No lack of OPTIONS

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PebbleTrader
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Postby PebbleTrader » Wed Feb 27, 2013 8:13 pm

Option Credit Spreads

Option credit spreads can give you the best of all worlds when
taking a position. For example, how many times have you bought a
stock or option and it immediately moves in the wrong direction, or
doesn't go far enough in the right direction? Too many times, I bet.
Selling option credit spreads can help alleviate that problem. One of
the greatest benefi ts of the option credit spread is the cushion it gives
you in case of incorrect directional prediction. How awesome is that?
The way it accomplishes that is by concentrating on selling out-of-themoney
(OTM) strike prices within the spread.

Here again, we are going to take advantage of the option buyers
who concentrate on risking their money on the low-probability,
short-term, OTM options. We will be selling these options to them,
but not as single, unlimited-risk types of trades. We will be selling
them as option spreads, which have a defi ned limited risk, as well
as a limited reward feature. I'm going to show you so many real-life
examples that your head will spin in amazement at how simple and
lucrative this strategy can be. I want to open your eyes to the fact that
option selling can be one of your best allies in the marketplace.

In order to take advantage of this strategy, you need to open up your
mind to the fact that you're not going to try to predict where the
market will go to in the allotted time frame (expiration month), but
where the market likely won't go to in the allotted time frame. There's
a huge difference in those two approaches. In the first approach (the
one we don't want to take), you're making a guess at where you think
the market will end up at the end of option expiration. As I've been
saying throughout this book, that is the hardest game to win. Nobody
is that good at figuring out the where and when of a market move.
But, if you are somewhat good at having at least a general idea of
which way the market is headed (either higher or lower), you can also
make a pretty good guess as to where the market probably won't end
up at option expiration.

With this approach, you'll have more than one way to win. When
you sell options, your only concern is for the market to NOT go past
the OTM option strike that you sold. That's the key, and that's what
this strategy will focus on. When you sell an OTM option, or an
OTM option spread, you can win in three different market scenarios
as opposed to the buyer only having one winning scenario.
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Postby PebbleTrader » Wed Feb 27, 2013 8:14 pm

After you have picked the stock or commodity and the direction
in which you believe it will move, it's time to pick the strike prices
and the expiration date. Since we are selling options in this strategy,
we will be taking advantage of the "time decay" factor. If you
remember, time decay is the process by which an option will lose a
little bit of its value day after day, regardless of which direction the
underlying security moves and regardless of whether it moves in your
favor or not. The one characteristic of time decay I want to impress
upon you is the fact that time decay will accelerate the closer you get
to option expiration day. This means that the option will lose value
faster as it nears expiration day. Even though the option is losing
value every day, the value gets lost faster as expiration draws near.

For example, if you bought a six-month option for $5.00, the
value lost in the fi rst month might only be $1.00, but the value lost
in the last month before expiration day might be $3.00 (if it still
remained OTM). In this case, the time value decay was three times as
big in the last month even though it happened in the same amount of
time (one-month intervals). So, when selling option credit spreads, we
want to concentrate on picking shorter-term expiration months?not
more than 90 days in length?and option strikes that are OTM.

Back up for one second. Just to clarify the actual mechanics of the
trade, an option credit spread entails the buying and selling of the same
amount of options as a single transaction for a single price. You don't
have to worry about trying to buy one option fi rst and then selling
the other option at a later time. It's all done together. The options are
done in the same expiration month with different strike prices and
are either both call options or both put options. It is called a credit spread
because you will be selling the more expensive of the two options,
which will yield a cash credit to your account. When you buy the
more expensive option, it is called a "debit" spread because money is
taken out of your account. We like the idea of having money deposited
into our account.
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Postby PebbleTrader » Wed Feb 27, 2013 8:17 pm

Remember, the idea of selling options is to let time decay erode
the option price so we can buy it back cheaper for a nice profit, or to
let all strikes expire worthless so we can keep all the money that we
received up front from the option buyer. I'm not looking to predict
where the market will go to in the allotted time. I'm just looking for
the market to not go through my short option strike (which happens
to be well away from the current price of the security). This is the
driving force in succeeding with option-selling tactics.

Any time you execute an option "spread" play, where you buy and
sell the same amount of options in the same trade, there is a limited risk
and limited reward feature of the position. You will not be exposed to
an unlimited loss potential nor will you have the opportunity to have an
unlimited type of gain. That's just the nature of any options spread. But,
when done correctly, the limited rewards that we can achieve from the
option credit spread can add up significantly over time.
Last edited by PebbleTrader on Wed Feb 27, 2013 8:26 pm, edited 1 time in total.
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Postby PebbleTrader » Wed Feb 27, 2013 8:18 pm

----------------------------------------------------------------------------------------
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Postby PebbleTrader » Wed Feb 27, 2013 9:39 pm

If I knew options were this simple and powerful I would have learned them long ago...I always stayed away from them because of the "complicated" names... :roll:
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Postby PebbleTrader » Wed Feb 27, 2013 9:51 pm

Is anyone doing currency options?
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Postby MightyOne » Thu Feb 28, 2013 6:46 am

PebbleTrader wrote:Is anyone doing currency options?


No, I often joke that I only trade things that I can hold in my hands...like cattle :lol:

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Postby PebbleTrader » Thu Feb 28, 2013 2:21 pm

Good philosophy :)

Maybe add, things that have value, why than are we trading over valued paper?! :)

Basically I work the under / over valued currencies so that my own currency is always growing. (inflation/devaluation)

Accumulate "paper money" and than move it into physical assets. In the future I'll be creating private trusts where each asset is a private trust with a master private trust. "Own NOTHING, CONTROL EVERYTHING". Nobody can take away my wealth because I personally own nothing but my trusts own all the assets and nothing can touch those trusts. (if you use an attorney or lawyer to create the trust, it's NOT a private trust :) )

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I was reading about currency options last night and some things concerned me, I'll re-find that article and post the stuff that concerned me in a bit.
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Postby PebbleTrader » Thu Feb 28, 2013 3:22 pm

Concerns With Currency Options:

"However, many retail online brokerage firms as well as larger institutions provide electronic access to FOREX liquidity pools that also include the trading of currency options online. Many of the options traded via these firms are still considered OTC as the trader (customer) transacts directly with the broker, rather than matching the order with another trader. In this case the broker becomes the counter party to the currency option and hence has to wear the risk. "

"For currency options that are OTC with your broker/dealer, you have what's known as counterpart risk. That is, the risk that the firm that holds the other side of the transaction goes bust, along with any financial obligation to deliver foreign currency. Any option agreements that you as a trader/client hold with such a company become worthless. Counterparty risk is more present in currency options than stock or futures options because there is no central clearing house to protect option traders when the dealer is unable to meet the exercise obligations."
EDIT: With exchange-listed options, investors get full price transparency; displayed prices and quote sizes are always actionable. In addition, counter-party credit risk is almost entirely eliminated because FX Options are issued and cleared through the Options Clearing Corporation (OCC). The OCC provides a vital function by acting as a guarantor, ensuring that the obligations of the contracts are fulfilled.

"FX options are generally European"
EDIT: FX Options can be traded throughout the day and do not need to be held till expiration. Since they are European Style, meaning they cannot be exercised till expiration, investors that are short an option, do not have to worry about early exercise risks. Whether you are long or short, you can trade out of your position at any time prior to expiration.

"Volatility is lower for currencies than other asset types"
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Postby PebbleTrader » Thu Feb 28, 2013 3:37 pm

LOL, seems there is some contradicting info out there...
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