For nearly two years we have been conditioned by the Federal Reserve, the SEC, the U.S. Treasury, and the federal government itself that no matter the situation government entities will bail everyone out. Never before in American history have free markets been tampered with to such a degree. As a result of these manipulated market perturbations, traders need to reflect and think seriously about market conditions with the intent to see all sides without any directional leaning.

With that in mind, imagine what would happen to the price of gold, silver, and oil if the dollar strengthened on the heals of a sovereign default issue in Europe. The simple truth is that the short dollar, long risk asset trade that so many traders and money managers are involved in could blow up in their face should the U.S. Dollar put in a strong bounce higher. The real question is whether this is just another short term bounce or whether this is the beginning of an entirely different sequence of events.

Equity traders acknowledge that while the stock market indices are significantly higher the rise in the equity and commodity market was accompanied with a significant selloff in the U.S. Dollar index (.DXY). The chart below illustrates the extreme selling pressure and the ascending trendline drawn on the weekly chart indicates a critical support level that must hold if the dollar is to put in any sort of a bounce.

Based on the chart above, a trade setup with crisply defined risk around the 75 area comes into view. Should the 75 area breakdown, more sellers would emerge leading to significant downward pressure on the dollar causing precious metals, specifically gold and silver to rally fast and hard. If the 75 level holds and the dollar bounces, it would likely place downward pressure on equities and precious metals. When we look at a gold chart, it is relatively obvious that gold is trending higher. Gold is at all time highs, which causes it to be scary to play either direction simply because we do not have any long term support/resistance areas that are nearby at this point as seen below:

With the gold chart being extended, it makes sense to key trading decisions off the dollar. Traders could get short gold with contingent stops on the other side of 75ish on the dollar index. Should the 75 level break with confirming volume, traders could get long gold. At this point, anything is possible it would seem based on the recent price action. Two potential trade setups could be taken depending on a trader’s directional bias. A trader with a long bias could either enter on any slight pullback on a short term gold chart (10 Min, 15 Min, etc.) and use the 75 area on the dollar index to place a stop order.

With most traders being extremely bullish with regard to gold and silver, I thought I would be different and post a short trade. Keep in mind, this trade is based on a period of time that will end with the November 19th option expiration. The trade construction is a put calendar spread. In the example being used, the primary profit engine is time (Theta) decay. However, because we used puts that were slightly out of the money, this trade does have a very slight short bias if gold were to decline. As is usual with trades that I post, the passage of time is our friend. Additionally, for the sake of analysis I used the Monday evening closing prices on the GLD option chains to illustrate this example.

The trade is constructed as follows: Short(Sell to Open) 1 November Week 2 (Exp. 11/12) 136 GLD PUT Long (Buy to Open) 1 November Monthly (Exp. 11/19) 136 GLD PUT

This type of trade is referred to as a calendar spread. The characteristic profitability curve is listed below:

The trade will be profitable this Friday at market close if price stays within a range of 132.80/share to around 139.30 per share. The maximum gain would take place if price on GLD closed this Friday precisely at 136/share and would produce a maximum gain of around $115 per leg. The maximum loss on this trade is $64 per leg. Keep in mind that if price stayed within the confines of the range, the option trader would have the ability to take profits this Friday or build another position utilizing the November monthly put which would expire on 11/19. These estimates assume implied volatility remains constant and that Vega is positive. It should be considered reasonable to assume the relative constancy of implied volatility over this truncated period of time and anticipated price movement represented in the above example.

While this strategy may seem quite basic, it can produce some insane risk/reward opportunities with a crisply defined risk level. The trade offers opportunities for trade management should market conditions change and the trade allows for a significant margin of error. Through the utilization of contingent stops based either on the GLD price or on the dollar index chart, an option trader utilizing this strategy can get short with a defined amount of risk and with very little emotional capital being exposed. While this is a speculative play regarding the short side in gold, it is an outstanding example of the power that options offer to traders who understand their price behavior.

For those of you wanting to get long gold via GLD for a longer term trade, be sure to watch for my next article later this week as I am going to focus on a strategy that utilizes options for a longer holding period (2-3 Years) and has the potential to produce massive long term gains should the gold price continue higher over the intermediate to longer term.

If you would like to receive my Free Options Strategy Guide & Trade Ideas join this free newsletter: http://www.OptionsTradingSignals.com/profitable-options-solutions.php

Chris Vermeulen & J.W. Jones

One of the best options trading strategies is to only guess the direction in which the change is moving. And, along with that, people need to know when to make the call or put. During the rising trend, the call option is made while the decrease requires the put option. The only thing that is required now is for the strike price to be reached when the expiry of the trading time is reached. If the value during the expiry time has crossed the strike price, then the options trading is profitable.

Since these are the only concerns that are important, learning how to trade options is quite an easy process. When people start investing in the forex trading, they find it quite simple provided so of the basic things have been well understood. Operating in the platform of the agencies have been made easy with adequate information and analysis to understand about the price trends.

The customers are made aware of such trends by regular updates of information and provision of useful option trading strategies which are quite easily understandable. There are not many things that are needed to be understood in the options trading as this involves only a fixing of the strike price.

This makes how to trade options well within the reach of the common man nowadays and hence the popularity of the forex trading among people. And within the forex trading, the binary options trading is the most favored. And due to this format of trading a lot of people are making their profits and are lured into the sphere of options trading. In the coming years, with more liberalization of the forex trading, the binary options, is going to be the most used trading option which already is showing signs of becoming a global phenomenon.

Based on your particular trading strategy, you can buy a call on a futures market that you think is moving or may move higher. Or you may buy a put on a market you think is moving or will move lower. Learning about options, you can look at a market and know that you will probably have to pay more for an option that is at or in-the-money. Out-of-the-money options trading strategies will be priced based on how likely it is that they will be in-the-money at or before expiration of the option contract.

If the futures market moves in the direction of your option’s strike price or moves through it, you can exercise your right on that contract and offset the resulting position with a futures market transaction and possibly collect a profit.

If the market does not reach or trade through your option’s price, it will expire worthless and you have, in effect, forfeited the premium.

You can also sell an option prior to expiration for more or less premium than you paid. Exiting, writing or selling options can also be an important part of the planning of your options trading strategies.

Option spreading techniques are worth learning how to identify and trade. Bull spreads and bear spreads are well known options trading strategies. The idea behind these strategies is that the sale of a further from the money option will offset some of the initial cost of your option. It will put a ceiling on your profit potential but it does take some money off the table when you are trying for a particular directional move in the futures market.

There must be a more compelling reason for you to trade stock other than just for the movement, if only 20% is unique to the underlying equity in question.  Consider this, in context of the Fundamental Analysis or stock picking software that you bought on a per $1 basis.  For each $1 dollar you spend, you “outsourced” the analysis at a cost of 80 cents, only to receive back 20 cents worth of work. Shouldn’t the 80:20 rule of “outsourcing” be the other way round? The problem is that you are still stuck with 80% of the work, to analyze price movement!  Plus, the more you use FA techniques/stock picking software, the more trading capital is stuck in equities alone.Now, you can say “special” research papers help you pick stocks.  Let’s have a look at some of the more common fundamental metrics in these research subscriptions:1. Dividend Yield: the problem is in the variability of yields as firms are in different stages of their business development.  A Mature company that dominates in a well established sub-segment/sector is able to afford a different dividend yield; versus, a Young company in a growth-oriented field; versus, a Small firm in a growing area that may not be able to afford a dividend payout.  Bear in mind there is nothing special about firms that pay a dividend.A company that gives away a portion of it’s retained earnings – which is what a dividend is – effectively gives away part of its valuation, which means it is not worth as much as a company that does need to give investors candy to commit capital to it.  So, a dividend paying stock has to be far superior to a non-dividend paying stock for reasons other than the dividend.  If it is not, there’s no point looking for dividend paying products to trade, there are plenty of non-dividend paying Indexes to trade.2. Price/Book Ratio: the problem is this metric varies across industries and from company to company, as the asset base and capital structures of companies change over time. It lacks cross sector applicability and accounting complexity arises from a firm’s capital structure as it changes due to acquisitions/divestments/CAPEX for new product lines; or, product line cut-backs, as recently seen in the restructuring of major US car companies.3.  Price/Cash Flow Ratio (the cousin of the P/E): accounting laws on depreciation vary across Asia, Europe and US.  As accounting rules are driven by tax codes, which change considerably across regions despite adoption of global accounting standards, there is a lack of uniformity in homogenizing a fundamental ratio that will fit as a common benchmark across geographies. These metrics fail to help you compare say a Dell parented in the US to an Acer parented in Taiwan; but, is listed as an ADR in the US, even though both are competitors in the same sector as computer manufacturers. Furthermore, the current dislocated cost of capital in credit markets, impairs the ability of corporations to optimize the operating cost of their balance sheets.  In essence, corporations are left with the working capital cash flows remaining on their balance sheets, as testament to their financial strength. Do not waste your money on Fundamental Analysis software or research paper subscriptions.As there is a fundamental flaw in fundamental analysis and stock picking, how do you select trades? Trade the options of a broad-based Equity Index to replace single stock exposure.  To replace Fundamental Analysis, use the Relative Strength measure based on Point & Figure methods.What is Relative Strength?  It is nothing more than taking one price as the Numerator, divided by another price as the Denominator, then multiplied by 100.  RS = (Price 1 / Price 2) x 100.  Typically, RS calculations use daily closing prices.  Though simple in its mathematical construction, RS is ingeniously powerful when it is applied not only within a sector; but, across sectors and between asset classes.Let’s start of within a sector.  For example, if you choose 2 semiconductor stocks trading at different prices, how do you know if one stock is outperforming the other in the same sector, when the 2 stocks have price changes at different rates; plus, the sector’s price itself is also changing?SOX = Semiconductor Sector Index, trades up from 452.24 to 467.81.Numerator1:      Price1 = BRCM 33.15    RS1 = 7.33    Price2 = 33.80    RS2 = 7.23Numerator2:      Price1  = TSM 9.91    RS1 = 2.19    Price2 = 13.43    RS2 = 2.87Common Denominator:      SOX  Price 1 = 452.24           Price 2 = 467.81BRCM’s RS1 = (33.15/452.24) x 100 = 7.33. BRCM’s RS2 = (33.80/467.81) x 100 = 7.23.  TSM’s RS1 = (9.91/452.24) x 100 = 2.19.  TSM’s RS2 = (13.43/467.81) x 100 = 2.87.BRCM’s price rises from 33.15 to 33.80 and TSM’s price also rises from 9.91 to 13.43.  Simply because BRCM is a larger stock, does that mean it benefits from the SOX trading up? No, the RS reading (RS1 compared to RS2) shows BRCM’s RS reading dropped (7.33 down to 7.23) against TSM’s RS reading, which increased (2.19 to 2.87).  RS confirms TSM as the outperformer rising in price strength versus BRCM’s weakened price.  RS is constructed on pure price rules.  Using an Index as the denominator, acts as a much more durable benchmark and is structurally more reliable, compared to any “magical” TA indicator; or, combination of income statements, balance sheets and cash flow statements touted in stock picking programmes.You can replace BRCM or TSM with Indexes or ETFs.  Using Indexes with Relative Strength enables a common denominator to compare Equities against Bonds, Commodities and Currencies, to crossover into asset classes other than stocks to trade.  It’s not that Relative Strength is infallible.  But compared to the fundamental metrics cited above, Relative Strength fails the least.  Break the mould on what you learnt about stock option trading.Is there an example of an optionable and consistently profitable portfolio that trades using Relative Strength across multiple asset classes? Yes.  Follow the link below, entitled “Consistent Results” to see a retail online option trading portfolio that excludes the use of single stocks and Fundamental Analysis, using broad based equity Indices, Commodity ETFs and Currency ETFs.  There is no need to trade FX directly. Just trade the options of Currency ETFs.

The most obvious benefit that makes every person wants to trade options is no doubt, the financial reward behind it.  In other words, it is:

Leverage – this is what makes every trader so excited about this game.  It can magnify your gain if you are correct in your view.  The ability to leverage your gain is desirable for short term speculative purposes.  Many short term traders, day traders, or swing traders are constantly looking for opportunities to enhance their return by trading short term options.

The second benefit that stock options investing can bring is:

Limited Risk – When a trader simply buys a call or put option, what he stands to lose most is just the premium that he paid for the option in the first place.  Therefore a trader with little amount of capital can easily get started in option trading.   There are many strategies in options trading, some also offer unlimited risk, and traders need to be familiar with the pros and cons of each one and their own unique trading style before deciding which one to use.

Another added benefit in stock options investing is that it also offers downside protection for people who are already holding stocks.

Hedging – Hedging a position can allow investors to protect their portfolio against price fluctuations, especially in volatile times.  Simply purchasing a put option can help to recoup some of the losses when the stock drops below the strike price.

Another not so obvious benefit is what is known as volatility trading.  This is a very popular option strategies among the professional option traders.  What traders are looking for here is either lots of movement in the stock or no movement in the stock.  With this strategy, when done correctly traders can stand to profit no matter which direction the stock moves and this is the beauty of volatility trading.

Overall stock options investing can offer some very lucrative return when done right.  However to learn how to trade stock options successfully is both an art and science.  In order to succeed in this game, traders need to follow a proven option trading system in order to taste success in the early stage of their trading career, and then traders require discipline to help them move through the ups and downs of their emotions that is inherited in this game.

For those who are not familiar how actually options work, it may be a little bit confusing in the beginning. Options actually share a lot of same characteristics like insurance policies, which most people should be able to understand. We will get a clearer picture of how literally options work by checking through the features that options and insurance policies have.  

For an insurance policy, the policy is actually a contract between the purchaser and the underwriter of the insurance policy. Underwriter of the insurance policy is the company, whose sells the policy. Whereas; option is a contract between the option buyer and seller when there is an initial transaction taking place. Stated in the contract, option buyer has the right to buy an amount of stock from the seller at an agree price within a specific period of time; whereas, seller has to obligate to sell an amount of stock to the buyer at an agree price within a specific period of time.  This agreed price is called strike price.  

For insurance policy, purchaser pays a premium to the insurance underwriter. The probability payout is influenced by a number of factors, which the premium is dependent. Premium will be charged higher if the risk payout is higher. Whereas for option; purchaser of the option contract pays premium to the writer of the option. A number of factors, which will affect the overall likelihood of a particular stock price being reached, will also affect the amount that needed to be paid as a premium. When the premium for the option is higher, the likelihood of a stock price can reached also higher. 

In term of time period, the validity of the insurance policy is within a specific length of time. The passing of time works in favour to the insurance underwriter but against to the purchaser of the insurance policy. For option, it works exactly same as the insurance policy, that is option contract is valid within a specific length of time. When the time passes, it does not favour to the option buyer but favour to option writer.  

Upfront is the risk for the purchaser of the insurance contract. The policy is paid by the premium. The insurance underwriter risk is open-ended depending on the terms that are insured. In options trading, the options buyer risk is also known as upfront. The option is paid by the premium. Here are the differences between insurance policy and the option. The option buyer can gain more than premium that he or she has paid for the option but not less than the premium. On the other hand, option writer has open-ended risk potential, which may cause unlimited loss.  

In term of payout, if there is any event that has been stated in the insurance policy has occurred, the payout from the insurance company will be a lot more than the original premium paid. If the market direction favours the option buyer, then he or she has unlimited profit potential. The option buyer may make a lot of money, which is many times more than the premium that he or she has been paid.