be considered similar to taking out insurance against a fall in the share price.


To receive ASX Option Recommendations or to learn more about trading options please request the complete Introduction to Options Trading eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au