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Monday, July 16, 2012

Different Options Trading Strategies

Options trading strategies are trading methods constructed by different followers to achieve trading profits, to regulate their market exposure and to better utilize opportunities. There are now a number of types of options strategies available; some of them are widely followed and others are by some specific traders.

Based on the construction, options trading strategies can be simple strategies and complex strategies. Simple strategies, as the name suggest, are simple and involves one or two trades/contracts ; and complex strategies may include many of the same.

Based on their nature, options trading strategies can be grouped in to 3 main categories as,
  1. Bullish Strategies: These strategies are utilized when the trader expects the underlying product price to go upward. The examples include long call options, short put options, bull spread and synthetic long stock, etc.
  2. Bearish Strategies: These are utilized when the underlying produce price is expected to drop downward. The examples include long put options, short call options, bear spread, etc.
  3. Market Neutral strategies: These are utilized depending on the price volatility of underlying product; and are usually not dependent on price ups and downs. They are also known as non-directional strategies. Examples include butterfly options, straddle and strangle strategies.

The neutral strategies have two sub-divisions as bullish-on-volatility strategies and bearish-on-volatility strategies. There are also two additional options strategy categories available as event-driven strategies and stock-combination strategies.

There are no single best options trading strategy for everyone. When selecting a strategy, one should consider his trading experiences, online trading system, options trading broker features, money management, portfolio size, market volatility and trend.

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Thursday, July 5, 2012

Forex Leverage - An Overview

Leverage in trading is defined as borrowing money from some other to invest in a financial instrument. Usually the money is burrowed from the broker. One of the main things which make forex trading very attractive to traders is its high leverage; generally forex brokers offer very high leverage compared to stock and futures brokers. Actually trading for the very small pip difference in currency pairs requires very high investments to make any significant profit or loss. The broker is providing you this leverage because most persons won’t have millions of dollars for doing such big currency transactions.

Generally forex trading leverage is margin based. Margin in defined as the amount of money one need to put up in his account to trade a specific transaction value. The margin based leverage can vary considerably with FX brokers; from 400:1 to 50:1. The usual 100:1 margin means that you need to invest at least $1 for trading a $100 worth transaction. Remember the margin-based leverage can be different from real leverage; and actually it is the greatest leverage limit a trader can enjoy in his account. The real leverage is the aggregate value of your total open positions divided by the total trading capital in your account. For example if you have $10,000 in your account and opening a position worth $100,000 then you are utilizing 10:1 leverage which will the one tenth of your allowable leverage of 100:1.

Many say 'leverage is a double-edged sward'. This is because it can magnify both the profit and loss. The extent of leverage a trader can utilize depends on many things like the liquidity of currency pair, his trading style and his money management.

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