Advanced Option Strategies

For the Purpose of this discussion, the term market transparency will be used to refer to the ability of market participants to observe the information in the trading process. Despite the simplicity of this definition, the issue of transparency is remarkably complex.

One difficulty relates to exactly what information is observable. For the purpose of this discussion we will assume that a market is said to be transparent if the order flow can be observed.

Note the word “Order Flow”. The order flow information can be very complicated since we need to take the following into account:

In deciding whether a market is transparent we also need to know who can observe the information. Is the information observable only to price-setting agents, to those on the floor of the exchange, to traders who submit orders or to potential traders at large?

The issues above are very important because the information available in the trading process can affect the strategies of market participants.

Charles Schumer, the third-ranking Democrat in the U.S senate, ask the Securities and Exchange Commission to ban so-called flash orders for stocks, saying they give high-speed traders an unfair advantage.

“This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system, where a privileged group of insiders receives preferential treatment,” Schumer wrote in the letter.

According to Bob Greifeld, chief executive of NASDAQ.  “Flash orders are but one symptom of the current evolving market structure. We have a unique opportunity at this time to take a hard look at dark order types and the underlying market structure issues that do not support public price formation. These include flash orders, internalised orders, enhanced liquidity providers, Block Talk orders and dark pools.”

Market participant’s strategies will depend on the transparency of the market and the market equilibrium is directly related to the degree of transparency.

The question we need to ask ourselves is:  “What is the optimal level of transparency?”

Many researches have been done in this area.

Madhaven in 1992 analyses how transparency of orders affects market behavior and viability when order flow information is observable to both price setters and traders.

Pagano and Roell in 1993 consider how transparency of orders to price setting agents affects the trading costs of informed and uninformed traders.

Biais in 1993 analyses how the transparency of quotes affects spreads when there is no private information.

Madhaven also considers the issue of transparency by looking at the effects of knowing the volume of trade.

I believe that the simplest transparency issue to consider is how the degree to which the size and direction of order flow is visible to market participants affects the viability of the market.

The crucial function of any trading mechanism is Price Discovery or the process of finding market clearing prices.

This process will depend on the transparency of the market and therefore we need to consider which market structure better aids the price discovery function.

We can divide the market clearing mechanism into Quote Driven (QD) and Order Driven (OD)

 Difference between a Quote Driven (QD) market and an Order Driven (OD) one?

The difference between these two market systems lies in what is displayed in the market in terms of orders and bid and ask prices. The order driven market displays all of the bids and asks, while the quote driven market focuses only on the bids and asks of market makers and other designated parties.

An order driven market is one in which all of the orders of both buyers and sellers are displayed, detailing the price at which they are willing to buy or sell a security and the amount of the security that they are willing to buy or sell at that price.

Let us now look at the properties of the resulting equilibrium in each market setting.

If the informational asymmetry in the market is not too great, then equilibrium will exist in the quote-driven system. In this state, security prices are semi-strong efficient and the market markers offers schedule of prices for different trade sizes rather than quote a single trading price.

If the information asymmetry is too large, it may not be possible to find such a price schedule and equilibrium may not exist.

In part two of this article we will discuss the benefits of transparency and how transparency affects the losses of the uninformed traders

FUTURES AND COMMODITIES TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. INFORMATION CONTAINED HEREIN IS STRICTLY THE OPINION OF ITS AUTHOR AND IS INTENDED FOR INFORMATIONAL PURPOSES. INFORMATION IS OBTAINED FROM SOURCES BELIEVED RELIABLE, BUT IS IN NO WAY GUARANTEED. OPINIONS, MARKET DATA AND RECOMMENDATIONS ARE SUBJECT TO CHANGE AT ANY TIME. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS

Opening a Forex trading account is not a complicated procedure, but there are some decisions that need to be made before you open the account. First you should decide how much capital you are willing to use to open the account, and then investigate brokers until you find one that you are comfortable with. Most brokers will allow you to open a new account with as little as two hundred and fifty dollars for a simple trading account. Check out the different spreads, allowable leverage, margin rules, and other aspects of Forex trading that you consider important. Check out the available pairs that the broker deals with in the Forex market, and make sure that these pairs fit your interests.
Once you know the amount of capital you are going to use for the Forex account and you have found a Forex broker that you trust, It is time to open the account. Figure out what account type you are interested in. Some brokers allow mini accounts, while others insist on full size accounts, and still others have a few choices. Discuss this with your broker to see which account type is best for your investment needs. The best way to proceed if you are new to the Forex market is to start by opening a dummy account with the broker you will use. A demo, or dummy, account will let you get comfortable with the trading strategies before you risk your capital. Once you are completely comfortable with your strategies and your results, then have the broker open your trading account.
Opening a Forex trading account may involve numerous pieces of paperwork and forms, depending on your home country and nationality, as well as the capital necessary to open the account. There are legal agreements between you and the broker that outlines the leverage rules and amounts, the agreement to make good on any losing margin trades, and all the other contracts and agreements that are necessary to open a Forex trading account. As long as you do your homework and investigate your options carefully, finding the right broker and opening an account to trade in the Forex market is easy. The most important part of opening a Forex account is to find a broker that you respect and trust. A Forex broker can make you money or lose you money, so the broker you choose when you open a Forex account can make or break you as a trader.
Copyright © 2007 Joel Teo. All rights reserved.

One will commonly hear or read the following “rule of thumb” for trading:Only trade positions with potential profits of at least three times the potential loss.This sounds like a reasonable rule, risking a little to make a lot. However, it ignores the probabilities involved. Buying a lottery ticket for $1 to potentially make one million dollars certainly meets this criterion for a good trade. But we intuitively know that the odds against us winning are astronomical. This paper will define risk/reward ratios, define the concept of expected value, and begin to explore the relevance of these concepts to success in trading strategies.Risk/Reward RatiosIf we are considering an investment where the maximum gain we can expect is $100 and the maximum loss that we may incur is $500, we would compute a risk/reward ratio of 500/100 or 5:1 (five to one) . This is a high risk/reward ratio in that we stand to lose a large amount compared to the maximum gain. The trading rule above of “potential profits of three times the potential losses”, would result in a small risk/reward ratio of 1:3.Expected ValueThe probabilities of the various outcomes of a proposed investment are often overlooked. When someone tells you an investment will return 300%, but doesn’t tell you the probability of success, you are missing critical information necessary to make a decision about that investment. When one accounts for the probability of the profitable outcome, one computes the expected value, sometimes called a risk adjusted return on investment.For example, let’s assume we are considering a covered call on IBM and the called out return is 4% for IBM closing over $90. If we were to determine the probability of IBM closing over $90 is 65%, then we would say that the expected return or risk adjusted return is 2.6% (0.65 x 4%). We can take this analysis one step further by accounting for the probability of loss. Using the same IBM covered call, let’s assume we have a stop loss order entered that we believe will take us out of the trade with a 8% maximum loss. Now our expected return has two terms:Expected Return = (probability of gain) x (maximum gain) – (probability of loss) x (maximum loss), or,Expected Return = (0.65)(4) – (0.35)(8) = (2.6) – (2.8) = -0.2%Therefore, if we were to place this trade many times, our expected return, based on the probabilities of gain or loss, would be a net loss of 0.2%. One could improve this strategy by either improving the probability of success or tightening the stop loss to reduce the maximum loss.High Probability TradesTrading strategies can be positioned in a variety of ways resulting in a broad range of risk/reward ratios. One extreme category may be called the high probability trades, i.e., trades that have probabilities of success of 85-90%. One type of option spread strategy, known as the iron condor, can be positioned in such a way as to have an 85% probability of profit. On the surface, that sounds very attractive. However, the losses for these trades can be quite large, even though their occurrence is unlikely. For example, a typical iron condor might be characterized as having an 85% probability of achieving a 19% return but a 100% loss with a 15% probability of occurrence. The expected return:Expected Return = (0.85)(19) – (0.15)(100) = 1.2%Or the calculation can be done with the dollar amounts. The 19% gain could correspond to a $1,600 gain and a maximum loss of $8,400. The expected return is:Expected Return = (0.85)(1600) – (0.15)(8400) = 1360 – 1260 = $100Therefore, trading this strategy over time and many trades is going to be close to break even, and probably a loser after trading commissions are included. Let’s consider the opposite style of trading and then draw some conclusions.Low Probability TradesLow probability trades are akin to the lottery ticket, i.e., the maximum loss is small, but the probability of success is also extremely small. There is a category of option spread known as “far out of the money vertical spreads”. The basic characteristic of this trade is a small maximum loss, but with a high probability of incurring that loss. An example might be a vertical spread that only cost $130 to establish, but could potentially return $870. Since the maximum loss is $130 with a probability of success of 12.5% and the maximum profit is $870, the potential gain is 669%, so the expected return is:Expected Return = (0.125)(669) – (0.875)(100) = 83.6 – 87.5 = -3.9%or,Expected Return = (0.125)(870) – (0.875)(130) = 109 – 114 = -$5So, the expected values of this low probability strategy result in small losses over time.ConclusionsTrading strategies come in all sizes and shapes to suit anyone’s style and risk preferences. But the reality is that none of these strategies have an inherent advantage. Some trading education firms and authors of trading books will often claim that they have found the holy grail of trading and have the “best” trading strategy. Each trading strategy has its own set of advantages and disadvantages. In addition, if each trading strategy was applied in a blind, “ put it on and let it run” methodology, the net results would be very similar: near break even or a small loser over time. However, the pattern of the results would be quite different. For the examples above, the high probability trading strategy would have many small positive gains throughout the year, but would be expected to have a small number of large losses that wipe out the gains. Whereas the low probability trading strategy would have a small number of large gains, but those gains would be wiped out by a large number of small losses.Therefore, one must manage the trade in such a way as to develop a probabilistic edge. The best analogy is a Las Vegas casino. If you analyze any of the games played in the casino, you will see that the odds favor the casino. The casino has a small probabilistic advantage, so the owners know that over time, they will come out winners. In stock and options trading, one must understand the probabilities and have developed a trading system that gives the trader a positive edge. You want to learn to trade like the casino, not the gambler at the tables.

Investors as well as professionals from the finance sector are well aware of what currency futures are, role of stock brokers, stocks market intricacies, profitable market shares, and related regalia. Novice investors who are completely new and have not yet started their investment venture will do take some time in understanding the nuances of trading. And if they face losses in their very first investment or face repeat losses at a stretch, it is no big thing. Yes if investments are made in bulk, then losses will no doubt play havoc on the investor. The maxim ‘try and try until you succeed’ does hold true everywhere but in the stocks market the statement should be followed in a different manner. It is only after you gain complete knowledge about the market, strategize your goals, get updated with the market conditions, etc. that you can ‘try and try until you succeed’. Buying market shares is easy but what is of substance is buying potential shares. With online trading being the buzzword in the stocks market, experienced stock brokers are functioning online via brokerage platforms. Finding top brokers is thus possible with a click of the mouse. There are numerous online trading platforms; do conduct a research in finding the best one before getting registered in one. Registration will keep you at a competitive edge. Besides knowing about the potential stock investment options, you will stay informed about the A-Z of the financial market. Diversifying your investment plans will prove effortless for you as you will know where to put in your hard earned money. The wise investor invests in diverse investment destinations; these may be market shares, currency futures, mutual funds, etc. The market is no doubt full of risks but diversification as well as investing in the right places can help one maintain a balance in between profits and losses. A panicky situation will then never arise. But not all investors are aware of the diverse investment strategies. Many are still led with the notion that it is only stock investment that can help one make money in no time. There was a time when people were hardly aware of stock investment. With time, and with online trading being introduced, people became aware and the numbers of stock investors are increasing by the day. Very soon, the same awareness will spread in other investment areas.To start a currency futures trading, you should first of all be familiar with the business. It involves trading in the currency of not only one nation but also several nations depending on your preference. You should have enough time to take into account the changing value of currencies as conversion rates of all currencies change almost everyday. It is inflation rate that affects the conversion rates of currencies. There are other factors as well that should be considered if you want to get involved in currency futures trading. Be it any investment, it is knowledge that can keep you on the winning edge!

Indices

U.S. stocks lost ground in the past week as concerns deepened that Europe’s debt crisis may derail the global recovery. These, along with proposed legislation that may hurt the financial sector, overshadowed a string of positive earnings and pledges by the Federal Reserve to keep interest rates low.

For the week, the S&P 500 declined 2.5 percent to 1,186.69, but the index ended April up 1.3 percent. The Dow Jones Industrial Average fell 1.75 percent through the week to 11,008.61. For the month, the Dow rose 1.4 percent

European stocks tumbled as Standards & Poor’s cut its credit ratings for Greece, Portugal and Spain sparking concerns that Greece’s debt crisis was spreading. The UK’s FTSE 100 fell 3 percent to 5,553.30, ending the month down 2.2 percent. Germany’s DAX dropped 2.9 percent to 6,135.70, and fell 0.9 percent through the full month, while France’s CAC 40 declined 4.5 percent to 3,816.99, and by 4.5 percent for the month.

European woes and concern that China will take further steps to curb economic growth weighed on Asian markets, with Japan bucked the global downtrend as some of its mainstay companies posted positive earnings. Japan’s Nikkei 225 index rose 0.2 percent to 11,057.40 but fell 1.1 percent for the full month, while Hong Kong’s Hang Seng index dropped 1.8 percent to 21,108.59 and declined by 1.3 percent through April.

Elsewhere, India’s Sensex index fell 0.8 percent to 17,558.71 and was flat for the month, and Australia’s All Ordinaries decreased 1.7 percent to 4,833.90, and by 1.3 percent for the month.

Forex

The euro fell to its lowest value in almost a year against the dollar as European leaders intensified negotiations over Greece’s bailout. The currency rebounded towards the end of the week as confidence that a deal would be struck rose. The dollar also strengthened on speculation that the Federal Reserve was moving closer to withdrawing stimulus as the economy recovers, and as it pledged to keep interest rates low.

Through the week, the euro weakened by 0.7 percent against the dollar to close at $1.3393. The dollar was flat for the week against the Japanese yen at JPY 93.855, while against the British pound, the greenback rose 1.2 percent.

Commodities

Gold rose 2.1 percent through the week to $1,180.10 an ounce as the Greece’s budget crisis prompted some investors to seek alternative assets. The increase came despite the stronger dollar, which often moves inversely to gold.

Crude oil gained 2.9 percent to $86.15 per barrel on speculation that Chinese demand will boost consumption of commodities and signs of improved demand from the U.S. A government report showed that U.S. refineries were operating at 89 percent of capacity, the highest rate in almost two years.

Crude Oil (April 26-30)

Stocks

Banking shares fell Monday as Congress prepared to vote on whether to debate on a financial overhaul. JPMorgan Chase and Goldman Sachs Group led declines while Citigroup dropped 5.1 percent as the Treasury Department planned to sell up to 1.5 billion shares. Caterpillar rose 4.2 percent after posting its first earnings increase in seven quarters. In Europe, BHP Billiton and Xstrata increased as metals prices rallied in London. TomTom jumped after the maker of portable navigation devices reported an unexpected profit. Toyota gained 3.4 percent in Tokyo after the Nikkei newspaper said the company had an annual operating profit instead of the loss Toyota had forecast.

On Tuesday, Alcoa Inc. and Caterpillar Inc. led declines while Ford Motor fell 6.2 percent after an analyst said first-quarter results were unsustainable. Goldman Sachs Group rose as executives testified to a Senate subcommittee about mortgage securities. European mining shares, BHP Billiton and Xstrata, declined as metals prices fell. Banco Popular Espanol fell 6.1 percent after saying that first-quarter profit slipped. National Bank of Greece dropped 10 percent in Athens. In Asia, the Industrial & Commercial Bank of China Ltd. sank 1.6 percent on concern lending will slow, while PetroChina fell 2.3 percent on lower oil prices.

Mid week saw Dow Chemical rise 5.9 percent and insulation producer Owens Corning Inc. rally 11 percent as profits beat analyst forecasts. Goldman Sachs Group gained 2.6 percent after defending its business practices to a Senate panel. In Europe, Nobel Biocare Holding’s first quarter revenues fell weighing on its shares, while wind turbine maker Vestas Wind Systems dropped 4.6 percent after reporting an unexpected loss. Japan’s Mitsubishi UFJ Financial Group fell 1.8 percent and Canon slumped 3.1 percent after the yen strengthened against the euro cutting into its profits.

Thursday, Motorola increased 3.5 percent after reporting an unexpected profit, and Starwood rose 5.7 percent. Pre-phone maker Palm Inc. surged 26 percent after Hewlett-Packard Co. agreed to buy the company for approximately $1.2 billion. Spanish bank Banco Santander gained 4 percent after profits beat analyst expectations, while the National Bank of Greece soared 18 percent on optimism Greek aid talks will conclude this week. Hong Kong’s Esprit Holdings slumped 4.7 percent and China Merchants Bank gained 1.5 percent in Shanghai after first-quarter profit rose 40 percent.

Friday had banking shares drop the as the Justice Department scrutinized Goldman Sachs, which lost 7.8 percent. Transocean and Halliburton Co. fell more than 12 percent as an oil spill in the Gulf of Mexico worsened. In Europe, Barclays slumped 6.4 percent after its investment banking unit’s profits lagged behind rivals. Asia’s Sumitomo Mitsui Financial Group rose 1.1 percent after returning to profit. Trading company Mitsubishi Corp rose 1.2 percent.

Binary Option Strategy for all your market news

Dow Nasdaq U.S.Stocks Technical Analysis By Bullet Advisory Bullet Advice for Indian Stocks-U.S.Market Trend DOW (10067.30) and NASDAQ (2147.30) closed 1.0% and 2.6% down respectively last week.Support for DOW is at 9980 and NASDAQ 2115.Resistance for DOW is at 10220 and NASDAQ 2200. Trend Of Major Indices and Stocks Symbol Trend No. of Days WeeklyTrend Month ^DJI Bearish 2 Flat! Flat! ^IXIC Bearish 2 Flat! Flat! AA Neutral 4 Flat! Flat! AXP Neutral 1 Flat! Flat! BA Bearish 1 Flat! Flat! C Bulllish 2 Flat! Flat! CAT Bearish 3 Flat! Flat! DD Bulllish 1 Flat! Flat! DIS Bulllish 1 Flat! Flat! EK Bulllish 3 Flat! Flat! GE Bearish 3 Flat! Flat! HD Bulllish 1 Flat! Flat! HON Bearish 2 Flat! Flat! IBM Bearish 2 Falling Flat! INTC Bearish 2 Flat! Flat! IP Bearish 3 Flat! Flat! JNJ Bearish 1 Flat! Flat! JPM Neutral 1 Flat! Flat! KO Bulllish 1 Flat! Flat! MCD Bearish 2 Flat! Flat! MMM Bearish 2 Flat! Flat! MO Bearish 1 Flat! Flat! MRK Bearish 7 Flat! Flat! MSFT Bearish 2 Flat! Flat! PG Bulllish 5 Flat! Flat! T Neutral 1 Flat! Flat! UTX Neutral 1 Flat! Flat! WMT Bulllish 1 Flat! Flat! XOM Bearish 12 Flat! Flat! Useful Technical Indicators for Major Indices and Stocks Symbol Close PVBreakout MFI-21 RSI-14 ^DJI 10067.33 Loser 66.8 33.09 GE 16.08 Loser 59.71 48.86 IBM 122.39 Loser 30.87 33.92 MSFT 28.18 Neutral 38.15 32.75 PG 61.55 Loser 47.59 54.21 MFI=Money Flow Index RSI=Relative Strength Index PV=Price Volume Trading Idea (1)DIS(29.55)Buy at declines and trade. By Bullet Advisory Indian Stocks-India’s Top Most No.1 Best Stock Market Advice Blog,Hot Stock Tips Calls by Expert Technical Analyst Narendra Nainani of India.Most Preferred and Successful Paid Subscription Stock Tips Calls Website of India.Excellent Success Ratio of more than 90% with Superb trading ideas.Most Successful Intraday Stock Future Calls Provider Service Indian Share Market. M-+919898162770 Website http://www.narendranainani.blogspot.com Narendra Nainani is renowned technical analyst and stock market advisor of INDIA having experience of more than 26 years having excellent success ratio.Expert in Derivatives Products-Futures & Options,Portfolio Management.Nifty Future,Nifty Options,Stock Future,Stock Options,Nifty Call Put Options Calls Tips,Stock Future Option Trading Recommendations Advice.Best Advisor India Website CALLOPTION. By Bullet Advisory Indian Stocks-India’s top most no.1 best stockmarket advice blog,hot stocktips calls by expert technical analyst Narendra Nainani of India Website http://www.narendranainani.blogspot.com

Lately, I have been asked about what I think is the single key that determines if you would make it as a rich man in options trading.
This is an extremely interesting question as I am not someone inclined to believe that any single reason constitutes to the success in anything at all. However, that got me thinking hard and reflecting on my own success in options trading. Then I decided to frame the question a little bit more academically. All things equal, what is the single key to options trading success? All things equal meaning everyone has perfect control over their emotions and will execute flawlessly all orders that they are required to without human errors and that market conditions as well as options trading knowledge is equal amongst all.
Imagine a group of options traders who knows all the options strategies available in options trading and exposed to the same market conditions. What will determine which one or ones of them makes a profit?
I came to a conclusion about what I think is the key to options trading success and that is the exact same key to stock trading success; the ability to pick stocks that will perform exactly as you would like it to.
Yes, sad but true, it’s the same thing in stock trading. You make money only when you buy stocks that goes up or short stocks that goes down.
In options trading, you only make money when you apply bullish options strategies on stocks that go up, bearish options strategies on stocks that go down, neutral options strategies on stocks that remain stagnant or volatile options strategies on stocks that stage quick and explosive breakouts.
You only lose money in options trading when you apply bullish options strategies on stocks that goes down, bearish options strategies on stocks that go up, neutral options strategies on stocks that breaks out and volatile options strategies on stocks that remain stagnant.
This single condition for losing money in options trading is, all else equal, the only key to options trading success; the ability to pick the right stocks or the ability to predict the future direction of a stock or index correctly.
Yes, being able to predict future market or stock direction accurately and consistently is an important skill in investing and is a far more fundamental skill set than knowing all the options strategies there is.
If that is the case, why options trading?
Well, even though the key to success in options trading is largely the same as the key to success in stock trading or any other forms of investment or trading, options trading does have a few tricks up its sleeves to help put the odds in your favor.
First of all is leverage and protection. The ability to risk lesser capital for the same profit or a lot more profit with the same capital already puts the benefit of risk in your favor. Even credit strategies can be low risk if proper stops are used.
Secondly, is the ability to make a profit in more than one direction! Yes, since the key to success in options trading is the ability to “guess” the correct direction the underlying stock or index is going to take, won’t your chances of success be dramatically increased if you could profit in more than one direction? Yes, you only get that in options trading.
For instance, a Bull Put Spread is a bullish options strategy that makes a profit when the stock goes upwards, remains stagnant OR drops a little! Yes, all 3 directions! Won’t your chances of success be dramatically increased with strategies like that?
Yes, the key to stock options ( http://www.optiontradingpedia.com/stock_options.htm )trading success is the ability to pick the right stocks which translates into the ability to accurately and consistently predict the future direction of the underlying stock. Nobody can do that consistently and that is why options trading puts the odds of success in your favor through options strategies that profits from more than one direction.

It has always been very difficult to constantly make money trading Currency Fx. The basic rules of trading are very hard to stick with. Normally new (and not so new  Traders) make these mistakes:

·         Trade too often. It is not the number of trades but the success of your trades that is important.

·         Try to anticipate a trade rather than waiting for the market to confirm a trend.

·         Spread the risk by having multiple trades running at the same time hoping one will profit.

·         Work on the theory that if you have a losing trade the best option is to double up on your next trade. (a very easy way to wipe out your capital).

·         Not understanding Risk/ reward. It is not a good strategy to risk more than you could win or the same as you could win. Most good traders would look at a 2:1 ratio, your profit being twice your potential loss. 

·         Incorrect placement of stop losses or trading without one.

The biggest change in trading the currency fx market is the use of robots. When we first tried them they tended to show good back testing but live trading proved a disaster.

 Trading has always been 70%+ mental, having the discipline to actually stay with a system that worked. Trading under pressure and constantly making the right decisions is very difficult. That is why we were very interested in automated trading. If the system worked the robot would just keep on trading, most of the problems we traders had were results of lack of discipline.

We have just bought one of the latest generation automated trading robots and are very interested to see how we get on. Sure the results we have been told about are truly amazing but like in most things we like to test these things for ourselves.

One of the methods of trading that has always appealed to new traders is using very short time frames, watching the screen constantly and entering trades frequently. This is very high risk as the market is very volatile and if the spread is too high and your stops very close you can have many losing trades with the costs to your broker adding up very quickly.

The robot we are using has two different methods of trading, scalping using the 15m charts and longer term trading. 

If you are new to trading we would highly recommend trying this robot and reading our review on our website. Trading with a demo account first is the only way to try it.  If these robots are going to eliminate human error then trading is going to open up new opportunities for everyone. Visit our website where we are updating our results constantly and see if it is for you.

This is one of the simplest techniques in derivative trading virtually nullifying the capital risk. In simple words this is a technique in which the trader used to buy two near ‘out of money’ call/put option of same strike or different strike and sell one ‘in the money’ or ‘at the money’ call/put option resulting a small debit.

 

The benefits of the 2/1 spread –

A.It will reduce your capital risk that is the amount of capital you have put in risk by 80%.

B. It will have unlimited profit if the underlying moves in the direction of the spread.

C.One can minimize the loss to the extent of debit if things go against him.

D. One can exit safely if the underlying consolidates for more than one week.

 

Draw backs:

A. It will land you in loss if the consolidation range varies between the long and short strike.

 

Technical aspects for initiating the 2/1 spread:

A. Before initiating the 2/1 spread one must and must remember that the underlying should be above the MACD and RSI break out point.

B.If the Daily chart indicates rising wedge, rectangle, pennants or symmetric triangle then avoid initiating this strategy.

C.The average daily volatility must and must be above 28%. The open interest must be positive for preceding 4 days.

D.The Underlying should be below 75% limit of the Open interest.

E.The daily chart should indicate Flag, head and shoulder or any other trend continuation or trend reversal pattern and near to the break out points.

F.Nothing can be wrong if you can validate the idea with candle formation patterns and gap analysis.

The 2/1 spread can be formed vertically horizontally or linearly.

A. Vertically: Buy strike should be just one step above the sell strike.

B. Horizontally: two different buy strike having one step above another and sell strike follows the same sequence.

C. Linearly: the buy and sell have same strike but different month.

 

Simulate and experiment this technique to refresh your knowledge base.

 

I have explained many more interesting techniques on my book named “Master’s Key to Futures & Options  ISBN  :8175257741”   to browse 20% of the book click and enter the search string as   master’s key to future and options. recently i have come with an intraday option calculator. you can access this calculator from my site. This calculator is the 1st such option calculator in the world.

 

Soumya Ranjan Panda

www.smartfinance.in

 

There are many index iron condor & credit spread options advisory newsletters on the market today.  The index iron condor options strategy is popular because it’s relatively easy to understand, it doesn’t require options analysis software to visualize the trade, and it generates an excellent monthly income of 6% to 10% ROI per month.  Most iron condor newsletters fall into two camps, either recommending 70% probability trades or 90% probability trades.   A few of the more visible iron condor newsletters have simplified their argument of why one approach is superior to the other, for example by only focusing on the amount of risk capital per trade.   This article proposes a more thorough methodology to analyze the risk associated with 70% probability iron condors versus 90% probability iron condors, discusses the pros and cons of each approach, and attempts to dispel possible misinformation in the marketplace.

When defining “risk” for credit spreads and iron condors options, most experienced credit spread traders will agree that risk comprises many components.   Two of the more important components are the following:  1) Probability of the credit spread going in-the-money (ITM);  and  2)  The risk versus potential reward of the trade.   Additional risk related factors that should be included and that many times are omitted are the following:  3) The amount of time and effort required to monitor and manage the trades;   4) The amount of time available to react to a fast moving underlying security giving the trader sufficient time to make adjustments if needed;  5) The average number of times per year the trades get into moderate danger, that is they get close to going ITM, causing stress and uncertainty for the trader;  6) The average number of times per year that the spreads get into high danger requiring the trader to close out the spread or make adjustments, causing a losing month;  and 7) The average % loss for each of the losing months per year. 

Using an example of a 10 point spread, and doing an apples-to-apples comparison by analyzing a single credit spread, let’s look at both a 70% probability trade and a 90% probability trade in more detail.  The 1.3 standard deviation, or 90% probability credit spread has a 9 to 1 ratio where the trade risks $9 to make $1, it shoots for an approximate 11% return, it has a 90% probability of expiring OTM and profitable, and has a 10% probability of getting into trouble and going ITM.   The 1.0 standard deviation, or approximate 70% probability credit spread has an 8 to 2 ratio where the trade risks $8 to make $2, it shoots for an approximate 25% return, it has a 70% probability of expiring OTM and profitable, and has a 30% probability of getting into trouble and going ITM. 

In order to analyze these two scenarios in more detail, we need to take into account the additional risk related components that we discussed above.  From data that we’ve extracted from several iron condor services, and through our own experiences of trading both types of iron condors, we’ve observed the following: 

Ninety percent probability iron condors tend to have on average 9 to 10 profitable months/year, and 2 to 3 losing months/year with typical losses of 10% or less.  Per the level of workload and stress involved, 90% probability trades tend to have 6 months of low stress where they make easy money, 3 to 4 months of moderate stress where no adjustments are required but some of the spreads get under pressure and have to be watched closely, and 2 to 3 months of higher stress and workload where they will have a loss and adjustments are required to keep the loss below 10%. 

Seventy percent probability credit spreads tend to have on average 7 to 8 profitable months/year, and 4 to 5 losing months/year with losses usually 10% or less.  Per the level of workload and stress involved, 70% probability trades tend to have 3 months of low stress where they make easy money, 4 to 5 months of moderate stress where no adjustments are required but some of the spreads get under pressure and have to be watch closely, and 4 to 5 months of high stress and workload where they will have a loss, and adjustments are required to keep the loss below 10%.  

To view a grid that summarizes the characteristics of each approach, please go to http://www.monthlycashthruoptions.com/90PercentVs70Article.htm.   After viewing this grid one might come to the conclusion that both strategies can work.  In actuality, both strategies can work and each strategy returns about the same annual return.

Some traders prefer the 70% probability iron condors, that comprise both a bear call spread and bull put spread, that shoot for a 25% to 40% return in 30 to 45 days and they accept the fact that:  1) There is about a 40% probability, or about 4 to 5 months/year that their iron condor will get under pressure causing a moderate level of stress and requiring additional time to watch the trade closely;  2) They accept the fact that there is a 30% probability, or about 4 to 5 months/year that their iron condor will get into high danger by a quick moving underlying index resulting in a high level of stress and a higher work load to make adjustments to minimize the loss for the month;  3) And investors that embrace 70% probability iron condors are ok with the fact that because of the higher probability of the iron condor going ITM causing a large loss, they should allocate no more than 5% of their portfolio to any single trade.  As a result, the trader will need to spend time researching and opening additional, non-related trades to put their available capital to work.

In contrast, some traders like the 90% probability iron condors that shoot for a 10 to 15% return in 30 to 45 days and they like the fact that:  1) There is a high, 90% probability that the iron condor will expire OTM and profitable, and as a result there is less work & time involved, it’s more hands-off, the trader sleeps better at night when the market gets volatile, and it’s a good fit for people with a day job;   2) There is low stress about 6 months per year when the 90% probability trades generate “easy money”;   3) Traders that embrace 90% probability iron condors accept the fact that there is about a 20% probability, or about 3 to 4 months/year that their iron condor will get under pressure causing a moderate level of stress and requiring additional time to watch the trade closely;  4) There is a 10% probability, or about 2 to 3 months/year that the iron condor will get into high danger by a quick moving underlying index resulting in a higher level of stress and workload to make adjustments to minimize the loss for the month;  and finally… 5) The experienced traders that have 2+ years of experience with index credit spreads & iron condors can leverage 90% probability trades to allocate up to 75% of their portfolio into this single strategy where they don’t have to trade any other strategies if they don’t desire or have the time.

In summary, both strategies can work since they both return, at least over the long run, about the same ROI.  The major difference between the two strategies is that the 70% probability trades tend to be more volatile as compared to the 90% probability trades, but they can generate higher monthly returns when they expire OTM and profitable.  Therefore, the best strategy boils down to a trader’s risk profile, personality, ability to handle stress, and the amount of time and effort that they are willing or able to dedicate to the index credit spread & iron condor strategy.