Trade in Groups

Binary options are good for beginners that want to get their feet wet, without worrying too much about all the jargon used in trading stocks. With binary options you either win or lose – there is no in between. The basic concept is that you buy a contract, either in the buy or sell mode and if the stock does as you predict you will receive money and if you were wrong, you lose it all.

Of course, this can still be quite confusing. Binary options are not available with each and every stock out there. A matter of fact, it can be hard to find the ones that offer this option.

The CBOE lists two stocks with binary options - VIX and SPX. The American Stock Exchange lists stocks with binary option as FRO and include Apple, Inc (AAPL), Cisco Systems, Inc (CSCO), Citigroup Inc (C), DIAMONDS (DIA), General Electric (GE), Goldman Sachs (GS), Google Inc CL.A (GOOG), Home Depot (HD), IBM (IBM), Intel (INTC), iShares MSCI Emerging Markets (EEM), iShares Russell 2000 Index Fund (IWM), JP Morgan Chase (JPM), Microsoft CORP (MSFT), Oil Service HOLDRS (OIH), PowerShares QQQ (QQQQ), SPDR S&P 500 (SPY), Select Sector SPDR-Energy (XLE), Select Sector SPDR-Financial (XLF) and Wachovia Corp (WB). Every stock exchange has their own binary options, so you will have to learn which ones are available with this type of option or listed as FRO’s.

Now, to explain the concept. Binary options give investors a wide variety of trading options in that some are short-term trades while others may be quarterly since they are based on the date of expiration. You as a binary option trader will choose the stock that you wish to buy or sell by if you believe the price will go up or down on the date of expiration. If you think the market price is going to be higher then you buy. If you believe the market price will go down then you sell. If you choose correctly, then you receive payoff on each contract you had on that stock.

Normally, the price you will receive is a fixed amount, such as $100. This means you will receive $100 for each correct contract. If you buy and spend $25 and the stock rises or are equal to the strike price on expiration, you will receive $100 for each contract. However, if you are not correct you will lose your investment all together.

Metals and energy can also be bought and sold with binary options and be watched through the New York Mercantile Exchange. With the economy the way it has been heading, many investors are buying and selling foreign currency with the hopes of making a quick buck while others are looking to natural gas or crude oil.

Example of buying a stock with binary options

Light Sweet Crude Oil (CL)
The strike price for buying (calls) is at 20000
The strike price for selling (puts) is at 8000

Looking at the market and the strike prices you can make an educated decision in which way you believe the stock will go. Let’s say you buy. The last strike price for calls was at 15000 and now it is at 20000. When you buy in you are saying the price of light sweet crude oil will be at 2000 or more on the date of expiration. If you are correct, you will then receive the set amount of money, usually $100, per contract.

Example of selling a stock with binary options

If you put on light sweet crude oil, believing the strike price of 8000 will be that or less then you will receive $100 per contract if the set amount is such.

However, in both scenarios if you are incorrect and the strike price goes down with a call or up with a put then you will lose all money invested.

Example of buying or selling a stock with binary options long term

You can also call and put with stocks that do not have an expiration, except quarterly. This allows you a few more options. You can always change your mind, however, you will only receive the money you put into the stock.

If you have a contract for Gold in the amount of $80 but now you do not believe the price will be the same or more, you have the option of selling. Of course, you will sell at a loss, but you will not lose your entire $80.

However, if you leave it the same and you were correct in your speculation, you will receive the set amount of money per contract.

You need to watch the binary option price the stock is selling at. This can be a great way to make an educated decision if the stock with rise or plummet on the expiration dates.

Written by Anita Johnston

Binary options (see: “Understanding Fixed Return Options (FROs)” offer traders another way to make leveraged bets on equities. While the total number of stocks and indices on which FROs are available is still relatively small due to FROs only being available for a handful of months, I see several trade set-ups:

After hitting an intra-week low of $7.80 last week, Wachovia (ticker: WB) rebounded on the strength of earnings from banks such as Wells Fargo (WFC) and US Bancorp (USB) to close at $12.97. While expectations are certainly extremely low for pretty much all lending institutions, there are significant differences in quality between banks like Wells Fargo and Wachovia. Wachovia’s loan portfolio is of inferior quality, and their Tier One capital ratio is relatively low and continuing to fall despite hugely dilutive capital raises. Until there is a clear sign of the ultimate magnitude of charge-offs and capital needed, you need to be skeptical of rallies in most financials. The October $20 mark on both the Finish High and Finish Low FROs have the greatest open interest; if liquidity allows, I would look to be short the Finish Highs and/or long the Finish Lows.

Likewise, Citigroup (C ) jumped almost 8% Friday after its earnings, despite seeing its North American credit loss ratio up 170%. Citi’s saving grace looks to be its strong increase in net interest margin – or the spread between what it pays depositors and what it makes on loans; cynics might note that this number was once the driving force of bank earnings before we entered the era of highly leveraged structured products transactions. Still, this is a company that had to issue almost $13 billion in common and preferred stock to build its Tier One capital ratio, which is going to hamper future earnings power (per share) due to the dilutive effect. This could make Citigroup a long-term flatliner because EPS growth might not be enough to offset the larger number of shares outstanding, making any options bets I make here tilted toward the bearish side.

Since these two trades would put you net short financials, how to hedge that exposure? One could bet long via Finish High FROs on the S&P Financial Sector (XLF), essentially creating a relative value proposition whereby one expects the index’s higher exposure to the financials I like more (i.e. American Express, 2.75%; Goldman Sachs, 3.58%; JP Morgan, 7.5%; US Bancorp, 2.95%; Wells Fargo, 4.67%) offsets a combined 8.5% exposure to the Wachovia/Citi combo detailed above. Another possible hedge would be to go long the Finish Highs on the S&P 500 (SPY) on the thesis that a recover in the financials – which might put the two short FRO ideas above underwater – would be offset by a broader market recovery.

Read the free Whitepaper on FROs.

Not all discount brokers are created equally. That said, most of them provide pretty similar services. Your choice depends on what kind of trader you are, and what’s important to you. Today we’re looking at a few of the differences between Scottrade and TradeKing

Your Dad Will Love Scottrade
Scottrade has an older feel. As soon as the sites load you see that TradeKing has a much more modern feel that Scottrade. It’s not just the graphics. TradeKing features a forum where investors can interact with company experts and each other and an overall vibe of interaction.

A quick scan of Scottrade’s top of page navigation reveals their emphasis on Retirement, whereas one of the first things you notice on TrakeKing is the Education tab. TradeKing seems to cater to the options trader who may or may not be in the early bird buffet crowd.

Customer Service
Despite Scottrade’s ads all over CNBC, Bloomberg, and FOX touting high rankings in customer service from JD Power and Associates, they’re actually somewhat infamous for lousy customer service. TradeKing is reportedly better, but they’re also smaller so it remains to be seen if they can continue that level of investor nurturing as they grow. A huge plus in my book: TradeKing has live chat customer service. This can be an enormous time saver.

Cost and Tools
TradeKing charges $4.95/trade + .65 per option vs. Scottrade’s $7/trade + 1.25 per option. The premium may be warranted. Trades executed at Scottrade clear fast, they have a huge selection of mutual funds, bonds, CDs, and preferred stocks, and there are a lot of physical locations, so you can always stop in to talk to somebody. (I’m thinking this would be very important to your dad.) Frequent traders will love the real time stock quotes and streaming ticker. At TradeKing only active traders get real time quotes.

Other neat tools at TradeKing include a Profit/Loss Calculator for option values, an Options Calculator that calculates volatility and risk, a Probability Calculator to figure out the probability of target stock prices in the future, and an Options Screener. I told you they liked options traders! If you like to write covered calls you’ll love the ability to do multiple transactions on the same page at TradeKing. There’s no need to navigate all around the site to buy the stock and sell the call. You can also save time with TradeKing if you trade in other sophisticated transactions like straddles, combos, and condors. And if you need to learn any of these strategies, it’s all there under the education tab.

If you’re a conservative trader aiming to manage your retirement funds, Scottrade may be a great fit. However, if you want to learn about and trade in new instruments and learn from your peers, TradeKing is probably your best bet.

Written By: Lela Davidson

Technorati Tags: Scottrade,TradeKing,discount brokers,review online brokers

    Binary options bring the excitement of a casino to the staid world of a stock exchange. This genre of trading instruments allows small players to take large but affordable risks. You cannot lose more than margin money, yet you stand to make windfall gains on occasion.

Benchmark your affair with binary options against a professional poker player. Take the time to memorize a deck, and practice your moves before the real thing. Enjoy yourself by all means, but never forget that call and put binary options require skills not luck alone. Here are three examples to get started.

 Pick a stock, currency, or commodity that is a clear victim of a bear hug. Consider natural gas as an example. It still sells at about the same price as when crude was well below $100 a barrel. You know that this must change. Invest modest margin money in a call binary option with a strike price well above today’s price, and a maturity date as far in to the future as possible. You could still lose the margin amount, but the chances are that you will net a neat profit.

 Example two: play the adage that any security which rises unreasonably has to come back to earth. Try corn for example. Early-summer 2008 prices have rocketed. Farmers, not just in the mid-west, but all over the world will have us awash in the stuff soon. Corn is about 100 days from seed to seed. It is a nearly perfect set-up for a binary put option.

 A binary option can be with a strike price very close to the prevailing one. You can opt for the stock instead of cash. Invest in a call binary stock option of a professionally managed corporation with great brands. It is sure to climb above the recession and inflation weather soon. You get to bag a great security at just a fraction of the prevailing price.

 A final tip: keep records of your trades. Learn from losses just as you celebrate cash and securities garnered through binary options. This is the way of a professional player. 

Binary options, also known as digital options or all-or-nothing options, are contracts which have only two possible outcomes - either they win, or they lose. Essentially, a binary option involves a fixed payout after the underlying stock meets or exceeds its predetermined threshold or strike price. Values of binary options payouts are determined at the start of the contract and aren’t affected by movement of the stock value.

Typically, there are two types of binary options: cash-or-nothing options and asset-or-nothing options. A cash-or-nothing binary option pays a fixed, predetermined sum of money providing the option expires in-the-money and nothing otherwise. Asset-or-nothing options return the value of the asset underlying the option.

Binary options can be either put options or call options. Binary call options pay the predetermined amount providing the underlying asset price exceeds the strike price at maturity, otherwise the payout is lost. Similary, binary put options pays the predetermined price if the asses price is trading at less than the strike price.

For example, buying a binary call option for $50 with an agreed payout of $400 will see the option holder receive $400 for every $50 dollars invested, providing the stock is trading above the purchase price of the option at maturity. If the stock is trading below the option price, then the investment is lost. Put options work in the opposite direction, with the option price required to trade below the purchase price at maturity.

Because there are only two possible outcomes of a binary option, they are often suitable for novice investors. However, large-scale financial establishments, hedge fund trustees and other market entities also use binary options as part of their investment portfolios due to their ability to allow traders to tailor their involvement according to market risks. Binary options are often traded by savvy investors and market speculators who are willing to run the risk of making a profit on a short-term contract by taking a stance on which direction a market price will go.

Foreign currency traders and investors might, for example, hedge their risk in currency markets by analysing one currency trend against another to protect against adverse currency movements, whereas traders and dealers of precious commodity metals, such as silver or gold, might seek to hedge their risk against weaker carat pricing.

Other examples of the use of binary options include homeowners who want to cover their risk against weakening real estate prices, and oil companies guarding against crude oil price increases which would represent in increased product costs.

A binary option is an all-or-nothing contract. The prefix “bi” denotes two possible outcomes for the investor. Other common names for binaries include fixed return options (FRO), all-or-nothing options and digital options for their on-off payment structure. Binary options are a new investment vehicle to hit the American Stock Exchange (AMEX). The contract calls for a fixed cash payout or fixed asset amount upon finishing “in the money.” If “out of the money” at expiration, the investor receives nothing and faces a maximum loss of their premium cost. Binaries appear in a variety of markets including commodities, currencies, indices, rates and even events.

Binaries seem to work in groups of two! There are two types of binaries to place bets on: the finish high FRO and finish low FRO. Just like normal vanilla options an investor pays a premium for the contract with a specified strike price, expiration date and underlying reference unit. The logic behind a finish high FRO is just like a standard listed call option. The investor is bullish on the underlying reference unit and believes the AMEX FRO Settlement Index will be at least $0.01 above the strike price and “in the money.” The logic behind a finish low FRO is just like a standard listed put option. The investor is bearish on the underlying reference unit and believes the AMEX FRO Settlement Index will be at least $0.01 below the strike price.

In binaries the settlement price is an index, namely the AMEX FRO Settlement Index referenced above. This is a key difference from standard vanilla options. Usually the underlying instrument price will close at a different value than the AMEX FRO Settlement Index. The index represents the average share value of a group of shares traded. The index is updated every fifteen seconds for investors on trading days. Such an index was instituted in hope of avoiding price manipulations.

Binaries seem to simplify the options game which helps less experienced investors. Having said that, sophisticated financial institutions, hedge funds, and other market movers use the investment vehicle in their portfolios. Agricultural and transportation companies use binaries to hedge against weather events (rainfall, tornadoes, hurricanes, etc.) where predictions are not always dependable. In other cases, investors place inflation bets against the Consumer Price Index (CPI) and Producer Price Index (PPI). Another example where binaries are helpful is in currency markets. Particularly illiquid and unstable currencies from emerging markets such as the Thai bhat or Turkish lira. Low volume creates illiquidity in these markets. Geo-political and economic instability make the currency prone to swift “jump risk.” Because of high risk associated with these currencies, higher required returns are expected. A currency trader can borrow stable, lower return currency like the euro and invest in high risk currency from developing economies. Speculators will use binaries to hedge their risk against volatile developing currencies.

I recommend you visit the American Stock Exchange website at the following link: AMEX. Find “Options” on the left-hand navigation bar and click on it. Next, find “Product Information” and click on it. Finally click on “Fixed Return Options.” This will lead you to a list of twenty securities that binary contracts can currently be purchased on. The list includes stocks, exchange traded funds (ETF) and trusts.

Written by Ryan Swift

It’s a race to the white house and McCain and Obama are hoping for your vote. But how will the candidates’ plans hit your bank account? Here are five ways Obama’s economic plan could impact the average American.

Tax Stimulus
Overall, the Obama tax stimulus plan calls for $20 billion to be distributed, but at $300 per family it’ll barely be noticed by the average American family. Small comfort items could be added to the cart that week so it may be time to look into strong grocers like Kroger.

Foreclosure Prevention Fund
Obama’s $10 billion Foreclosure Prevention Fund may be good news for for-profit consumer credit services. His plan calls for ‘pre-foreclosure’ counseling to help families act responsibly when it comes to foreclosure and refinancing.

Tax Preparation Simplification
The concept of simplified tax returns sounds good to a lot of people, everyone except tax preparers. Obama wants Americans to have the option of receiving pre-filled tax forms from their employers. We would only need to verify, sign and return. This move could cut $2 billion in tax preparer fees. Not good news for H&R Block.

Green Technology Investment
5 Million New ‘green’ jobs could be created if Obama gets into office. His plan calls for $150 billion invested over 10 years in next generation biofuels and the infrastructure they require. Look for solid companies making hybrid vehicles, commercial scale renewable energy, low emissions coal manufacturing, and digital electricity grid service providers.

After School Care
Obama’s plan includes expanded after school care for American kids. In addition to doubling the current federal funding for the 21st Century Learning Centers program so that it served a million more children, performance and effectiveness would be monitored. Childcare and educational consultants could profit from new contracts. Look for a company that can consolidate the industry.
Written By: Lela Davidson

In the financial world, the term ‘Volatility’ refers to the measurement of the fluctuation in prices over a certain period of time.

Volatility is often used to quantify the risk of an investment, and the value of volatility is expressed in either of two ways: one as a definitive monetary value and the other as a percentage of the mean average value. It is calculated from the annualized standard deviation of an option’s daily change in price. Essentially, if the price of an option fluctuates rapidly over short periods of time, it is said to have a high volatility. Conversely, if the price remains relatively static it is said to have low volatility.

In essence, options which possess high volatility mean their value can change dramatically over a short period of time, either upwards or downwards, while a lower volatility means the value will not fluctuate wildly but rather changes in value at a steady pace across a longer period of time.

Volatility is often used to represent an options uncertainty and level of risk. However, in certain circumstances volatility can be good due to its profit-making potential and short-term traders often buy into volatile markets in contrast to those who look towards long-term buy and hold investments.

Market volatility changes can often warn of impending changes in price trends however it is usually on calculable with any degree of certainty for the past. For traders, however, previous historical volatility trends can give clues to an option’s implied volatility for the future.

May you live in interesting times.

-Ancient Chinese Curse

Stress in the financial markets has been spilling over into other areas, affecting equities, derivatives, and a wide array fixed income products. Because of their multiple uses and leveraged nature, the equity derivatives market is an especially interesting point of study, because the behavior of numerous speculators and hedgers is colliding in an increasingly uncertain world. There are a number of unusual developments all options traders need to keep in mind, and I was lucky enough to speak with a contact who works the equity derivatives trading desk at a major investment bank many would call the best on Wall Street. Naturally, most of these also have applications to the regular equity markets as well. A few notes, interspersed with my comments…

One puzzle of the options market lately has been the lack of the VIX making new highs as the broader market makes new lows; typically, the VIX moves inversely to the S&P 500. Perhaps more importantly, the VIX is still relatively low even as broader market volatility seems very high; 2%+ moves have become a frequent occurrence. Why, then, is the VIX 30% off its 52-week high when the S&P 500 is setting new lows, and is 21% below its 52-week high? This has to do with many funds becoming net short the market, and thus not seeking protection via purchasing puts. Instead, they are selling stock – which drives the market lower, but doesn’t send the VIX higher. If you think of the asymmetry presented by institutions being net short, it seems the VIX will move lower more easily than it moves higher, because the likely course of action would be to buy calls to quickly offset short positions.
Taking this a step further, I’ve chronicled a number of indicators of market internals and how far into the oversold area they are getting. The noteable exception was the lack of a blowout in the put/call ratios - but this pretty much explains that. If you’re willing to place a contrarian bet, the oversold levels we’re reaching combined with the big money already being net short may lead to a snapback rally in the equity markets on any positive news.

Earlier options articles on this site note that volatility is a component of an option’s price; by being long a call, for example, one is inherently long volatility. While volatility isn’t at an extreme, it’s noteworthy to point out that speculating on a breakout rally with calls has an added risk – being directionally correct and seeing the markets go up, but having those gains mitigated as volatility falls. Better, perhaps, to use a spread strategy – i.e. bull call – to reduce the net long vega. Also, don’t be afraid to step back from the at-the-money options positions into far-into or far-out-of the-money situations; according to this trader, many professional volatility traders have done so because the huge intraday market swings make it difficult to exercise proper risk management.
Everybody wants to think about making money, but it often pays more to think about how not to lose it.

Phrases most commonly associated with volatility are: degree of unpredictability; extent of uncertainty; range of values within a specific time period.

Volatility refers to the change in value of a financial instrument within a time horizon. It is considered by investors as an important measure of risk when assessing a financial instrument. A stock can have a stock price that grows very steadily at 15% per year. A very similar stock can also have a growth rate that averages 15% per year, but the trend in price may be volatile. That is, growth in year 1 may be 25%, while growth in year 2 is 5%. This variance of 20% between year 1 and year 2 is considered as risk by investors. Thus, all things equal, most investors would consider the first stock because of its predictability, especially long-term investors with a buy-and-hold investing strategy.

On the other hand, volatility can present opportunities to quickly make (and lose) money for short-term traders. Day traders can follow volatile stocks, making purchases at the bottom price point, and shorting stocks when at its peak. Investors with large amounts of capital, such as institutions, often mandate internal controls in place to prevent massive losses. That is, losses (and gains) beyond a certain threshold are capped, and trigger a sale of the financial instrument. Derivative securities such as options and variance swaps allow investors to trade volatility directly.