Welcome to our Options Trading Tutorial. Options trading is all about understanding leverage and trying to get the highest return investments to pay out in the shortest amount of time. You'll find that in this tutorial we delve into other related topics where leverage is important in order to improve your understanding of why options trading in most cases offers a better trading experience than other forms of trading.

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Options Trading Basics | Call Options | Put Options | Carry Trade | Inflation Investments | Option Brokers | Making Money on Options
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Tuesday, May 11, 2010

Options Trading Tutorial - Surveying the Underlying Economics

Welcome to my options trading tutorial on blogspot. I wanted to jot down some thoughts on how I identify and exploit trading opportunities in the derivatives market to make a few extra bucks every month. Options trading isn't for everyone, and the strategy / style of trading I discuss here honestly requires a lot of confidence and patience in the face of an adverse market.

Options Trading in an Adversarial Market

Right now is an extremely adversarial trading market. The fundamental economics of the global economy are screaming "SLOWDOWN/CONTRACTION IMMINENT" however the largest global governments are throwing the kitchen sick at the problem of global macro-economic depression in an effort to keep the economy going. Successful trading requires being able to gauge the direction of the market at a given point of time, entering the market quickly, setting modest profit targets, and exiting the market before it has a chance to react to your exit strategy.

Key Terms in an Options Trading Tutorial

I'm going to assume you know the basic options trading terms. In the previous paragraph I have described the basic macro-economic picture in simplified terms. Two opposing forces: declining asset values due to real estate and bond market bubbles against government central banks pumping those same asset values up as fast as they can to prevent global economic melt-down.

Cash Is King in an Uncertain Market

What is the best place to be in a market with two extremely large and diametrically opposing forces? Clearly the answer is to be in cash as much as possible and trade into and out of the market with as short duration of trades as possible. In the simplest terms, duration is the length time holding an investment position prior to returning to cash. In an extremely dangerous market like today, duration is measured in days (and preferably - in minutes). This is not the time to be caught "holding the bag" when the market falls out from underneath you.

Having said that, given that economic prosperity and growth is really in all of our best interests, it behooves us to hope that the economy grows and the stock market goes up. The problem is that our pragmatic side knows that double digit global unemployment, overwhelming debt, and an ever widening gap between rich and poor leads to only one conclusion: civil unrest and economic collapse.

The wisest minds in finance and economics know these fundamental facts, and certainly some of those minds work on the trading floors of the biggest banks in the world. They HAVE to know that trading the short side of the market (expecting the market to go down) is the most obvious and profitable trade. The problem lies in that should they make all the money possible betting against the market and the governments and economies of the world they will likely lose their independence and be nationalized, their assets seized, and cushy lifestyles traded in for lynchings and bondage (or worse!).

To Shear or Skin a Sheep, That Is the Question

Whether to shear or skin the sheep, that is the question powerhouse banking interests have to ask these days. Multiple times over the last 30 years trading firms have gained a cumulative trillions of dollars of wealth and kept it for themselves. These trillions have changed hands at the expense of the blind money in the market - away from small investors, to 401Ks, to pension and or mutual funds and into the hands of high net worth individuals, hedge funds, and multinational banks.

The game today has gotten so out of hand it seems to have come to the point of revolution. We've recently seen riots in Greece, which standing on it's own may not seem like a big deal, but we're less than a year from seeing the same level of unrest and or violence in Spain, Portugal, Ireland, and the UK. It is not entirely out of the realm of speculation that riots in California and other debt swollen states are possible.

Adversaries Become Strange Bedfellows When Disparity Reaches the Point of Violence

A wise banker sees this writing on the wall and ultimately can't help but be co-opted by the governments determined to prevent their own overthrow then. That's the underlying economic theory (call it speculation if you wish) behind this options trading tutorial / trading strategy. Banks and governments have to work hand in hand to make it LOOK as though "all is well" long enough to fool the people so subjugated into believing the illusion. The trick is to keep just enough people (the mid-middle class basically) feeling just content enough to prevent uprising.

We'll talk next post about the likely market movements associated with this scenario of overwhelmingly negative economic fundamentals combined with a coordinated central banking intervention strategy.