Trading has it’s pitfalls, but when you’re trading for income it’s a whole different ball game. How many times have you had a winning streak and tripled your initial deposit, then all of a sudden things went terribly wrong and you wiped out your entire account? You went from envisioning yourself in a red Ferrari on the way to your high rise condo, to the pits of hell in a matter of minutes all because you allowed greed to take over your mind. Many traders fall victim to greed, especially trading on the Nadex platform due to it’s use of leverage. I will admit, Nadex makes it very easy to want to keep trading even after you’ve made your daily goal, but doing this will only lead you to disaster. As a full time trader, you cannot afford to let greed destroy your trading account.
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Since conditions are constantly changing, the Greeks provide traders with a means of determining how sensitive a specific trade is to price fluctuations, volatility fluctuations, and the passage of time. Combining an understanding of the Greeks with the powerful insights the risk graphs provide can help you take your options trading to another level.
The Greeks let you see how sensitive the position is to changes in the stock price, volatility and time. The middle (dashed) 30-day line, halfway between today and the January expiration date, has been chosen, and the table underneath the graph shows what the predicted profit/loss, delta, gamma, theta, and vega for the position will be then.
Call options have positive deltas and put options have negative deltas. At-the-money options generally have deltas around 50. Deep-in-the-money options might have a delta of 80 or higher, while out-of-the-money options have deltas as small as 20 or less. As the stock price moves, delta will change as the option becomes further in- or out-of-the-money. When a stock option gets very deep-in-the-money (delta near 100), it will begin to trade like the stock, moving almost dollar for dollar with the stock price. Meanwhile, far-out-of-the-money options won't move much in absolute dollar terms. Delta is also a very important number to consider when constructing combination positions.
Using the Greeks to Understand Combination Trades
The Greeks help to provide important measurements of an option position's risks and potential rewards. Once you have a clear understanding of the basics, you can begin to apply this to your current strategies. It is not enough to just know the total capital at risk in an options position. To understand the probability of a trade making money, it is essential to be able to determine a variety of risk-exposure measurements. (For further reading on options' price influences, see the article: Getting to Know the Greeks.)
The dotted line shows what the position looks like today; the dashed line shows the position in 30 days; and the solid line shows what the position will look like on the January expiration day. Obviously, this is a bullish position (in fact, it is often referred to as a bull call spread) and would be placed only if you expect the stock to go up in price.
First, you should understand that the numbers given for each of the Greeks are strictly theoretical. That means the values are projected based on mathematical models. Most of the information you need to trade options - like the bid, ask and last prices, volume and open interest - is factual data received from the various option exchanges and distributed by your data service and/or brokerage firm.
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You can also "box" an exacta, trifecta or superfecta, which means you bet on all the possible combinations. So if I bet a trifecta box on Nyquist, Destin and My Man Sam in the Kentucky Derby, I'd actually be making six bets because I'm taking all six possible combinations.
But here are some key terms to remember to make sure you know what you're doing when you walk up to the betting window or place a bet at your Kentucky Derby party.
— Pick three (or four, or five, or six). This involves picking the winners of several different races at a track on a given day. It often pays out the entire pool.
You can make an "across the board" wager on a horse — a bet on that horse to win, place and show. If the horse wins, you collect all three; if second, two ways; and if third, one way, losing the win and place bets.
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Fight, trade, explore and survive in Elite Dangerous: Horizons 2.3, The Commanders. Available now for PC and Xbox One.
In order to initiate a trade you need:
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Short selling creates another set of alternatives for setting up an arbitrage trade — one that’s almost necessary to the process. Short selling allows a day trader to profit when a security’s price goes down.
Using a derivative in tandem with its underlying security, traders can construct a range of risk arbitrage trades. For example, a trader looking to set up arbitrage on a merger could trade options on the stocks of the buying and selling companies rather than trading the stocks themselves. The more arbitrage opportunities there are, the greater the likelihood of making a low-risk profit.
Risk arbitrage usually involves strategies that unfold over time — possibly hours, but usually days or weeks. Pursuing these strategies puts you into the world of swing trading, which carries a little more risk than day trading.
Derivatives are options, futures, and related financial contracts that draw or derive their value from the value of something else, such as the price of a stock index or the current cost of corn. Derivatives offer a lower-cost, lower-obligation method of getting exposure to certain price changes.
The short seller borrows the security that she thinks will decline in price, sells it, and then buys it back in the market later so that she has the shares to repay the loan. Of course, that difference is her loss if the price goes up instead of down. The arbitrageur can use this to bet on assets that are likely to go down in price when another asset goes up.
By thinking up ways to mimic the behavior of an asset through a synthetic security, a day trader can find more ways for an asset to be cheaper in one market than in another, leading to more potential arbitrage opportunities.
Yes, you buy one security and sell another in risk arbitrage, but it’s not always the same security and not always at the same time. For example, a day trader may buy the stock of an acquisition target and sell the stock of an acquirer in the hopes of making a profit as the deal nears the closing date.
A typical arbitrage transaction involving a synthetic security, for example, involves shorting the real security and then buying a package of derivatives that match its risk and return. Many risk arbitrage techniques involve the creation of synthetic securities.
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Options Theta is very important for traders who are entering into a Theta-based neutral strategy. An example of such a strategy is the well-known calendar call spread, where the trader attempts to benefit from the decay of the options’ extrinsic value.
An options trader who is speculating on a relatively small short term move in the price of the underlying asset must ensure that he or she buys options with a Theta rate which is as low as possible so time decay does not completely cancel out the small profits that can be expected from such a trade.
Another important factor to keep in mind is that Theta is not constant. The Theta at which one buys or sells an option will most likely not be the same the next day. This is because time decay does not happen in a straight line: Time value decay fairly slowly when there is a lot of time to expiration and it decays faster during the last 30 days before expiration. That is why many options buyers prefer longer term options and options sellers often prefer shorter term options.
Marcus Holland - Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.
Xcel’s Northern States Power Co. is part of the computerized midwestern power market, so the trader in Denver puts into the system bid and asked prices to see automatically what is available.
Divvying the money has been controversial, for Xcel wanted to keep 20 percent and the Colorado Office of Consumer wanted at least 85 percent going to customers.
The key to the market is the weather, because that will largely determine how much heating or cooling customers are going to use. “Everything we do is around the weather,” Pierce said.
From the 10th-floor trading desks at its Colorado headquarters in downtown Denver, Xcel trades in power, as well as renewable-energy credits, 24 hours a day, seven days a week.