http://www.options-trading-education.com/24155/best-approach-to-options-trading/
Best Approach to Options Trading
On these pages we write about the technical aspects of options trading and about stocks or commodities in the news. We continually emphasize that you need to do your homework to be a successful options trader and you need to show up for work every day. The right skill set is important to making money trading options. Picking the right stocks or commodities or Forex pair to trade are also necessary. But beyond these essentials what is the best approach to options trading? People trade options for two separate reasons. Businesses often trade options to contain the risk of commodity, stock or currencies price fluctuations. Speculators seek to make money when there is volatility in the markets. In each case the trader approaches the market with a clear plan or action in mind and never enters a trade that he does not understand. We look at the best approach to options trading first of all from the viewpoint of a company that needs to purchase products offshore and pay in a foreign currency.
Hedging Currency Risk
Hedging risk with options is common for companies that need to pay for products and services in a foreign currency. The value of Yen when purchased with dollars varies every day in the Forex markets. A US company is buying electrical parts worth ten million dollars at the contract price. But the payment must be made in Yen and the value of the Yen may rise against the dollar before delivery of the product when payment must be made. The best approach to options trading in this case is to buy calls on the Yen with dollars in order to guarantee that the company will not have to pay more than anticipated for the parts. If the Yen goes up versus the dollar the company executes the call contract, purchases Yen and pays the bill. If the Yen does down versus the dollar the company lets the contract expire and pays less than ten million for the parts with the now-stronger dollar.
Speculating on the Value of the Euro
The Euro zone may be heading into a recession. What is that going to do to the Euro? The first thought is that the Euro will devaluate because of the weakness of the economy. The second though is that the European central bank is going to finally emulate the actions of the US Federal Reserve and start a quantitative easing program to stimulate the economy and keep lines of credit open. The best approach to options trading the Euro is to pick a strengthening currency like the US dollar and trades of the ups and downs of the pair as this scenario plays out. When speculating in currency trading one is not forced to trade because one has to do business and make payments. Thus a speculator can wait for exactly the right time and circumstances to trade. And, as always, only trade what you understand as no one ever lost money sitting out an unclear trade.
2. On these pages we write about
the technical aspects of options
trading and about stocks or
commodities in the news.
3. We continually emphasize that
you need to do your homework to
be a successful options trader and
you need to show up for work
every day.
4. Before We Continue…
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5. The right skill set is important
to making money trading
options.
6. Picking the right stocks or
commodities or Forex pair to
trade are also necessary.
7. But beyond these essentials what
is the best approach to options
trading?
11. In each case the trader
approaches the market with a
clear plan or action in mind and
never enters a trade that he does
not understand.
12. We look at the best approach to
options trading first of all from
the viewpoint of a company that
needs to purchase products
offshore and pay in a foreign
currency.
14. Hedging risk with options is
common for companies that need
to pay for products and services in
a foreign currency.
15. The value of Yen when purchased
with dollars varies every day in
the Forex markets.
16. A US company is buying electrical
parts worth ten million dollars at
the contract price.
17. But the payment must be made in
Yen and the value of the Yen may
rise against the dollar before
delivery of the product when
payment must be made.
18. The best approach to options
trading in this case is to buy calls
on the Yen with dollars in order to
guarantee that the company will
not have to pay more than
anticipated for the parts.
19. If the Yen goes up versus the
dollar the company executes the
call contract, purchases Yen and
pays the bill.
20. If the Yen does down versus the
dollar the company lets the
contract expire and pays less than
ten million for the parts with the
now-stronger dollar.
24. The first thought is that the Euro
will devaluate because of the
weakness of the economy.
25. The second though is that the
European central bank is going to
finally emulate the actions of the
US Federal Reserve and start a
quantitative easing program to
stimulate the economy and keep
lines of credit open.
26. The best approach to options
trading the Euro is to pick a
strengthening currency like the US
dollar and trades of the ups and
downs of the pair as this scenario
plays out.
27. When speculating in currency
trading one is not forced to trade
because one has to do business
and make payments.
28. Thus a speculator can wait for
exactly the right time and
circumstances to trade.
29. And, as always, only trade what
you understand as no one ever
lost money sitting out an unclear
trade.
