Stock Market Index Options

Where can a trader find options on the stock market indexes or indices? For a stock the options are connected to that stock and can usually be found very easily. For an index it is only confusing because a traders has many options (no pun intended).

The S&P 500, the FTSE, MICEX, Dax or the Tadawul  are a indexes that traders cannot trade directly. The way the index is trades is via a futures contract or an ETF.

The ETF for the S&P 500 Index is ticker: SPY. The SPY ETF trades in perfect correlation to the actual S&P 500. So when a trader would like to “buy a call on the S&P” or “buy a put on the S&P”, the way it is done is by buying a put or call option on the SPY.  As traders can see in the picture below, there are more options listed for the SPY than any other stock or etf.

Index Options Chain

The other option or method to buy options on the index is via the futures contracts. The S&P 500 futures contract trades on the CME (Chicago Mercantile Exchange) under the ticker ES. They are also referred to as the EMini’s. There are options listed on the S&P futures and they are similar to those traded on the SPY ETF.

A trader needs to look out for the option multiples and option expiration dates and types when using Futures Options.

Another way to trade options on the Indexes is with Binary Options. There are binary option brokers that offer short term options on many of the large stock market indexes. Although binaries are different than weekly options or monthly options they are very easy to understand.

boundary options

Trading Economic Events with Boundary Options

A few brokers have introduced what are called boundary options or range options. The boundary option is basically a play on volatility. Will the asset stay in the range or will it move outside of the range.

The profit on a boundary option is 70%.

Trading high impact economic events is the lifeblood and thrill of both amateur and professional traders. A trader has the ability to make more money in one hour than an entire month. The risk of trading such market moving events is not getting whipsawed in a trade that reverses. While this is usually not a great trade due to the calm nature of the Forex markets, during a major economic event this option becomes a real profit center.

The spread on boundary options are currently very narrow which is great for traders looking to profit from a move outside of the boundary. The boundary option is available on the $EUR/USD, $GBP/USD, $AUD/USD, $EUR/JPY & $CL_F (OIL). The spread is currently 6 – 12 pips which any Forex trader knows, is very small for betting on a move outside the boundary, when a high impact event like the jobs report or interest rate decision is announced.

Bookmark the economic calendar to check for the next event to trade.

These Brokers List Boundary Options. 24Option is for international traders, see here. and Boss Capital is for American traders, see here.

Boundary Options

Another favorite trade for boundary option traders is the weekly oil report at the Nymex. US Crude Oil Inventory is released on Wednesday. This is the announcement that tells oil traders about supply and demand in the US oil markets. Although there are geopolitical events all the time, when traders are looking to remove the noise and focus on data, this is the report they read.

Traders can use the boundary option trade to also trade the oil inventory report on Wednesday.

As always, it is important to follow proper risk management so that you do not blow out your account. This trade has a probability for certain announcement and traders need to understand that there is no such thing as a holy grail.

You may have heard about auto trading binary option software’s like the Instant Profit App, Profit in 60 Seconds, 7 Figure Secret, Automated Trading Bot, Binary Bot, Signals Pro, Algobit, and many more binary option robot trading packages. There is no such thing as automatic money and automated traded that every day you check your bank account and see more money in it.

Trading any type of option, be it binary options, monthly options or weekly options requires research, planning and education. Do not fall for a get rich quick scheme!

 

Covered Call Option Trading Strategy

So is a covered call a worthwhile trade?

If you are like me and every time you buy stock it goes down. Then the covered call is a very good trade. Buy the stock, immediately sell a call against it. The stock goes down, and along with it the call option starts declining in value. Now at least there is some profit to go along with the loss.

If we go with the false assumption that the stock market will return on average 8% a year, doing a covered call that returns 1% a month will beat the market and do 12% a year.

Options As A Strategic InvestmentLearning to trade the covered call is not very difficult. Take a look at Microsoft stock ticker $MSFT as an example of buying and selling a covered call.

The covered call trade strategy (aka buy-write) involves buying the stock and selling one call option against every one hundred shares that is owned.

If we were to buy 100 shares of stock in Microsoft, Ticker MSFT for $25.80 a share and then sell the $26 call. This would be a covered call.

Let’s dig deeper and see what just happened.

In the picture below we have the option chain for Microsoft. The example shows the front month options that will expire in 26 days.

Covered Call Options Sample Trade

It is July 26th and we own stock in Microsoft, which we paid $25.80 a share, what can we do to make money on it besides waiting for the stock to go up? We can sell a call.

A call option gives the buyer the right to buy the stock from us on option expiration day. The call option also gives the seller the obligation to sell the buyer the stock for the predetermined price.

If we look at the $26 call, it is trading at $0.50 – $0.53 per contract. This amounts to $50 per one hundred shares. If we sell the $26 call and on options expiration day Microsoft stock is still below $26 a share we get to keep the $50 from selling the call and the stock stays in our account.

If the stock is trading above $26, say $26.10, on option expiration day, the stock will be sold from our account for $26.00 a share and we will keep the $0.50 from selling the option contract. Either way we will have made a 2% profit in one month! If we manage to do this every single month it would be 24% profit on the year.

This sounds very exciting and enticing, but there are downsides to selling covered calls.

One downside to the covered call trade can happen when the stock losses too much of its value and then the profit from selling the call doesn’t cover the losses from the stock itself.

Example: We sold the $26 call for $0.50. We bought the stock for $25.80. On expiration day the stock is now at $25.05. We will have made 2% on the calls but lost 3% on the stock.

OK, so we are only down 1% overall on expiration day, let’s do it again and sell the $26 call for the next month.

Another negative to the covered call trade is when a call is sold and then the stock far surpasses the strike price and now the profit was limited.

Example: We sold the $26 call for $0.50. We bought the stock for $25.80. On expiration day the stock is now at $27.00. We will have made $0.20 on the stock, $0.50 on the options we sold and the other $0.50 that we could have made, is now the profit of the person who bought the option.

Buying & Selling the option

When you are creating a covered call trade, it can be done at one time by placing a combination trade. A combination trade is when the stock it bought and the call is sold simultaneously.  Or, if you already own the stock you can sell a call, either the weekly option or the option that expires in six months from now. Selling a call against stock you own is called sell to open (just like short selling). Some brokers have two different order types for selling options and you will need to select “sell to open”. To buy it back you will “buy to close”.

Do I need to wait for the option to expire?

No. You can go back and buy the option you sold, either for a profit or loss. Sometimes people will sell the call that expires in this month and then the stock has an earnings announcement and the volatility of the option drops giving them a profit on the far out of the money call that they sold. They can lock in profits by placing a “buy to cover” order on the call and sell another call that expires next week or next month.

Put Options Trading

Profiting When The Stock Market Falls

Why does every investor feel bad when the news announcer tells us that the S&P 500 fell 1% today? Why do investors assume that their portfolio lost 1%? The reason is, most mutual funds and stocks do the same thing the S&P 500 does. When the market falls, so does the value of most portfolios.

Except! Protected Portfolios, and day traders with ADHD who trade binary options and profit or lose from 60 second markets movements. Read related article here.

What is a protected portfolio? Also know as a hedged portfolio? The way to protect a portfolio from a stock market crash or correction is with a put option.

A put option is used in two ways:

  1. Investors or traders will buy a put option because they think the price of a stock will go down, and they would like to profit from the fall.
  2. Put options can protect a stock investment like an insurance policy for the portfolio. It give the owner the option to sell the stock at the strike price.

The way an investor hedges an entire portfolio works like this. The S&P 500 or easier to use is ticker $SPY is trading at $178. The December 2014 put option for the $160 strike price is $6.00. This means that if the SPY falls below $160 by December 2014, the owner of the put option can sell shares of $SPY for $160, even though the price may be at $140.

Put Options Trading

The reason no one likes this method. The cost to protect the portfolio is 3.3% and that only offers protection of a loss greater than 10%. So all the put option does for the investor is protect in the event that the markets fall 13% in 2014.

Another way to profit from the fall of the stock market is to trade options. Trading options consists of buying put options in anticipation of the market moving lower. When the market moves lower, the price of the put option usually will go up.

Read our article about trading a covered call.

Bitcoin Options

Betting Against Bitcoin With Options

As we all watch the rise and fall of Bitcoin, traders keep asking, How can I short bitcoin? Are there options available for bitcoin?

The answer is yes, you can short bitcoin with put options.

The type of option that is available for shorting or betting on the rise of bitcoin is called a binary option. Basically, it is an all or nothing bet, if you are correct on the direction before expiry, you profit, if not, then you lose. Mostly returns are in the 70% – 74% range depending on the length of the contract and the broker.

MarketOptions & TradeRush, both binary option brokers, offer monthly options with returns of 74%. EZTrader a CySEC regulated binary options broker, offers hourly options with 70% returns, see here. Either one of these brokers will allow you to open account with a minimum deposit of $250. The trader can choose the actual size of the option contract. For instance, the trader can select $10 for a potential return of $17 or the trader can bet $100 for a potential return of $170.

As CNN Money recently reported

If you are betting against bitcoins, what you want to do is buy a put option, which is a derivative contract that allows you to sell something at a set price. If the actual price of the thing falls below the set price, or strike price, you make money.

Prices of Bitcoin

The price of bitcoin reached previous all-time high of $1124.76 on November 29th 2013. It was at $13.36 on January 5th 2013. Because Bitcoin change hands on multiple platforms, to see the range of prices head over to Bitcoin Charts. As you can see there are over 10 different prices for bitcoin depending on the exchange.

Bitcoin Price ChartWhen trading options on bitcoin, the only price that matters is the price your option broker uses. Ask your options broker where they get their pricing from. Since Bitcoin is not recognized by typical stock brokers, you will not find Etrade or Ameritrade offering you the ability to trade options on Bitcoin.

Learn more about binary options trading on http://www.binaryex.com

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