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Archive for the ‘Educational’ Category

Investing in ETF Options: Perspective of a Trader

Posted by rantaboutit on March 17, 2007


I found an enlightening interview of a trader talk about investing in ETF options. Let us have a quick look at what ETFs and Options are before we move to the interview…

What are ETFs
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

What are Options
A privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price (strike price) during a certain period of time or on a specific date. Options are extremely versatile securities that can be used in many different ways. Traders use options to speculate, which is a relatively risky practice, while hedgers use options to reduce the risk of holding an asset.

Naked calls increase in value as the underlying stock increases in value. Likewise naked puts increase in value as the underlying stock decreases in value. Buying both a naked call and a naked put means that if the underlying stock moves up the call increases in value and likewise if the underlying stock moves down the put increases in value. The combined position can increase in value if the stock moves in either direction. The position loses money if the stock stays at the same price or within a range of the price when the position was established. This strategy is called a straddle. It is one of many options strategies that investors can employ. Options strategies can favor movements in the underlying stock that are bullish, bearish or neutral.

Taipan Financial News’ Smart Investing host Sandy Franks gets ETF trader Rick Pendergraft’s advice on profitable ETF investing.

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(Source: Wikipedia, Investopedia)

Posted in Educational, Exchange Trade Funds, Investment, Options, Trading, Video | Leave a Comment »

Forex: Do You Understand Currency Movement ?

Posted by rantaboutit on February 26, 2007

There used to be a time when trading on the currency exchange (foreign exchange market or forex) was not for everyone. It used to be a domain for government central banks, commercial banks, investment banks, hedge funds and huge international corporation. However with the advent of the electronic trading networks, trading in forex is now more accessible than ever. The forex offers trading 24-hours a day, 5 days a week, and the daily dollar volume of currencies traded in the currency market exceeds $1.4 trillion, making it the largest and most liquid market in the world.

Forex is generally a low volatile market. Currency fluctuations are usually very small. Most high risk investors & speculators use leverage (which is possible due to high liquidity) to increase the profit margins. For example, it is possible for an investor to control a position of $100,000 by putting down as little as $1,000 up front and borrowing the remainder from his or her broker.

The movement of currency prices are based upon the demand and supply model. This cannot be manipulated easily because the size of the market does not allow even the largest players, such as central banks, to move prices at will.

What is Forex all about ?
Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros. This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars into euros. The same goes for traveling. A French tourist in Egypt can’t pay in euros to see the pyramids because it’s not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.

The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. One unique aspect of this international market is that there is no central marketplace. All transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The forex market can be extremely active any time of the day, with price quotes changing constantly.

Spot Market and the Forwards and Futures Markets
The 3 ways to trade forex are the spot market, the forwards market and the futures market. The spot market is the largest market because it is the underlying real asset that the forwards and futures markets are based on. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.

Spot Market
The spot market is where currencies are bought and sold according to the current price. Few factors that determine the price is demand & supply, interest rates, economic indicators, political stability and future performance of one currency against another.

Forwards Market
The forward market does not trade in actual currency. Instead they deal in contracts of a certain currency type at a specific price/unit and a future date. Forward contracts are traded over the counter.

Futures Market
The futures market also does not trade in actual currency. Like forwards market they deal in contracts of a certain currency type at a specific price/unit and a future date. Futures contracts are traded upon a standard size and settled over public commodities markets such as the Chicago Mercantile Exchange.

Trading Instruments
The majority of forex traders focus their efforts on seven different currency pairs: the four majors, which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs (USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same currencies, otherwise known as cross currencies. This makes currency trading easier to follow.

Conclusion: The forex market provides plenty of opportunity for investors. The currency market is also the only market that is truly open 24 hours a day. The amount of leverage available in the forex market also makes it attractive for many speculators. However, in order to be successful, a currency trader has to understand the basics behind currency movements otherwise the benefits of leverage can work against the trader.

Forex trading is a vast topic and will be covered in depth..
To be continued….

(Source: Investopedia)

Posted in Dollar, Educational, Foreign Exchange | Leave a Comment »

Options: The Power Lies In Their Versatility

Posted by rantaboutit on February 23, 2007

Most investors invest in stocks, ETFs, mutual funds and bonds. How about adding another type of security called Options to your portfolio ? If you are new to the world of options trading, read on…

The power of options lies in their versatility. They give you the power the adjust your position according to the present situation. However just like any other security, options have their own set of problems. Options are complex securities and can be sometimes extremely risky. Option trading is therefore not for everyone.

However before you decide not to trade in options, you should atleast understand them. Not learning how options function is as dangerous as jumping right in it.

What is an Option
Option is nothing but a contract that gives the buyer the right to buy/sell an asset at a specific price on/before a certain date. So what is the big deal about that ? The big deal is that the buyer is not obliged to buy/sell. Now that sounds interesting….isnt it ?

Investopedia gives an excellent example.

Say, that you discover a house that you’d love to purchase. Unfortunately, you won’t have the cash to buy it for another three months. You talk to the owner and negotiate a deal that gives you an option to buy the house in three months for a price of $200,000. The owner agrees, but for this option, you pay a price of $3,000.

Now, consider two theoretical situations that might arise:

  1. It’s discovered that the house is actually the true birthplace of Elvis! As a result, the market value of the house skyrockets to $1 million. Because the owner sold you the option, he is obligated to sell you the house for $200,000. In the end, you stand to make a profit of $797,000 ($1 million – $200,000 – $3,000).
  2. While touring the house, you discover not only that the walls are chock-full of asbestos, furthermore, a family of super-intelligent rats have built a fortress in the basement. Though you originally thought you had found the house of your dreams, you now consider it worthless. On the upside, because you bought an option, you are under no obligation to go through with the sale. Of course, you still lose the $3,000 price of the option.
Sweet…options isn’t that intricate as i previously thought. But wait…there is more…

Calls and Puts
The two types of options are calls and puts:

A call gives the holder the right to buy an asset at a certain price within a specific period of time. Buyers of calls hope that the stock will increase substantially before the option expires.

A put gives the holder the right to sell an asset at a certain price within a specific period of time. Buyers of puts hope that the price of the stock will fall before the option expires.

People who buy options are called holders and those who sell options are called writers. Holders have the right to buy/sell but are not obligated. Writers are however obligated to buy/sell. This makes selling options more complicated and even riskier.

Why Investors use Options ?
Investors use options to both speculate and to hedge risk. Speculation in nothing but betting on the movement of a security. The advantage of options is that due to their versatility you can make money even when the market is crashing. Think of hedging as an insurance policy. Just as you insure your house or car, options can be used to insure your investments against a downturn.

Types of Options
There are two main types of options.

  1. American options can be exercised at any time between the date of purchase and the expiration date.
  2. European options can only be exercised at the end of their lives.
Conclusion: Options adds another item in your investing toolbox which also gives you insight into the workings of some of the world’s largest corporations. With online brokerages providing direct access to the options markets, the average investor now has the ability to use the most powerful tool in the investment industry just like the pros do. However options aren’t for everyone. Options can be alot more dangerous if you don’t educate yourself before using them.

Related Posts:

  1. ETF: Something for those lazy investors !!
  2. Stocks: Learn the A-Z about it
(Source: Investopedia)

Posted in Educational, Investment, Options, Trading | Leave a Comment »