Binary Options Brokers Overview

There are few differences between the best binary options broker services such as EZTrader and StartOptions. Both have advantages and disadvantages but they essentially do the same thing - allow people to trade binary options using a small amount of cash. Here we will review a few of them and try to give some guidance as to what to look for when selecting one for binary options trading.

** Update** Be sure to also check out Optionbit, a new entrant in the retail binary options broker business.
We've also taken the time to do an in-depth review of other binary options brokers such as AnyOption and TradeRush as well.
See a side by side comparison of binary options securities traded.

 

Binary Option Broker Overview: EZTrader

Before I go any further, I should say right off the bat I am compensated for referrals to EZTrader. Make of that what you will but I will say this: I get referrals because people like what EZTrader offers, not because of any smoke and mirrors. Here is what is to like about using the EZTrader platform:

1. EZTrader frequently offers bonus cash on new deposits (not only on new accounts)
   -
   • allows newbies to trade with EZTrader money before committing their own capital
   • Traders can buy in again and get more EZTrader money to start
   • The bonus cash ultimately becomes yours
2. Trades are "fire and forget" - hit the execute button and go get some coffee
3. Yields vary between 60%-75%
4. Binary option contracts expire either hourly or at the end of the day
5. Binary option contracts are for fixed dollar amounts
6. Some contracts offer some return of capital even when out of the money
7. The EZtrader interface is ridiculously simple to use

Honestly - the biggest difference between EZTrader and TradeSmarter/StartOptions is the bonus cash.What do I mean? Consider that TradeSmarter is doing a holiday offering of $100 bonus cash on a new -account, whereas typically EZTrader bonus cash weekly offers range from $150 to $300 on a new -deposit. Huge difference. Huge.

 

Binary Option Broker Overview: Tradesmarter / StartOptions

Before I go any further, I am compensated for referrals to binary option broker StartOptions (broker TradeSmarter - a reputable binary options broker uses the same platform fwiw). Make of that what you will. Recent changes to their trading platform have made this portion of the comparison obsolete. See our full review of StartOptions.

Here's what is to like about using the StartOptions platform:

1. StartOptions offers a variety of "pre-canned" trading positions
   • allows a wider variety of set positions
   • Double no-touch, Single no-touch, Straight Binary (or Digital Options)
2. Trades are "fire and forget" - hit the execute button and go get some coffee
3. Yields vary around 70%
4. Binary option contracts expire either hourly or at the end of the day
5. Binary option contracts are for fixed dollar amounts
6. Simple interface
7. StartOptions offers a demo account
   • Allows users to learn interface while using "play money"
8. StartOptions parent Tradesmarter is Australian Securities industry regulated (edit: 2013 - no longer the case - although Market Punter is)

Here's What's Not to Like About StartOptions:

1. Limited number of securities traded
   • At last look six cross pairs
   • seven US securities
   • three metals
   • ZERO foreign securities
   • ZERO Indexes (DJIA, Nasdaq, etc.)
2. StartOptions has a Demo Video which is a cartoon that demonstrates NOTHING (since pulled down)
3. Smaller bonus cash

Basically StartOptions (TradeSmarter) appears to be an interesting competitor (very interesting variety of pre-set trade positions) to other brokers but they have much less to offer in terms of raw number of securities traded, less bonus cash offers.

StartOptions and TradeSmarter now offers a nice selection of foreign securities including some Chinese stock options you'll find nowhere else - but be forewarned - they do NOT accept US Residents as clients.

 

Binary Options Broker Reviews

Numerous binary options brokers have sprung up in the last twelve months and it has taken us a little time to catch up with all of them however suffice to say we finally think we have a pretty good grasp on the binary options broker industry. Click on any of the links below to read our in depth reviews of each broker working in the binary options space... and no, they are NOT all the same.

1. TradeRush is rapidly becoming one of the most popular choices amongst binary options traders in the US. Great platform, popular offerings, and even the high paced 60 second options!
2. AnyOption has the best selection of foreign indexes and commodities - and in the gold standard vis a vis reputation in the industry. They restrict trading for US clients though.
3. Optionbit is a highly innovative broker offering range options and one-touch/no-touch options in addition to vanilla binary options.
4. optionFair is an extremely innovative broker offering NON-US Residents a great variety of options contracts including no-touch/one-touch, bounded/range options, and high yielding weekly options (400% yield!).
5. TradeSmarter has grown by leaps and bounds in the last year, including new Asian/Chinese stock offerings... Note: NO US residents... Australian securities industy regulated.
6. GlobalOption has limited offerings at this time but we will continue to monitor their growth over time...
7. EZTrader is one of the oldest online binary options brokers. They offer fire and forget digital binaries on a pretty wide variety of securities, indexes, and foreign securities...

Binary Option Trading, Tips, and Strategies

Here are a couple of resources you may find useful in learning about binary options and how to use them to increase the profitability of your trading efforts.

• Binary Options as Described in Layman's Terms
• Trading Binary Options - Tips, Strategies, and Scenarios Using Binary Options
• Margin Trading Examples - Great examples of learning how margin is used.

Free Online Trading Sites - 3 Places to Trade Without Fees

Are There Really Ways to Trade
without Commissions or Fees?

Savvy day traders these days have found free online trading sites that offer ways to use small capital investments in a way that does not involve fees or commission. Here we will look at some of these alternative platforms and elaborate on the strengths and weaknesses of each.

Binary Options

The first platform we will look at is the typical binary options site. Normally these fixed high yield / high risk contracts pay out 70%+/- on daily or hourly investments depending on the duration of the investment. The great benefit for users of this type of platform is that it (like the others reviewed here) does not charge any transaction fees or commissions. Whereas one could normally expect to pay anywhere from $3 - $10 typically on a stock trade (plus spread) for each traditional stock or option trade - and invest in increments of $1000+. Contrast that with the binary options broker, who would not charge any fee or commission and would allow investments in increments as small as $10 (to perhaps as large as $3000 per contract). It does not take a lot of analysis to figure that this type of trade is much more efficient for small capital investors.

Barrier Options

Similar to binary options are barrier options. While the binary contract tends to be one sided in nature (up or down), a barrier option site works differently. The contract on these types of free online trading sites involves either a one side, two side, inside, or outside range of values where the contracts fall in the money. A buyer can pick the inside of a range, outside the range, or the top or the bottom of a given range. Algorithms belonging to the barrier options broker will determine the strike prices and yields for each contract. The buyer of the investment pays no fee nor commission nor spread for the privilige of trading. This is very popular as a means of hedging against price swings in long (or short) positions of the underlying securities.

60 Second Options

Yet a third type of high yield, high risk addition to the list of free online trading sites is the 60 second options platforms. These platforms can offer yields similar to the previously mentioned free sites but with a duration lasting just 60 seconds. It is without question the highest turnover rate of capital imaginable short of high frequency trading bots. A 60 second options broker can offer lot sizes as small as $5 to perhaps as large as $2000 depending on the dealer.

Free Course on High Yield Short Term Investing

For more information on trading any of these types of securities, please sign up for a free trading course on binary options. In the course you will learn about each of the above securities in detail and be shown basic strategies and methods for constructing positions, hedges, and using simple statistics and basic probabilities to improve profitability.

Binary Options Hedge vs Trading Barrier Options

Are Barrier Options the Right Choice for You?

Before one considers trading barrier options one should also consider the similar alternative investment, the binary options hedge. Although the investments are very similar in terms of in the money yields offered, the risk characteristics are considerably different. Many times the determining factor in deciding which asset to trade comes down to a choice of convenience versus control.

"The development of binary options trading has been a huge blessing for the world of hedge trading for retail investors," said Steve Wise of binary-option-broker.com. "It affords the retail trader the opportunity to make simple hedges in the marketplace as a means to trade for profit or as insurance against loss. Previously this sort of risk management trading was the realm of institutions and wealth managers."

Convenience vs Control

Wise added that when it comes to picking barrier options or attempting to use the binary options hedge it really came down to a choice of convenience or control. "Does the retail trader want to buy a spread of values outright with barrier options or does the trader want to have more control over when - and whether - an individual binary options contract is left open or hedged. The effort required to do either trade and the range of potential outcomes is considerably different depending on which contract you decide to use."

When a trader picks up a binary options contract with the intent to potential hedge the initial contract with an equal and opposite trade, the resulting combination of assets provides a small range of strike prices with a high yield of sixty to eighty percent and a very wide range of values with a modest loss - "Typically ten percent plus or minus," according to Wise. In theory the draw of opening one contract and then hedging it revolves around having the opportunity to create a window of values with a high yield while all other possibilities preserve most of the capital invested.

Boutique Solution vs Off-the-Shelf

On the other hand in the case of barrier options the retail trader effectively walks up to the counter and picks up whatever spread of values is offered by the barrier options broker. Said Wise, "The range of in the money expiration prices is set by the broker at purchase and the day trader then hopes the contract expires with the spot price somewhere in that money range." Once the contract is purchased, the trader effectively walks away having already bought both the put and calls at the same time. One major difference with the binary options hedge is that the tail risk - the possibility that the contract expires outside the money - results in loss of most or all of the investment. "In theory the tail risk is the price the trader pays for the typically wider spreads and convenience of buying a range of values with no initial open ended exposure," said Wise.

Regardless of whether a trader has an interest in barrier options or binary options it behooves them to take a basic options trading course to learn the ropes according to Wise.

Online Options Trading Basics

Here are a few online options trading basics anyone interested in trying to make money by investing in stock options. We'll try to cover anything and everything we can think of from deciding where to open an account to what to expect from your first trade. It is my hope by the end of this you have a good idea what trading options is about and have the confidence and knowledge you need to make your first trade intelligently.

Online Options Trading Basics: What Is Option Trading?

Option trading is the process of buying and owning the right to buy (or sell) shares of stocks, commodities, or other assets. When one buys an options contract, they own the right to purchase some other asset on or before a future date for a set price. Think of it as being similar to (but not exactly the same as) putting a purchase on layaway (a washing machine, for example) at the local department store. At any time in the future up to "X" number of days before the layaway expires you can walk in and pay for your washing machine at the price you locked in when you put it on layaway. Options work nearly identically.

The principal difference between the washing machine example above and an options contract is that the cost of the option is completely separate from the purchase price of the underlying asset. In most layaway contracts, the deposit made on a washing machine is credited toward the final purchase price. Not so in options.

The other significant difference between options trading and a layaway contract is that you, as the trader, can either BUY or SELL the RIGHT to BUY or SELL assets. In a layaway contract, you're only in the position of BUYING assets. The point is there is quite a bit more complexity in options trading than buying something on layaway... but the layaway example is useful in describing what options trading represents conceptually.

What Matters in Trading Options Online?

There are very few differences between online options trading brokers these days. The principal differences between brokers will be cost per transaction (trade) and variety of other services offered. Odds are if you are engaging in option trading online your focus should be cost, which will be lower at specialist options trading companies such as optionsxpress. Specialist houses can offer lower costs because they don't have the high overhead associated with other more service intensive products like retirement planning, IRAs, 401Ks, and the like. If you are options trading online for income, cost needs to be your principal focus. End of story. Fill out the online screens to setup your username, password, and your account basics. Print out forms for margin accounts and electronic banking, as well as any forms which require a returned signature.

What to Expect When Opening an Account

Expect to have to fill out a lot of forms / or at least read a lot of forms online (at least 2 forms will require printout and signature for options trading typically). I strongly urge you to printout and READ the forms you are signing. Reading the fine print will help you understand some of the risks associated with options trading, and it will also clarify your rights as an account-holder - yes, you have rights which brokers must disclose to you.

The two forms you should expect to print and sign are the account signup form, and the margin account agreement. A margin account is required to trade options, as you will be in position (potentially) to be buying shares for which you do not have the cash to purchase outright. You don't have to understand this entirely right now (you can see an example of the risks of leverage here if you're so inclined). READ THE MARGIN AGREEMENT! It contains important language about restrictions and how the broker will operate when things go wrong (as they potentially can).

Beyond Opening the Account: Funding

Above and beyond opening an online options trading account you'll need to fund it. Nearly all account funding these days is done electronically. Be prepared to submit a blank voided check with your account application. This will allow funds to be transferred between your bank account and brokerage account - a MUST in today's fast paced world of online finance. The other ways to move funds in and out are with a credit card (not everyone does this), and or a paypal account (which can link to your banking account as an intermediary). The best setup is to simply have your local bank electronically tied to your brokerage account. There is a form for this as well (what else is new). Print it, sign it, and attach a blank voided check to it. Send it in. Once done and all the account information is verified you'll be prepared to move funds in and out of your account quickly and cheaply - critical to keeping liquidity high and costs low in your trading account.

Preparing to Make Your First Trades

Once you have your account setup (which requires an awful lot of work just to setup) and funded, you are ready to make trades. All you have to do now is figure out which trades to make. Fear not, we've written a primer - an options trading tutorial for you to take it from here.

How to Hedge Stocks

Knowing how to hedge stocks owned in a portfolio is one of the most important aspects of maintaining a portfolio of equities. Figuring out how to hedge stocks in your specific portfolio will be a different problem than how I hedge stocks in my portfolio - as our investments and timeframes will differ. Here are some guidelines as to how to hedge stocks in your equities account based on what types of securities you own and how long you intend to own them.

How to Hedge Stocks Held for Long Term

Long term investments have higher duration risk, and unfortunately that means higher cost when it comes to insurance (a.k.a. hedging). At today's interest rates borrowing costs are relatively low which makes valuations on future cash flows to be fairly expensive based on discounted cash flow valuation methods. In other words cash flows in the future are worth almost as much as cash flows today. When rates are higher, future cash flows are worth much less than cash in hand today. What does that mean for long term insurance of equities? Bad news. An insurance contract on a long term fixed dollar value payout (based on the value of the stock today) will be more expensive than a similar contract would be if rates were higher.

In a case like this it may pay a little attention to the volatility indicator (see Trading the VIX). As the volatility indicator falls, the part of the premium on general stock options contracts falls as well. Leaps (a long term stock options contract) are less expensive with a low VIX (all else equal). If you are going to buy insurance on long term securities, odds are you will buy leap put options on your stocks at the strike price you wish to receive should the market tank on you. They will generally be expensive, and the spread will also be wider than short term hedges.

How to Hedge Stocks with Reduced Cost

In the above discussion what did we say added to the cost of hedging stocks? Lower interest rates? Higher volatility? Higher stock price? Longer duration? Howabout all of the above. So how do you reduce the cost of hedging stocks? Howabout changing the conditions mentioned above that raise the cost?

You have no control over interest rates, so that's out (although today they are as low as they can conceivably go, so nowhere to go but up... if that ever happens...). What about lowering volatility? Although you have no control over it, you can decide WHEN to buy your insurance, and interestingly enough that as your stocks are highest, volatility will typically be lowest, and hence that is a favorable time to hedge stocks.

What about those higher stock prices then? If volatility is low and stock prices are high (those two things usually go together), do you absolutely HAVE to hedge the ENTIRE current value of your stocks? Can you live with hedging perhaps your capital investment plus a 10 or 20% gain (presuming you have gains > 20% on your present holdings)? Reducing the overall AMOUNT of the hedge is the most direct way to reduce the cost of hedging stocks.

Using Shorter Duration Options to Hedge Stocks

Shortening the duration of stock hedges in low rate environments like today has a dramatic impact on reducing the cost of hedging. The time/duration premium on options contracts is much higher in a low rate environment than it would otherwise be. Shortening the length of the options contract bought reduces the length of coverage, true, but it also dramatically reduces the cost.

How to Hedge Stocks Held for Short Duration

Here is where the choices become significantly more interesting. Once the target holding period of an equities position drops to a month or two, the number and variety of available contracts to use as a hedge opens up dramatically. Among the more interesting choices are one-touch options and barrier options. Unfortunately these contracts are only available on the most liquid securities, but if you're holding shares of Microsoft or Apple that you plan on liquidating after a certain number of days and want to lock in today's high prices, a one-touch options contract might serve you well. Sadly these aren't widely traded yet, and aren't available on most stocks, but in most cases a simple one or two month options contract will do - and most stocks have something out there that can be traded/bought for hedging purposes.

I know that doesn't cover every scenario known to the market, but hopefully that gives you some idea of how to hedge stocks in your portfolio, and what sort of tools you have at your disposal, and what sorts of market conditions are likely to impact the cost (and therefor effectiveness) of your stock hedging efforts.

Investments for Inflation

"What investments for inflation are going to be effective today?" That's a question I get asked on a regular basis these days. I have to say this is a question that is of great concern to me as a person living in America.

Investments for Inflation: Is It Time to Jump Ship?

The economic picture in the US may be deteriorating again, and I have been struggling to find the right answer to the age old question: "are we seeing inflation or deflation." It's pretty clear that in terms of consumable necessities (food and energy), we are definitely seeing price inflation. Similarly we have seen big gains in metals - gold, silver, copper, and rare earth metals. Given that energy prices have increased greatly over the last 12 months it would be very hard to argue that costs have done anything but go up.

But that's not the honest truth, is it? We have also seen price deflation in long-term assets such as housing / real estate and perhaps consumer electronics. We can attribute the relative drop in price of electronics due to improved quality and productivity in that industry. Basically innovation. But what about the drop in prices of long-term assets like real estate?

A simple answer would tell us that investments for inflation would be tied to the near term price swings we are seeing in short term consumables and commodities.

The Problem with Short Term Volatiles as Investments for Inflation

The problem with using these current "hot items" as investments for inflation eras is that these commodities are highly subject to short term supply issues and can be easily manipulated by traders. The prices of these investments do not necessarily reflect the true nature of the present inflationary environment. So how does a prudent trader find a true balance between the short term pricing pain seen at the gas pump and the grocery store and the long-term reality that the economy stinks and prices of high ticket, long-term assets are falling?

The answer should be coming to you. That last sentence has a secret in it. Did you catch it?

See more information about gold price inflation and other ways to protect against inflation

Trading Options Course | Put Options

In the next part of our trading options course we'll start talking about put options, the opposite of call options (which we discussed in an earlier post).

Put Options Represent the Right to SELL

First and foremost put options represent the right to SELL an asset. The asset can be any number of things ranging from stocks to currencies to indexes to interest rates.  How you as investor profit from trading put options depends entirely on how you choose to use them.

Principal Elements of Put Options

A put option is a contract with specifically defined terms. Almost invariably the contract will consist of a strike price (at which the asset will be sold), an expiration date (on or before which the contract must be executed), the number of shares per contract (nearly always 100), and of course the asset to be bought or sold.  The person who OWNS the option has the right to SELL the asset to the person who SOLD the option in the first place.  That probably sounds totally confusing, so let's talk about a real world example.

Buying a Put Option on Apple Stock

It just so happens Apple Inc. is in the news today given the health of Steve Jobs is failing.  If you know Apple's history and Steve Jobs... as goes Steve, so goes Apple... so one might surmise that today it might be a good day if you're already an owner of a put option on Apple stock.  So lets pretend we went to buy a put option on Apple stock last Friday (the last day markets were open).

At the close of trading on Friday a January 2011 put option with a strike price of $345.00 (near Apple's approximate closing price on Friday which was $348) would have cost $5.91 to buy in the market. Buying (going LONG the Put Option contract) would cost $591.00 ($5.91/share x 100 shares/contract).

Now consider that if we were to execute the contract Friday we wouldn't get any money!  Why would we want to sell shares at $345/share when we could go into the market and sell them for $348?  Doesn't make sense does it?  And yet according to the finance pages there are 14,000+ contracts open at this time.

Why People Buy Put Options - Trading Options Course Lesson in Market Timing

Over the holiday weekend Steve Jobs announced he is taking a leave of absence from the company.  Steve is and always has been the driving force behind the value creation of Apple Inc.  The last time he took a leave the stock immediately tanked, and here we are years later about to open the market again after a "Steve is leaving" announcement and the shares are down $15 to ~$323.00.  Approximately how much will the put options on Apple Inc. stock be worth on Tuesday when the market opens?

The answer is the value of the put options will be AT LEAST the amount of money you can make by simply executing the contract and selling the shares, ie the difference between the strike price ($345) and the current market price ($323).  The put option contracts should open this morning at least $12.00/share, making the Friday investment of $591 now worth at least $1200. Not a bad return (doubling your money) for one weekend's risk, eh? (editor's note: for the record the $345 January 2011 put option opened around $13.00)

Now does the decision to buy put options for with a price of $345 make sense? I hope trading put options makes a little more sense to you today.

Options Trading Tutorial | Call Options Explained

In the next post of the options trading tutorial series we'll talk about call options. A call option represents the right to buy a specific number of shares of a company or other asset at a specific price on (or before - in the case of Standard -or American- options) a specific date.

Call Options Explained

A call options trading tutorial has to talk about three critical pieces of information: the strike price, the expiration, and the call premium. Each of these bits of information play a critical role in determining the ultimate return on investment for the options trader.

Call Options: Explaining the Strike Price
The strike price of a call option is the price at which the option holder (long position, or buyer of the call option) has the option to pay for a set number of shares of stock (or some other asset) on or before a certain date. If the shares of stock (IBM for example) is trading ABOVE the strike price of the option, the option is considered "in the money." A call option buyer (or LONG) would be able to execute the option contract, forcing the counterparty to deliver the specified shares at the strike price. The option holder (now a share holder, given that the shares have been delivered) would have the freedom to re-sell the shares into the market at a higher price (see put and call option trading examples) and therefore cashing in the difference between the price paid (strike) and price sold for (market) as trading profits.

Call Options: The Expiration Date Explained
The expiration date on a call option (standard or American options) refers to the date on or before which an option must be exercised otherwise it expires (or can be subject to automatic options execution - not always a good thing for the trader short of cash). A call option which expires out of the money is worthless while an in the money option pays a profit (explained above - the difference between strike price and the market price of shares less the call premium times the number of shares in the contract). On *MOST* stock options contracts, the expiration is the third Friday of the month at the close of trading in New York (4pm EST). Sometimes there are options contracts which expire at the end of a quarter. It is extremely important to know when your options contracts expire, and to have your trades settled long before then unless you intend to exercise the contracts (a rarity these days because of the huge cash commitment involved... and the fees).

Explaining the Call Premium
The call premium on a call option contract is the fee the buyer of the contract pays to the seller of the contract (through a clearing house - to be explained elsewhere later). The call premium is essentially the market price of the contract - meaning the "fair" price the market has established for the contract based on a number of factors, including the probability of in the money expiration, the risk free rate, the volatility of the market, the number of days before expiration, and the current price of the underlying stock or asset.

In this options trading tutorial on call options we explained call options premiums, expiration dates, and strike prices. Options trading is risky and can result in significant losses of capital.

Carry Trade Explained - How Forex Trading Makes Money Long Term

The carry trade is one of the less understood ways to make money investing, but ultimately is used by all of the largest, most sophisticated investors to preserve wealth and diversify risk amongst economies. I took time out to write a series of articles about the carry trade, and forex trading in general. Here is a brief piece published around a week ago which scratches the surface with more information available via links at the end of the article.

Carry Trade Explained
By Steve B Wise
The carry trade explained as it relates to interest rate differentials between countries is the most common use of the term in actual market practice. The concept begins fairly straight forward like any other investment. Raise capital (either borrowed or equity) and then lend it at a higher rate somewhere else. The carry trade explained this way does not obviously capture all of the complexity of the mechanics of actual trades however it does help to start trying to understand the position from its basic roots: interest rate differentials.
How a Typical Investment Might Be Established
Among the most common uses of rate difference trading is leveraged borrowing of large quantities of one foreign currency (and paying one interest rate) and lending/investing a different currency (in the same gross quantity) in another currency at a different (higher) rate. This results in a rate gap (owed versus earned) which nets the investor a small amount of profit per dollar invested daily. Generally this amount is quite tiny on a dollar for dollar investment, which is why investors typically use very high leverage to increase the daily profits to a meaningful amount.
Carry Trade Explained: How Leverage Makes Rate Differentials Worthwhile
Note that while we mentioned a moment ago the amount of profit on a dollar for dollar equity investment in a forex interest rate differential trade is small (a $10000 investment might yield $1.20/day), when leveraged up to a typical high water amount of 100:1 leverage that daily profit becomes $120/day, a typical living wage in the United States. In truth most investors will go with something more conservative like a 10:1 ratio or perhaps 20:1 (making a $100,000 equity holding pay out the same $120/day at 10:1).
What Forex Pairs Are Used in Interest Swaps in Today's Market
Trade positions typical in today's market are spoken of as going long AUD/JPY or alternatively long AUD/USD, meaning borrowing at today's low rates in the United States and Japan, then lending that same dollar amount in Australian dollars collecting a daily fee along the way.
See a detailed example of the carry trade explained, including a forex margin account example.
Steve B. Wise
Article Source: http://EzineArticles.com/?expert=Steve_B_Wise
http://EzineArticles.com/?Carry-Trade-Explained&id=5272141

I hope this carry trade explanation whet your appetite for more information on this high yield / high risk investment strategy. While the leverage involved in trading forex is quite high, the rewards can be substantial and consistent when managed appropriately. We'll be making up a couple of these carry trade positions in the not too distant future and when we close them we'll share the results.

Learn more about Forex Trading

Options Trading at Expiration Can Be Playing with Fire

If you are options trading near expiration and are a retail trader like I am - boy you can be in for a rude wake up call if your contracts are just barely at the money.

Ever Heard of Automatic Options Execution?

Yeah, odds are your broker features automatic options execution on contracts that expire in the money without being exercised or sold/closed out prior to expiration. What this means is that if your contracts are as little as 1 cent in the money your broker likely will exercise all those options on the next day and go hunting around in your account to find cash to pay for all the stocks YOU JUST BOUGHT. If you have 100 contracts with a strike price of $10/share... you had best have $100,000 cash - CASH in your account. If not, don't plan on ever being allowed to engage in options trading ever again. You'll be banned.

So What Do You Do With At the Money Options Close to Expiration?

Dude... you have to unload those contracts prior to expiration. That means engaging the market HARD to get those contracts rammed through the market makers - not the easiest of tasks when the market is illiquid and your contract is only a penny or two in the money. Not a fun situation to be in.

What If That Fails? How to I Handle Options Expiration Then?

If you're nearing closing time and your options are about to expire just barely in the money and leave you hanging, you've got to place that call to customer service (they've probably already called you) and get them to take the contracts off your hands.

That's your tip for today. Happy trading!
PS - Tomorrow is options expiration for June :)

Most Profitable Stock Picking System

The most profitable stock picking system for a retail trader like you and me is going to involve finding stocks that move.  The beauty of the life of the options trader is that we don't care which direction the movement comes (so long as we forecast it correctly).  We are much more concerned with the size and frequency of movement instead (unless you are trading binary options, which only require the direction of movement to be correct).

How Do I Pick Stocks That Have Big Movement

Although it really isn't all that helpful for it's originally intended purpose as a measure of risk for making efficient portfolios, Beta is a well established statistic which describes the variability of a stock relative to the broader stock market.  That being said, doesn't it seem that using beta might suit our needs for finding stocks of high variability?

Why Beta Still Matters to the Cash Options Trading Investor

Even though beta has been more or less written off as a measure of portfolio risk, resigned to the dust bin of efficient portfolio design, to the options trader it measures (historically) EXACTLY the metric the retail options investor is looking for: volatility.  Beta, simply stated, measures the historical variation in a stock relative to the broader market.  For example, a stock with a Beta of 2.0 would be expected to move twice as far as the broader market on any given day.  Similarly, a stock with a Beta of 0.5 would be expected to move 50% as far as the broader market in a given day.

So What Sort of Beta Should A Good Options Trader Select?

Oddly enough, the most profitable stock picking system for the retail options trading investor would be (drum roll please): stocks with a relatively high beta.  A stock which moves a higher percentage relative to the market is likely to have greater swings in options pricing.  Greater swings in options pricing inevitably opens the door for a small cash options investor to capture a significant portion of those swings (incidentally, the short seller of options prefers to trade in low Beta stocks... because those stocks are less likely to move, allowing the holder of the short seller's contracts to expire out of the money - so the short seller gets to keep the premium for themselves... but thats a topic for another day).  The point is that stocks with larger percentage swings on a daily, weekly, monthly, etc. basis will likely have a greater probability of providing profitable entry and exit points for options trading.

The Most Profitable Stock Picking System Involves More Than Just Beta

Finding the most profitable stock picking system for options trading isn't just about Beta, and we'll talk more about that later.  What I hope I have accomplished here is getting you (as a cash options trading investor) to stop thinking about trying o find "stocks that are going up" and instead turn your attention to a more profitable enterprise: finding stocks that are "going to MOVE"

Cash Is King for the Options Trading Icon

In options trading Rule #1 is: Cash - IS - King

Sums it up, doesn't it?  Why is it that such a simple concept get so easily lost amongst day traders.  Aggressive and smart people are humbled over and over again by the market.  WHY?

Simple: Because they forgot rule #1: Cash-IS-King

I have seen far too many traders get greedy and take on positions far larger than their ability to manage or properly capitalize with COLD-HARD-CASH.  Why is it that traders insist on getting greedy and either abandon their established trading limits or simply fail to establish good limits at all?  Does the average day trader forget that there are bigger fish in the sea who can easily take out weaker leveraged positions?  Face it, unless you have huge amounts of capital to work with, margin-style leverage is only going to get you completely wiped out.  Leave the margin trading for the big fish.  The good news is you don't have to use margin to create leverage.  It is really possible to leverage your buying power with options, paid for with CASH.  Have I mentioned Cash-Is-King?

Consider the example of a forex margin account.  A typical forex margin account (like here) will allow you to trade using up to 400:1 leverage (on maintenance margin after initial 200:1 margin position).  Sounds great doesn't it?  A one cent change in an exchange rate turns into as much as $2 in profit per dollar of capital invested.  Where's the problem in that?

The Devil In Margin Trading Is the Margin Call

What is a margin call?  Think of it as catching a big wave on a surf-board and then finding out you're actually riding a tsunami into the ground.  The math isn't all that complicated but the gist is this: the same rules that apply to gains in a margin account apply to losses as well... except for one thing.  If your trades are going badly and your equity (cash + net securities value) falls below a certain level (called the maintenance margin), your broker can (legally and without notice) begin selling any and all of your positions to satisfy margin requirements.  Basically, they can wipe out your entire account... AND if the position has gone badly enough, you may still have unpaid losses!

Ok So Margin Trading Isn't All Peaches and Cream - How Do I Create Leverage Using Cash Options?

Now you're starting to ask the right questions.  A lever, from the time of Archimedes to the present, has always been a tool for a person to do more work than can be done using the body alone.  A lever in day trading stocks allows a trader to purchase or control vastly more buying power than they would otherwise be able to get with cash alone.  We've already discussed how this is done with margin (a margin stock account allows 2:1 leverage max).  Another way to create leverage is by using cash stock options.

How Do Cash Options Create Leverage?

A stock option is defined as the right to buy a particular stock on or before a specified time for a specific price. An option is a CONTRACT between the buyer and the seller of the option.  The SELLER of the option is paid a PREMIUM for the risk exposure they are taking in committing to being the short side of the contract.  The premium paid by the buyer of the contract relative to the actual share price of the underlying stock determines the leverage.

Think of it this way - a person with $1000 can buy 100 shares of a stock that has a share price of $10/share.
An options trader on the other hand might be able to buy 100 call contracts (a call contract typically represents right to buy 100 shares) for $0.10/share ($10 per 100 shares) giving the trader right to buy (control) of 10000 shares.  This represents buying power leverage of 100:1 versus an outright cash stock purchase. 

Now who knows what the terms of the strike price and expiration date are of the options contract.  That's not the point here.  The point here is to demonstrate that options create buying power leverage for the cash options trader (long side).  The seller of the call contract(s) is a different matter entirely.  They may be closing out a position, hedging a position they already have, or making a (naked) gamble that the stock will go down and they'll never have to pony up the actual shares of stock.

I hope you can now see why options trading using purchased cash options is the small capital trader's way to create leverage - remember rule #1: Cash-Is-King.

Establishing Your Comfort Zone for Options Trading

Establishing your options trading "comfort zone" is the most important step to take before taking the plunge and making trades.  What kind of "comfort zone" am I talking about?  I am talking about making trades using options contracts which require no further attention on your part and give you the ability to walk away from the computer terminal and not look back.  And oh, by the way, the reason you'll have this confidence is that you aren't worried about losing money on the trade - the only concern you have with the trade is WHEN you are going to get your PROFITS on the trade.  THAT'S what I mean when I talk about a COMFORT ZONE in options trading.

When I started writing this blog I made some assumptions about how much you know about options trading.  I have assumed that you know the basics of put and call contracts, and what circumstances (market direction) make them profitable.  If you haven't got a clue about options trading, this blog probably isn't the place for you: it'd probably be best if you picked up a beginner's book to get the basics first.

For those of you still reading, what do you think will give you the most confidence in making options trades?  Want to know the biggest secret? Would you believe there is one critical advantage you can have over nearly every other trader in the market - a critical advantage that will MAKE YOU MONEY in options trading.

The Critical Advantage in Options Trading Is CONFIDENCE

How do you get the kind of confidence I am talking about?  It is way easier than you think.  While you may think the market is extremely intimidating and full of sharks and schisters trying to steal your money (it IS intimidating, and there ARE sharks, and they ARE trying to steal your money), the truth of the matter is that the vast majority of traders are under MUCH GREATER PRESSURE than you are.  Taking advantage of the pressures that others are under is HOW YOU CAN BE COMPENSATED IN THIS MARKET. Once you understand what gives other traders heartburn (and avoid doing what they do) you can build the kind of confidence you need to start making trades AND THEN WALKING AWAY... WAITING FOR THE MONEY TO COME IN.

Why Do Other Option Traders Feel So Much Pressure

That's the million dollar question, isn't it?  Look at yourself.  What pressure are you under?  Do you have overwhelming bills to pay?  Did you lose your job?  Do you have medical bills?  What anchors are you carrying around in your life?  Want to know the secret to successful options trading?

TRADERS WITHOUT ANCHORS MAKE MONEY CONSISTENTLY.

But wait, you say - if traders are making money then they don't have anchors like bills and such.  WRONG!
The anchors causing you worry OUTSIDE YOUR TRADING ACCOUNT have to be cut FIRST. 

The First Principal of Successful Options Trading Is Trading Without Anchors

Consistent successful options trading involves taking monetary risks that can result in TOTAL LOSSES. The successful trader understands this and ONLY TRADES MONEY HE IS WILLING TO LOSE. Yes, WILLING is bolded in the prior paragraph.  We are talking about contracts which (if they expire out of the money) are WORTHLESS.  If you can't accept the risk of 100% losses DON'T TRADE OPTIONS.  This principal also applies to pressures OUTSIDE your account as well... Which leads to my second fundamental principal of successful options trading.

SUCCESSFUL OPTIONS TRADERS DON'T TRADE WITH THE MORTGAGE MONEY.

Trading With Money That Is Borrowed or Isn't Free to Lose Is Sure to Be Lost

Does that make it clear enough?  Trading with money designated for basic suvival needs (food, shelter, health) is A HUGE ANCHOR. Successful options traders are TRADING WITHOUT ANCHORS. If you are trading money that has an achor attached to it you are at a HUGE DISADVANTAGE in the market, and on average YOU WILL LOSE.

I will write more later, but your mind should be pretty well stirring now.  If you've already traded options (and lost money), you ought to beginning to figure out why by now.  More soon.

How Options Trading Is Like New England Weather

From the title, "How Options Trading Is Like New England Weather" you ought to have a pretty good idea about where I am going with this post.  What we're talking about is getting a price you like for the securities you want, in this case options contracts.

An Options Trader Must Be Disciplined

The retail options trader has to be very patient and disciplined in trading. What this means is establishing a minimum or maximum price to pay for a options contract and not wavering until the entry point is reached (or walking away if missed).  It's that simple.  Preservation of investing capital demands committing to purchasing a security at a pre-determined price or set of market conditions (based on your observations of the market and comfort level) and not wavering from that commitment.  Likewise, immediately after acquiring the contract(s) the well disciplined trader already has an exit price in mind and sets a trading exit point with their broker to automatically execute once the criteria has been met.

Automatic Exit Transactions Reduces Anxiety

Setting automatic transactions reduces the duration of the holding period of the options contract, and likewise maintains disciplined entry and exit strategies (reducing a trader's stress and number of ulcers).  Second guessing is not an option (pardon any pun) for the options trader. The goal of this options trading tutorial is to get you thinking about determining what YOUR conditions for being comfortable entering and exiting the market will be.

Some factors you will need to consider are
What option contracts will you trade?
How much capital are you willing to commit to each position?
What is the minimum number of days to expiration you need to feel comfortable?
What is the maximum premium on the contract you are willing to pay?
What is the maximum spread between bid and ask you are willing to accept?
What is the minimum profit you are willing to wait for?
What are the market conditions (light volume? heavy volume? big dip pre-market? earnings announcements? dividend ex-date?) you require in order to feel comfortable buying an options contract?

The answers to these questions will help you determine which contracts to purchase, how much to pay, how much to sell for, and how long you will hold the contracts.

There is no guarantee of success with options trading, but the greater effort you put into narrowing down which market conditions and trading patterns you are willing to work on, the better your chances of making successful, repeatable profits from trading.

So How Does New England Weather Relate to Options Pricing?

Now back to the original title of this post: "How Options Trading Is Like New England Weather" - the answer to that is simple: Options trading is like New England weather in that if you haven't gotten the price you like to buy or sell a contract, chances are all you need to do is wait a few minutes because the prices (like the weather) will continuously change.  Eventually if you wait long enough, you'll either get your price, or the contract will expire.  No sense worrying about it.  You should be trading with money you can afford to lose.. so you your approach to exit pricing should be ambivalence - so long as you bought your contract at a price you were comfortable with in the first place (which you also should have waited for... like New England weather).

I hope this gives you an idea of ONE WAY to think about options pricing and trading discipline.

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.