January 7, 2009
Futures Options Vs Stocks Options
While we may be talking about how profitable and consistent money can be made by selling options, some traders have popped the most fundamental but yet critical question on what type of options to sell. Our context here refers to stock options, ETFs options or futures options.
Most options sellers may be familiar with the concept of selling options against equities which can include stocks or ETFs, but selling options against futures contract may be a totally new ground to them. The basic principles may remain generally the same, but one must be aware of certain aspects which could make one more appealing or fearful than the other.
ETFs options work very much the same as stocks options. They are treated like just normal stocks except that while stocks can crash to zero value, the possibility of ETFs crashing to zero is extremely small, which I will not commit to saying zero. Something very drastic must have happened to the market to cause this to happen since ETF like SPY comprises of some of the strongest companies listed in the exchange. And for that reason, I generally prefer to sell put options on ETFs. Of course, that’s just my preference and I believe you have yours too.
I have heard of some traders who did options selling on stocks and I mean on big companies which failed. Depending on the risk management approach that was taken, disastrous to the trading account could have been avoided or minimized then.
The risk associated with selling options on stocks may therefore be perceived as relatively higher and thus lead to a possibly higher margin. Premiums obtained from selling stock option and future options differ. Margin requirement from selling stock options can be 10, 20 times higher than the premium collected while that for future options can be just a few times higher. The return on investment is thus viewed as better for doing options selling on future contracts.
Strike price consideration is also a critical factor when deciding between stocks and futures options. For futures options, it is possible to sell very far OTM options and yet collecting a reasonable amount of premium for it. However, for stock options, one would have noticed that after just a few strikes OTM, the premium to a miserable amount which might not be worth the risk to do so.
With a lower margin and possibility of getting a substantial premium for very far OTM options, futures options seemed a much choice than stocks options at this moment. However, one must be aware that futures come with contract dates which they mature or expire. They are unlike stocks or ETFs which one can hold upon assignment on the expiry dates. Risk management for futures and stocks options selling hence differ. Futures contracts like the E-mini S&P (symbol ES) also come with different contract dates, e.g., the September, December contract etc. ES options expiring in the months of October, November and December are associated with the underlying future contract which expires in December. Such knowledge can be important to a trader who is trading these options though the price difference between the various future contracts can be small.
Hope this article has been helpful to you if you are thinking of embarking on the futures options selling track.
Good luck!
By: uktank
About the Author:
Most options sellers may be familiar with the concept of selling options against equities which can include stocks or ETFs, but selling options against futures contract may be a totally new ground to them. The basic principles may remain generally the same, but one must be aware of certain aspects which could make one more appealing or fearful than the other.
ETFs options work very much the same as stocks options. They are treated like just normal stocks except that while stocks can crash to zero value, the possibility of ETFs crashing to zero is extremely small, which I will not commit to saying zero. Something very drastic must have happened to the market to cause this to happen since ETF like SPY comprises of some of the strongest companies listed in the exchange. And for that reason, I generally prefer to sell put options on ETFs. Of course, that’s just my preference and I believe you have yours too.
I have heard of some traders who did options selling on stocks and I mean on big companies which failed. Depending on the risk management approach that was taken, disastrous to the trading account could have been avoided or minimized then.
The risk associated with selling options on stocks may therefore be perceived as relatively higher and thus lead to a possibly higher margin. Premiums obtained from selling stock option and future options differ. Margin requirement from selling stock options can be 10, 20 times higher than the premium collected while that for future options can be just a few times higher. The return on investment is thus viewed as better for doing options selling on future contracts.
Strike price consideration is also a critical factor when deciding between stocks and futures options. For futures options, it is possible to sell very far OTM options and yet collecting a reasonable amount of premium for it. However, for stock options, one would have noticed that after just a few strikes OTM, the premium to a miserable amount which might not be worth the risk to do so.
With a lower margin and possibility of getting a substantial premium for very far OTM options, futures options seemed a much choice than stocks options at this moment. However, one must be aware that futures come with contract dates which they mature or expire. They are unlike stocks or ETFs which one can hold upon assignment on the expiry dates. Risk management for futures and stocks options selling hence differ. Futures contracts like the E-mini S&P (symbol ES) also come with different contract dates, e.g., the September, December contract etc. ES options expiring in the months of October, November and December are associated with the underlying future contract which expires in December. Such knowledge can be important to a trader who is trading these options though the price difference between the various future contracts can be small.
Hope this article has been helpful to you if you are thinking of embarking on the futures options selling track.
Good luck!
By: uktank
About the Author:
uktank is the author of the website http://www.anybodycanberich.com which deals with options trading, especially options selling.
Filed under Investing by Administrator
November 3, 2008
Is Stock Option Trading A Profitable Investment Option?
A lot of traders now favor option stock trading because of its many advantages. For one it can be highly profitable if used rightly, it offers the investor more flexibility and a larger option to diversify. This trading system offers more protection to the portfolio gives more control to the investor and offers a higher possibility to generate more returns on investment. They can be used under any market condition. They offer the investor the advantage of making returns on a change in stock price without actually owning the stock. Options stock trading can be used in combination with other option contracts and/or other financial tools to maximize returns.
Furthermore, a lot of trading is done on the floor of the stock exchange; one of such is referred to as stock option trade. Sometimes the trading could just be more of speculative activity. Speculative activity trading is done on stock exchanges through stock options trading. The term option in stock parlance means “a right”. There exists the right to sell as well as the right to buy. In a deal involving an option, the right to buy or sell a certain amount of securities, within a particular period at a given price can be bought off a dealer. If the purchased right was an option to buy securities it would be called a “call option”. If the right was the option to sell, it is called a “put option”. Instances where the two possible options are combined, to buy or sell a certain quantity of securities at a particular price up to a given future date, it is then referred to as “a double option”, or “a put and call option”
Speculative activity or stock option trade is carried out for anticipated profit. Here is how it works. If a speculator expects the price to go up, he buys a call option. This allows him in future when the price has arisen to buy at the old lesser price and sell at the higher prevailing price. When the reverse happens and a drop in price is anticipated he buys the put option.
When a speculator notices that his predicted or expected rise or fall in price did not occur he can chose not to exercise his right or stock trade option that he had purchased. The party that grants or sells the stock option trade to the speculator is paid a premium for granting it.
This premium is also called the option money. This is the fee that is earned by the trader who grants the speculator the stock option trade. When the speculator desires not to exercise his option he loses the option money or premium. But his loss is restricted to the option money alone. Stock option trade is useful for speculators who want to protect their capital and yet seize advantage of fluctuations in prices. He has the choice to decide whether to exercise his option or not.
By: Wincent Loh
About the Author:
Furthermore, a lot of trading is done on the floor of the stock exchange; one of such is referred to as stock option trade. Sometimes the trading could just be more of speculative activity. Speculative activity trading is done on stock exchanges through stock options trading. The term option in stock parlance means “a right”. There exists the right to sell as well as the right to buy. In a deal involving an option, the right to buy or sell a certain amount of securities, within a particular period at a given price can be bought off a dealer. If the purchased right was an option to buy securities it would be called a “call option”. If the right was the option to sell, it is called a “put option”. Instances where the two possible options are combined, to buy or sell a certain quantity of securities at a particular price up to a given future date, it is then referred to as “a double option”, or “a put and call option”
Speculative activity or stock option trade is carried out for anticipated profit. Here is how it works. If a speculator expects the price to go up, he buys a call option. This allows him in future when the price has arisen to buy at the old lesser price and sell at the higher prevailing price. When the reverse happens and a drop in price is anticipated he buys the put option.
When a speculator notices that his predicted or expected rise or fall in price did not occur he can chose not to exercise his right or stock trade option that he had purchased. The party that grants or sells the stock option trade to the speculator is paid a premium for granting it.
This premium is also called the option money. This is the fee that is earned by the trader who grants the speculator the stock option trade. When the speculator desires not to exercise his option he loses the option money or premium. But his loss is restricted to the option money alone. Stock option trade is useful for speculators who want to protect their capital and yet seize advantage of fluctuations in prices. He has the choice to decide whether to exercise his option or not.
By: Wincent Loh
About the Author:
Find out more about the best options trading courses at options university site.
Filed under Investing by Administrator