The First Best Practice

Highly successful businesses don’t just ‘happen’ by accident or by themselves… and you do want a highly successful trading business, right? I mean you’re not in this for mediocrity or just something to do, are you?

No, you want a trading business that is consistent and most of all RELIABLE. You want the security of knowing that your trading business can be counted on to provide both right now and for the future. Again, reliable businesses don’t just happen, but the reason the so many traders never get anywhere, let alone taking it to that level where it IS reliable is this:

- they make the mistake of thinking that if they can just get making some money, then somehow everything will fall into place.

Where things go wrong

So many traders wind up too busy doing the thing of the business to ever take it to that next level, and just stay in kind of that ’scrambling to make money this month’ mode. This is how businesses that ‘just survive’ get built and the owners usually do NOT enjoy the lifestyle that they want.

They find that they are working more hours than they’d like. They are not making nearly as much money as they’d like. They do NOT have the security in their business that they want.

The other (and more common) result is that the business struggles and dies, usually in a matter of months, simply because of the resources that get wasted instead of contributing to the bottom line.

So the solution is to implement the first Best Practice: taking time to work “on the business”, not just “in it”.
This is most crucial AT THE VERY BEGINNING of the venture with the most important business asset – your Business Plan. Once that is in place, then taking time periodically to again work “on the business” and not just in it, is so vital to making it what you really want.

The Second Best Practice

Because you are the decision-maker and center of your trading business, how well you perform has a direct impact on how good your results are, so you need to live by the second Best Practice and that is making the time to take care of yourself – this means several things.

1. Take the time to exercise. Taking a walk or jogging or anything that gets you away from ‘work’ and does your body good will also benefit you in your trading.

2. Take time to detach and get some R & R. It is vital to efficient and effective trading for you to take time completely away from trading. A full 24-hour break, meaning completely stepping away from it, will do you worlds of good.

3. Get enough sleep – how can you expect to trade at your best if you are shorting yourself necessary sleep? You can’t, so make sure you get enough to feel rested.

4. Mind what you eat. Certain foods will agree with you and others might taste good, but don’t serve you well. On trading days, eat what helps you feel good and sharp.

Summing it up – and more…

Your trading is your business and it directly depends on you the trader. Put these Best Practices into place and make them practices. Remember to work “on your business”, take care of yourself, and make sure that you have a Business Plan.

Are you truly treating your trading as a business?

To watch the video “Trading As Your Business”, go to
http://insideouttrading.com/tayb/tayb.html

Find out how well you’re doing, take the “Trading As Your Business Quiz” go to
http://insideouttrading.com/thequiz.html

- Futures contract: legally binding contract to buy or sell a named commodity at a specific price at a specific location and at a specific date

- Options on futures contract: a right, not an obligation, to buy or sell a futures contract at a specific price by a specific date

Options investors are buying futures contracts or stock options if trading in stocks rather than commodities. Stocks and futures contracts are two very different markets though the vocabulary and principles are the same. A future option indicates an investor has a chance to invest in a financial vehicle to gain an opportunity to make a profit.

Trading options is fairly complex but can be mastered by anyone serious about learning the options markets. The first thing to do is learn the basic terminology like calls, puts, strike price, holder (buyer), writer (seller) and premium. The premium is what the buyer pays a person selling an option and is one of the main determinants of whether you manage your loss or realize a profit.

Premium

A premium is paid at the time the option is purchased. It is equal to the intrinsic value of the option plus the time value. Therefore, these two future option features most influence the premium of course.

The intrinsic value represents the amount of money that could be realized if the option was to be exercised at the strike price. At the time the option is realized, the futures position is liquidated. The value of the liquidation depends on the current market price of the futures contract. A future option has intrinsic value when it is in the money.

Time value equals the amount of money someone is willing to pay now to obtain the option rights that can be exercised in the future. Time value represents an amount that is over the intrinsic value. Time is measured in three ways.

- How long it will take the market price and an option price to reduce an out of the money condition because the further apart the strike price and market price are the less time value the option will have

- How much time remains until the option expires because the time value erodes as the expiration date gets closer

- How volatile the market is because volatility can lead to beneficial price changes

Reading the factors determining premiums on future option trades makes it clear that learning the terms and pricing concepts is important to trading success.

Quotations

Where can you find quotations for options? You can find them in financial newspapers like the Wall Street Journal or online. The quotations will include commodity specific information like the strike price, the calls and puts by expiration month, and the transaction volume.

It is possible to purchase software today that will provide daily quotes and identify possible trading opportunities. But even with software, the future option trader must have an excellent understanding of how to interpret the information. Options trading should only be undertaken after spending the time and effort it takes to learn how to successfully maneuver the market.

Explains concepts and issues related to future option in layman terms, and provides comprehensive description of basic and advanced options strategies – http://www.theoptions.net

When comparing stock options to options on futures contracts, there are some similarities and there are some differences. A stock option represents a contract to buy 100 shares of stock that serves as the underlying instrument. An option on a futures contract represents one futures contract that also gets its value from the price of the underlying instrument which are non-equity assets like commodities.

Options for both stocks and futures contracts must outline the specifics of the transaction which includes naming the underlying commodity or equity, delivery and price among others. Both types of options also have calls and puts which indicate the equivalent of bets on whether the price of the underlying asset will rise or fall. A call option means you expect the price to go up. A put option means you expect the price to go down.

Both types of options also have a premium attached. The futures contract itself does not have a premium, but the options on the futures contract does. The term premium refers to an amount a buyer pays a seller for gaining the privilege of not having to buy the underlying asset in the event the price movements are not beneficial to the buyer. It is the most a buyer can lose on a contract no matter what the price of the asset does in the marketplace because the buyer can choose to not exercise the right on a losing transaction.

Learning About Volatility

The amount of volatility in options refers to price action. Volatility addresses the propensity of the price of the underlying security to go up or down in the marketplace. In a nutshell, there is a relationship between the market conditions that affect the volatility of an asset and the volatility of the option itself but that relationship may not be an exact correlation.

Estimating the possible price swings over the life of an option is one of the most complex calculations in options trading. There is software available that can simplify the process, but investors need to understand the concept of volatility. The desirability of volatility depends on your option position. For example, if you are long in the option then volatility is a benefit for both put and call options.

The more volatility there is in the marketplace, the more likely the option will be in the money. That is why more volatility leads to higher premiums.

Two measures used to determine the relationship between the price of the option and the price of the underlying asset are delta and theta. The terms are called Greeks.

- Delta: a formula to measure the relationship between a change in an option’s price and a change in the price of the underlying asset of the futures contract. Delta represents the percentage rate of change between prices. Values can range from -100 to 0 of talking about put options. Delta values range from 0 to 100 if talking about calls. Sometimes the delta ranges are expressed in decimal form.

- Theta: a formula that measures time decay. Time decay is the rate of change in the time premium. The time premium is the value to the option price due to the remaining time before contract expiration. Theta values increase from zero. The higher the Theta measure the more volatility exists due to time decay.

There are many option pricing models including the Black-Scholes and Cox-Ross-Rubinstein models. You don’t have to complete the calculations yourself but you do need to understand the potential impact of volatility in the buying of stock options and options on futures contracts.

Trading options – TheOptions.net offers articles that can help you learn option trading as well as informative stock option advice.

Most non-investors had never heard of derivatives until the recession. Suddenly the newspapers were full of stories of banks in trouble because they sold derivatives that had mortgage securities as underliers. When the housing market collapsed, the mortgage securities lost value which meant the derivatives were now worth less than their purchase prices.

Though the mortgage backed derivatives created a real nightmare for financial markets, the recession also gave a perfectly legitimate financial instrument an undeserved bad name. Even a retail investor can learn a lesson from the mistakes of the institutional investors. The lesson is: make sure you understand what you are buying before you buy it.

That may sound like an over simplification, but it’s not. Many of the global banks buying mortgage backed derivatives did not understand that the mortgages were overvalued. That is why investors are always advised to be familiar with the commodities or stock market where the underlier exists. This is not meant to be a lecture on derivative investing safety but rather an explanation of why investors should appreciate the versatility and profit making potential of derivatives.

Marketable and Versatile

Derivatives are marketable financial instruments. Derivative options are bought and sold in large quantities by private and institutional organizations. The main purpose is to hedge against risk of loss as prices of underlying assets change in the market place. But smaller investors are derivatives investing when buying stock options or options on futures contracts for example.

Derivative options first came into being in 1982. The options are agreements that give a buyer the right, but not the obligation, to buy or sell the underlying asset at a specific price and by a specific time. If the option expires, all you lose is the premium if you are the buyer. If you are the seller of derivatives options and the option is exercised, the risk of loss is higher because the underlying asset has lost value. If you have to buy the asset at a higher price and resell it to the buyer at a lower price, the loss can be quite large.

Pricing derivative premiums is complicated because so many variables go into the equation. For example, the premium amount is affected by the strike price and the amount of volatility. Measuring volatility is complex in and of itself and uses difficult mathematical formulas to calculate what are called The Greeks – delta, theta, gamma and vega.

To make pricing easier there are option pricing models such as the Black Scholes model.

If you are considering investing in derivatives options then the first step is learning all you can about trading derivatives. But when you are ready to do actual trading, you will need to work through a licensed and registered broker. The best way to insure you limit your losses is to only make trades you can understand and afford.

Oh if only the global banks had followed that advice two years ago there might not have been a recession!

Master the art of options trading and profit from any market condition. Learn how to trade options using the various option trading strategies – http://www.theoptions.net

So what is a stock index option? This term refers to options on future contracts that have a value tied to the movement of a larger stock index. It is also called a stock index future and the stock index, rather than the stock, can be considered the underlier. There is not a specific individual stock or commodity that underlies the option like in other option contracts. Instead the option contract value depends on the movement of the index funds like the S&P 500, the New York Stock Exchange composite fund, the Russell 2000 or the Nasdaq-100.

When the option is exercised, the settlement must be made in cash. Since there is no underlying commodity contract or stock for settlement, it is only cash that can be used. Stock index futures are popular and are traded on a number of global exchanges. Stock index options serve the same purpose as other types of options – for speculation and for hedging.

Comparing to Fair Value

The stock index futures market has a different term for the value of the futures contract – fair value. Fair value is based on a formula that uses several factors like the current index level and the contract expiration date. When an options contract is trading in the market place below the fair value it is said to be trading at a discount (kind of like being out of the money). When the options contract is trading in the market place above the fair value it is said to be trading at a premium (somewhat like being in the money).

The stock index options have a number of advantages. As mentioned, leverage is one of them. Index options offer leverage because the premium paid for the option contract is usually quite small and a fraction of the value of the index. When the index price moves up, the option holder will realize a gain that is a multiple of the index gain in terms of percentages.

The option holder can also choose an index of interest that reflects a broad market or a specific market sector. But one of the best features of the index options is that buyers can only lose their premiums so risk of loss is managed.

Strategies

Like other types of options, you can use a number of strategies to manage index options with the goal of limiting risk. Stock index option traders use a lot of charts to manage their trading. There is a whole set of terms used in this type of options trading too. For example, there are Bollinger bands and oscillators.

Like all options trading, you should never attempt stock index options trading unless you understand the terms and how the market works. Developing the right strategies that fit your investment style is the right approach. It is never wise to jump into any kinds of options trading without first laying the foundation for understanding the market. Do your homework first and trading second.

Stock Index Options – TheOptions.net offers articles that can help you learn option trading as well as informative stock option advice.

Some of the concepts are fairly simple like put and call. But there are other terms that are just as important and involve more complexity. For example, you should be familiar with what are called the Greeks. If you don’t know what they are then your investing knowledge has a big gap that can cost you money or prevent you from taking advantage of investing strategies.

Delta

The delta is actually just one of the terms used in options investing that are called Greeks. The delta measures the change of the price of an underlying asset on the premium of the option. It measures change in terms of a single one-point move in the underlier. Puts are expressed as negative delta numbers because they have an inverse correlation to the underlying asset. Calls are the opposite because calls have a positive correlation to the underlier.

The delta can provide a lot of information to an investor. For example, a delta that is at .5 and still moving towards 1.0 is in the money. Learning how to interpret delta values is important for developing option strategies.

Gamma

The gamma is related to the delta because it measures the deltas rate of change compared to the rate of change in the option contract underlier. It is used as a predictor of gain or loss through a reference to the price movements in the underlier.

Theta

The theta is a measure of the rate of change in the time premium. It actually measures the rate of decline as time passes and the option moves closer to its expiration date. The theta is often used with the delta and incorporated into a trading strategy. The theta can tell you if the option is losing money due to time.

Vega

The vega is a measure of risk. It is a value that measures the impact of volatility on an option’s price. Volatility is an important concept in options trading including option stock trading. Volatility addresses both market expectations and historical price movements. It is a complex concept and complicated formulas are used to assign value to volatility. The Black-Scholes model is one of the oldest and most used of the models available.

Option stock trading can be exciting and profitable as long as you invest money you can afford to lose and understand the market and the risks before trading. As you begin to study the various strategies used in equity futures investing, you will find that understanding the Greeks is important. In fact, most of the options software packages calculate these values for you and then use the values to find investing opportunities.

Millions of people successfully complete option stock trading every day. The more you trade, the more comfortable you will get using the more advanced strategies. But whatever you do, don’t try to over-extend yourself financially. That is where new investors find their greatest risk while learning options trading.

Learn option stock trading – TheOptions.net offers articles that can help you learn option trading as well as informative stock option advice.

Option trading with puts or calls is the simplest strategy in many ways. In fact, the largest category of option trading among self-directed traders is the purchase of call options. Though that is an excellent way to begin trading, it is only using one-half of a versatile equation. Instead, even beginning investors use spread trading to improve market performance.

Spreads represent one of the primary types of option strategies that use both purchases and sales of options. A vertical spread strategy, by definition, involves purchasing and selling options and the various options will have different strike prices and/or they will have different expiration dates. In effect, you are buying and selling at the same time, or another way to say it is that you are trading long and short.

Some of the more common spread option strategies used including the following:

- Bull spreads: used when the market is expected to move higher
- Bear spreads: used when the market is expected to move lower
- Volatility spreads: the put and call are purchased at the same strike price with the expectation volatility is about to hit the market
- Risk reversal spreads: put and call are purchased for underlying futures that are expected to move in the same direction
- Butterfly spreads: involves three steps composed of option purchases, selling options and then purchasing another option
- Straddles: combination of purchases or sales of puts and calls (includes strangles)
- Credit spreads: used in volatile markets where monetary risk is to be limited

Each of these strategies could fill pages with explanations and examples. The fact is that advanced investors will even combine multiple strategies. When combining two or more option strategies, it is necessary to thoroughly understand the options market and have the means of closely tracking complex transactions.

Deciding on a Strategy

Choosing the right strategy to implement is dependent on a number of factors. For example, you should understand how the market price movements and direction will impact option trading. You have to understand price action and pricing of the option. You even must decide if you will be a holder or a writer of options.

What separates beginning traders from experienced traders is the ability to apply hedging strategies to minimize risk. Since options traders must be willing to risk loss of their entire investment, learning how to hedge to your advantage is important. The goal of options trading is always to limit risk taking as much as possible in the pursuit of profits.

The spread strategies are designed to add a type of hedging to options investing because risk is lowered through the purchases and selling of puts and calls in different configurations. The good news is that the more you trade in options, the easier it will be to learn new option strategies.

Learn how to trade options using the various option strategies – http://www.theoptions.net

If you do want to invest in blue chip stocks, then how do you determine which stocks to invest in? What parameters do you use to determine a good stock that has value. Many investors will use a discount off of net asset value (NAV), or a low p/e ratio, or a low price to free cash flow ratio. This last one seem like the best one to use since it is less likely to be manipulated.

Contrarians are not necessarily bullish or bearish. They are simply wise investors who choose to do the opposite of what the crowd is doing. Humphrey Neil in The Art of Contrarian Thinking said “When everyone thinks alike, everyone is likely to be wrong”.

If you are a contrarian, then you have the attitude that you are going to buy sell rated stocks. You are looking for strong companies who the analysts do not currently like. You are looking for those stocks which have a large short ratio. Of course, you do not throw your money away at worthless stocks. We all know that there are plenty of these. What you are looking for are the stocks that are temporarily out of favor. They have had some rumor or innuendo that has caused them to be knocked down. You realize that they have strong fundamentals and will in a short term come back.

Bruce Stout, Murray Income Trust manager, states “Never pay up for anything, even if it is the best quality asset in the world.” He will often identify growing companies and may wait for years to buy them cheaply.

When looking for good, strong stocks to invest in, then you should definitely stay away from penny stocks. These stocks are never a good investment. You should also look for stocks that have a strong institutional interest. Institutions have the management tools to look beyond the immediate short-term news. They are aware of the good companies and invest in them. It is in their best interest to do this since that is how the managers get paid.

Another rule of thumb is to look at what the insiders are doing. If they are buying then it is probably a good idea for you to buy also. If they are selling, then you can guess they may know something is coming down the pike.

It would be my suggestion that if you find that everyone is selling, then that is probably the time to buy. Warren Buffet is a well known contrarian. It is his belief that the best time to invest in a stock is when the shortsightedness of investors have beaten down the price.

There are no actual trick to stock market investing. Many websites may state that they have the solution to making money with stock market investing. However, it just comes down to what Warren Buffet said “Rule No. 1: Never lose money. Rule No. 2: never forget rule number 1. Making good solid investments with quality companies will help you to live by those rules.

Garth Wheeler is the author for all of the articles on http://www.mystocktradingtips.com. It is a website devoted to providing informative stock tips to both the practiced and beginning investors. It covers all aspects of stock trading including how to begin to trade, what the stock market is and many tips on how to pick winning stocks to invest in.

The higher rate will apply to non-business assets, with property buy-to-let investors likely to be the biggest losers. The rises would also impact the contracts for difference (CFD) market, but spread betters are safe as they are not liable to Capital Gains Tax. The annual exempt amount for 2010-11 will remain at the level set previously, at GBP10,100.

How far will the tax rise?

The CGT tax rise goes up from 18 per cent to 28%.

Who will be exempt from the tax rise?

Entrepreneurs, spread betters, and lower and middle income earners who are set to receive a substantial increase in the personal allowance.

Who is going to be affected by the CGT Rise?

Buy-to-let investors, private equity and CFD investors, shareholders, bondholders and mutual funds.

How significant is the CGT Rise?

In any case I don’t really have a problem with CGT at 28%, it was absurd to reduce it to less than income tax. What I was upset about was the Liberals attempt to remove the GBP10,200. Now, it has been frozen but at least it’s intact. CGT in the UK is still quite favourable for speculators as its only 28% and you get a tax free allowance of 10K a year. Someone making 30K gains a year will only pay 5.6K in tax, and even less if they have a joint account with the wife.

What is the situation in the United Kingdom stock market trading market?

Many brokers in the United Kingdom are setup as spread betting outfits where you’re technically gambling, even if your broker is hedging all the positions in the market. I like to use spread bets for my speculative punts because the profits on gambling are currently 100% tax free in the UK – you don’t even declare a gambling win. I’m British (well Scottish really) and it’s nice to just make a bit of extra cash without having to pay tax, or have the hassle of filling in a tax return…etc…

I know that the spreadbetting companies state that it is a tax free product because it is classed as betting rather than trading, but what about the tax man’s view on spread betting for a living as a sole source of income?

Regardless of whether the gambler is professional or not, whether profits are sole income or not, there is no tax to pay on spread betting (quote the nice people at HMRC over the phone). From HMRC website: ‘To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. Whether or not a particular spread bet is taxable will depend on the terms of the contract and the economic substance of what is done.’

What is tax situation outside the UK?

As a UK resident, I am familiar only with the tax situation that affects those like myself. For us, spread betting profits are free of all taxes and this is true for whatever the markets or wherever the traded market is located. Other countries where an account with a UK spread betting provider are permitted, as with any other form of financial gain/earnings (or losses!), local tax laws will be applied to the individual as appropriate.

For more information please check my Stockmarket Trading journal which documents my trading activities and performance from week to week, spreadbetting stocks.

Spread betting can only be done when information about the bid price and offer price is present. Spread betting is levied unto the difference of the bid and offer price. Generally, expectations of a market boom or improvement would induce buyers to buy, while they are forced to sell their share, if they would perceive a future price fall.

Spreads has a varying range, volatility is can be witnessed above or lower than the spread. In Spread Betting, different predictions can be inferred on the possible outcome of the market price, usually dependent on some events. This uncertainty on the values of spread can post a great amount of risk of possible gains or losses from your investment.

Financial Spread Betting:

Financial spread betting gives an opportunity for investors to take advantage of investing in the financial market specifically on spreads without actually having to buy an underlying asset or instrument. Financial spread betting is only a speculative tool leveraged on the directional tendencies of financial instruments traded such as shares of stocks, foreign exchange and of commodities. Financial spread betting enables an investor anticipating of a price hike to buy such instrument or sell these instruments whenever he expects a price fall. Benefits of financial spread betting may also come from the freedom of paying deal charges, stamp duty and Capital Gains Tax.

Online Spread Betting:

In today’s modern world, people are becoming free and wanting to do their transactions within the comforts of their own home. It is now possible to bid on an instrument anywhere a person is. Benefits from Online spread betting goes from purely provision of financial information up to delivering such information directly to the writer or investor. With online spread betting there is no definite strategies that can be used to offer to sell or bid and solicit an offer to buy. Online spread betting is also free from taxes and direct investment in instruments. Faster, flexible and easier ways to trade are the pros ob betting on an online spread.

Guide in Spread Betting:

A lot of people are probably new unto betting and financial trading. Thus, considerable time should be set aside to study and learn its fundamentals. One must know facts on trading, instruments, spreads, prices and bets, placing orders, margin of work and proper timing. These details are now available as spread betting guides.

Spread Trading:

It is not really required to hasty when trading on spread since spreads is less volatile compared to other instruments being traded. Although spreads a relatively fair playing field, one could not back out and slow down upon trading. Spread trading is one of the purest forms of trading since it’s a continuous type.

One derivable benefit from spread-betting is the saving from commission pay because traders would only be dealing the dealing charges. Another, an investor can have the opportunity to access thousands of financial trading markets. There are also relatively lesser restrictions on the volume and time for trading, investors can always trade whenever and wherever.
visit us: http://www.independentinvestor.co.uk