Options Trading Strategy: The Vertical Leap

By Jordan Weir

Many traders view options as only a short term trading strategy. This is because the idea of a highly leveraged instrument with the potential to make big bucks quickly appeals to the gambler inside all of us. Just like a card counting black-jack player, options can be used to make consistent short term profits, provided the trader is careful, and knows what they're doing. But while stock options are usually employed solely by that group of high-risk, high-reward traders, they actually have enormous benefits that tend to go unnoticed by many a long term investor.

The strategy I'm about to unveil is rarely used. In fact, I've only briefly heard mention of them on obscure websites, and even then, not in enough detail to give an example. So here it is, what I believe may be the biggest secret kept from long term investors on wall street. The stock option strategy for the long term investor.

Its the vertical option spread, using leap options. How this technique works is you buy one option, while simultaneously selling another option for the same month, but at a different strike price. While XYZ is usually my generic symbol, I will use a real stock in this case. Keep in mind, this is NOT a recommendation. Indeed, it would probably be a bad idea to invest in the example I'm about to give. Its just an example. Yet to get realistic prices for this strategy, it may be helpful to use a legitimate corporation.

note:I wrote this part of the article about a short time ago, prices may not be 100% current. at this time GE is currently at 10.41 per share. In this example, let us talk the January 2011 options, giving GE plenty of time to go the direction we think it will. So if you thought GE was an excellent long term buy, it would be reasonable to believe it is going to at least $20 per share by that point. By January 2011, many experts expect the recession to be over, and that single development alone should lead to a substantially higher stock price.

Buy one option to start the vertical spread, and sell a second option at a higher price to complete it. With our price target of at least $20, and given the current price, 10.41, I would buy the 12.50 strike call option, and sell the 17.50 strike call option. The 12.50 option can be bought for 2.71 at the moment, while the 17.50 can be sold for 1.40, giving us an total cost basis of 1.31 per share for the option spread.

Now lets examine this trade for a second. If GE is trading under 12.50 on the January 2011 expiration, both options expire worthless, and the 1.31 per option spread invested is gone. On the other hand, if General Electric is trading above 17.50, then the 12.50 option will be worth exactly $5.00 more then the 17.50 option, and so the position has a value of $5.00 per share. If its between 12.50 and 17.50, the call we sold expires worthless, while the call we bought will have value equal to the difference between the stock price and the strike price; 12.50 in this case. How do you break even? Well we paid 1.31 for the vertical spread, so if its exactly 1.31 higher then 12.50 (13.81), then well be at break even if the stock is at that point.

That gives us an amazing return of 281% if GE is above 17.50, for an annualized return of 107% (holding period is 22 months). Due to the high potential for risk - a complete loss of investment if GE is below 12.50 in Jan 2011, you shouldn't put more then you're willing to risk in the trade. Definitely a high risk, high reward play. Yet given how much time there is, its a much safer bet then short term options, and significantly more profitable then just buying the shares.

So now that the basic idea is out of the way, what are some examples of vertical spreads I would consider? I am a big believer in investing in emerging markets, so I am long term bullish on EEM (IShares MSCI Emerging Markets Investment Index). The January 2011 25-30 vertical on EEM is only going for about $1.88 at the moment, with EEM trading at 25.30 so I think that would be a superb investment. Above 30 it would be worth $5 at expiration, while below 25 it would be worthless. Unless the economy stays bad until then, I cannot imagine that occurring.

Similarly, I expect FXI (iShares FTSE/Xinhua China 25 Index) to go up. The "China miracle" isn't over, merely in a subdued state due to temporarily reduced demand. The 30-35 vertical Jan 11 vertical would be worth $5 at expiration if FXI is above 35, which from its current price of 28.51, isn't much of a stretch. That vertical spread currently has a $2 price, so that would be an even 150% return from now until January 2011.

A much more controversial play would be Bank of America. While the trader in me screams to short the stock, I foresee it being far more valuable then it currently is a couple years down the road. The simple reason is that yes; the financial sector has been hammered by the current collapse. Yes, some banking companies have gone bankrupt, or have been on the verge of bankruptcy. Is the financial system going to completely fail? No. Are rampant bank runs going to drive them out of business? No. Are banks going to be lending and making money again after this recession ends? YES! Is pent up demand in housing going to cause a rush to buy houses at prices not seen in a decade? YES! Are banks going to profit from this? Most DEFINITELY. If BAC is at or above 10 at the January 2011 expiration, the 7.50-10 vertical for Jan 2011 would be worth 2.50, while only costing about $0.65. That would give a 286% return, or 108% annualized. The risk of course, is that BAC goes bankrupt, or BAC flounders under the $7.50 per share mark past January 2011. In either case, you would lose your investment. Yet with prices as low as they are now, there isn't a high chance of that scenario unfolding.

For the vast majority of people, the stock market is not the place to make a quick buck. While some short term traders will have tremendous success with these option strategies, long term investors should use these same strategies while remaining focused on the longer term, to achieve gains vastly exceeding those of the regular stock market, while limiting risk. - 23221

About the Author:

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Heding in the Foreign Exchange Market

By Tom Wright

For those not familiar with the Forex market, the term "Hedge Group" means absolutely nothing. But these are regular traders know that many ways to use the concept of trade.

Most of the time when you hear this phrase it means that you are trying to reduce your risk in trading. It is something that everyone who plans to invest should know about. It is a technique that can protect your investments to some degree.

What Is It?

While hedging sets are a popular marketing term, it is also one that seemed a bit mysterious. It is like an insurance plan. When you hedge, insure yourself in case of a negative event may occur. That does not mean that when an adverse event occurs, you will get out of this simple.

It only means that if you properly hedge yourself, you will not experience a significant impact. Think of it as your auto insurance. You buy it in case bad happens. Do not avoid bad things happening, but if they do, you will regain a part better than if you are not insured.

All involved in the negotiations is how to hedge. From large corporations to small individual investors, hedging is a problem, it is practical. Ways to do this is to use market instruments to offset the risk of any adverse movement in price. The easiest way to do this is to cover investment in other investment.

For example, the way most people would deal with this is to invest in two different things with negative correlations. This is still costly to some people; however, the protection you get from doing this is well worth the cost most of the time.

To begin to learn more about the coverage, you begin to understand why many people do not know quite what it is. The procedures used for the cover was created using derivatives. These are complicated instruments of finance and most often used only by experienced investors.

Have a negative to hedging set?

When you decide to hedge, you should remember that it came with a price. You should always ensure that the benefits you get from a security should be more than enough to make it worth your time. Should ensure that the price is reasonable. If not, then do not hedge. That hedging will not make money. You will not make large gains by hedging sets itself.

You have to take some risks in order to gain. Hedging is intended to be used to protect your losses. The loss cannot be avoided, but the hedge can offer a little comfort. However, even if nothing negative happens, you will still have to pay for the hedge. Unlike insurance, you are never compensated for your hedge. Things can go wrong with hedging and it may not always protect you as you think it will.

Should I hedge?

Keep in mind that most investors never hedge in their entire trading careers. Short-term fluctuation is something that the majority of investors do not worry with. Therefore, hedging can be pointless. Even if you choose not to hedge however, learning about the technique is a great way to understand the market a bit more. You will see large corporations and other large traders use this and may be confused at why they are acting this way. When you know more about hedging you can fully understand their strategies.

Whether you decide to use hedging to your advantage or not, you will benefit from learning more about it. You can use it like an insurance policy when trading. You should remember however that hedging can be costly. Always check to make sure the costs of hedging will not run against any profits you may or may not make.

Be sure those costs are realistic and that your need for hedging is realistic as well. You will be able to use hedging to help cut your potential losses, however hedging will never guard against the negatives altogether. Learning about it will give you a better understanding at how large traders work the system however, which can in turn make you a better player in the trading game. - 23221

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What Must You Do to Make Money With Forex Trading

By Elliot Miner

You may have heard forex trading but are wondering just what you have to do in order to make money from it. The truth is that forex trading, though it inevitably carries some risk, can be an extremely profitable endeavour if you know what to look for in your investments.

There is now a huge market around the development of trading strategies which can help all levels of experience gain from trading the forex market.

When you go into forex trading, do so armed with all the information you can. Understand the economy and the basics of international trade, as well as making sure you do not skip any important steps.

There is now a huge market around the development of trading strategies which can help all levels of experience gain from trading the forex market.

Check these tools out before starting, making sure you will have all the up-to-date knowledge at your fingertips. The more you know about the state of the market the more chance you will have of making money through forex trading.

When you go into forex trading, do so armed with all the information you can. Understand the economy and the basics of international trade, as well as making sure you do not skip any important steps.

Forex trading isn't all about strategies, however. You must also choose a forex broker who is registered to make sure all investments are legitimate. When you choose your broker you should also find that they provide you with various tools to keep you up-to-date with the market. - 23221

About the Author:

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Penny Stocks, Pink Sheets, Or Micro Caps What's the Difference?

By James Brumley

Its extremely important that investors know how to distinguish between terms like pink sheet and penny stock, bulletin board and micro cap. The differences can mean making a winning or losing trade.

Though its likely you know the true definition of at least a couple of these terms, its worth spending a couple of minutes planting a simple " and unique " explanation in the back of your mind for each one. Doing so may mean the difference between making a profitable investment or not at some point in the future.

Penny Stocks " As a general rule of thumb, any stock priced under $5.00 is considered a penny stock, though many traders dont consider a stock to be a penny stock unless its priced under $1.00. Either is acceptable, though one definition clearly expands the number of stocks that could qualify as penny stocks.

If you want to short or buy a penny stock on margin, make sure you know whom youre doing business with. Some brokerages will not allow shorting of any stock under $5; others dont place a limit. So, choose wisely.

Its also generally true that penny stocks tend to be a pink sheet or a bulletin board stock (see below), though its imperative to understand that many exchange-listed stocks are also penny stocks. These low-priced exchange-listed stocks have at some point met the same requirements as some of the worlds highest-priced stocks. The low share price may be a temporary situation, not to mention an incredible investment opportunity. The size of the company (market cap) or its exchange has nothing to do with determining whether its a penny stock or not.

Pink Sheet " A pink sheet stock is an equity that trades on the over-the-counter quotation system maintained by Pink OTC Markets Inc. Though this is generally considered to be the least desirable " and most dangerous " market to delve into, the stigma isnt always deserved.

Some foreign stocks choose to list their equities in the U.S. market, but for technical or logistic reasons cant list their stock with one of the exchanges or the bulletin board system. That doesnt make the investment any less credible though. The size of the company (or market cap) is irrelevant.

If viewing weekly financial statements of a company is a deal breaker for you, then stay away from pink sheet stocks. The majority of them dont disclose audited accounting statements because they arent required to do so.

On the other hand, if a stock trades on the OTC market, or as an OTCBB stock, you can be assured that these companies have met SEC requirements.

This may come as a surprise, but the bulletin board system is not the only over-the-counter game in town. Both pink sheet and NASDAQ markets are OTC markets.

When it comes to determining if an equity should be listed as a bulletin board stock or an exchange-listed stock, share price doesnt come into play. Specific market caps may be required, however.

Dont judge a bulletin board stock by its cover. Dig a little deeper because some can be stronger and more productive than exchange-listed stocks.

When it comes to determining is a company is considered a micro cap, share price doesnt matter, but it usually has a market cap of $250 million or lessgive or take a few million.

A micro cap status also has nothing to do with where or how a stock trades. The New York Stock Exchanges minimum market cap requirement is only $25 million, so qualifying for an NYSE listing isnt necessarily a sign of great size or strength.

In A Nutshell

As you can see, penny stocks, pink sheets, bulletin boards and micro caps all serve different purposes and play the trading game uniquely. In this instance, semantics do matter. Becoming knowledgeable about specific definitions will go a long way in making profitable investments.

Whether youre looking for top stock picks and trading ideas among the penny stock world, bulletin board equities, or micro caps, youll find them at www.smallcapnetwork.com. We explore the information that really matters to find you the best of the best stocks, and to offer highly meaningful market commentary. Sign up for the free e-newsletter today. - 23221

About the Author:

James Brumley is an expert in the small stock arena covering penny stocks and small cap stocks for over 10 years now. Investors with an appetite for high risk/reward investment ideas should consider getting his free newsletter publication by visiting www.smallcapnetwork.com and subscribing.

How To Trade Forex?

By Hass67

Learning forex trading should not be difficult. With decent understanding of money management rules and a good trading strategy, you should be ready for conquering the forex markets.

You should always try to understand the big picture. You should start each trading session by looking at the daily charts. After looking at the daily charts zoom into 4hr, 1hr, 30min, 15 min etc charts. Forex trading is about interpreting the past price action as well as about interpreting the future price action.

You need to understand whether the market is ranging or trending. You should try to understand any long term patterns that have developed. By looking at the different charts you will develop a feel of how the forex markets are behaving in the short as well as the long term.

You should try to understand the general direction of your favorite currency pairs. You can use candlestick analysis and moving averages (simple as well as exponential) to identify long term patterns and reversals.

You can use the Bollinger bands applied to 4hr charts to identify the daily trading range. A daily trading range shows you where the vast majority of moves are expected to happen. Any moves outside the daily trading range can be viewed as short term abnormalities.

You need to do some scenario planning for each day, once you have a general overview of the market for that day. You should know what fundamental news is scheduled to be released for that day and how the markets are expected to react.

Understanding the big picture does not mean knowing the whole picture. You should only focus on your favorite pairs. It takes a longtime and effort to understand a currencys behavior, how it reacts to things like oil prices, interest rates etc. So concentrate only on a few pairs in forex trading.

You should always try to take notes and keep a daily trading journal. Start each entry in the trading journal by analyzing the general direction of the markets for that day. What you think how the markets are going to react to different news that is expected to be released that day? What should be your entry and exit for the trade. How many pips you are expecting to make?

After each trade try to analyze what went wrong and how to avoid it in the future! In case of a winning trade, analyze how many more pips you could have made and how to tweak your strategy for better results in the future trades.

Keep these general tips in mind while you learn forex trading. Never ever trade without putting stop losses! Practice on the demo account for at least three months before starting live trading with your real money. - 23221

About the Author:

Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.