The Technical indicators that we use in our mechanical method include eight indicators that we apply on two different charts with different time frames. The longer time frame chart will determine the first step before a trade is permitted. Once the longer time frame chart trend is confirmed, confirmation from the shorter time frame chart is sought. The indicators we use are derived from extensive research over 25 years that we believe may provide additional confidence for trading success. Strategies are then designed that may generate rewards that commensurate the risk involved. We often use option spreads to minimise capital outlay and risk and maximise the rewards.
Our Main Focus Is Risk Management
We bring traders and investors together and show them the method we use. If further education is required, we provide this in our membership with an intensive focus on learning the methods which will assist them to design and control their own strategies. If further assistance is required, we provide one on one mentoring. Subscribers may also join our private website to gain additional learning and use our recommendations that they can trade through a FS Securities broker. We often provide between 5 to 15 different trades per month and produce regular reviews.
- Why Options?
As we will never be certain beyond doubt about the direction the market may take from one day to another, Options offer a method of trading with substantial opportunities. Most traders seek leverage to maximise their reward. Options offer a higher return on the outlaid capital when compared with direct share purchase. Options give a lot of flexibilities and help us to design strategies where the reward is known as well as the risk, prior to entering the trade. Provided we seek trades where the reward is at least equal if not greater than the risk, then we have a proper wise strategy to enter into.
Options are used in three different strategies. Firstly as direct leverage when speculating on the direction of the market, to generate income and as an insurance againt a portfolio.
The reason we use Options is because of the flexibility to trade the market when it goes up, down or sideways. If we predict the direction correctly under any of the three scenario we end up making profit. If we are incorrect, the maximum loss we may incur is the price we paid for the trade and no more.
The Advantages of trading Options
An exciting way trade in the Stock Market regardless Of Economic Conditions and Regardless of Whether the Market Goes Up, Down, or Sideways!
- Cost Efficiency – you only need a fraction of the capital to control the same amount of investment
- Control More Investments – because you only need a fraction of the equity you get more “bang for your buck”
- Profit in Any Market Direction – irrespective of whether the market is rising, falling, neutral or volatile
- Limited Risk – your risk is limited to the small option premium you pay to give you the right but not the obligation
- Better Percentage Returns – The leverage your percentage return is increased
- Generate Income – using share renting techniques to receive monthly income
- More on Options
When You Buy A Call Option
- you have the right (but not the obligation) to buy a number of shares at a fixed price (known as Strike or Exercise price)
- On or before a fixed date (expiry date)
Traders buy call options when they think the market will go up and hence they will exercise their right to buy the shares if the price of the share has gone up. They will then make profit (current share price less the lower strike price). The strike price is fixed. Traders will chose to exercise their right to buy the shares, only if the price is higher than their strike price. As the buyer of an option, you can exercise your right at any time before the expiry date of that option. Australian stock options expire on the last Thursday of every month. *This may vary over public holiday periods.*
Each stock has set strike prices for trading. Depending on where the strike price is in relation to the current share price, influences the amount you pay (called premium).
When Would You Exercise A Call Option?
If you have bought a call option and still hold it at expiry, you may choose to exercise your right to buy those shares. You would only do this if the current share price is above the option strike price. In other words you could then sell those shares at a profit. There is another strategy using call options where you can profit from a much smaller amount of money to start with in a shorter amount of time. Would you like to learn how to profit from call options? If yes, contact us.
Option Spread Strategies
Bearish strategies may include Call Credit Spreads. They require the purchase of out-of-the-money call options (long position) as well as selling in-the-money call options (short position) in the same month. We begin to make money (or keep what we were credited) when the price moves below the break-even point which is the higher strike price minus net credit we receive. This strategy is known as “vertical spread”. The risk management represents a great benefit as we will never exceed the net investment of buying and selling call options simultaneously. The maximum risk is known before entering the trade which will occur if the price moves above the out-of-the-money call option price. The maximum reward if our analysis was correct is also known which will occur if the price move below the lower strike price. Hence the ratio of maximum reward to risk is chosen that we ensure that it is near or greater than one. The ratio of Greed to Fear is therefore managed.
Selling (writing) Option Strategies
Traders may at times sell (write) call options. I am talking here about selling options before you buy them. Remember when you buy an option you have the right to exercise that option, and hence you pay for that right. If you sell an option, you have an obligation to delivery what you are contracted to do and for that you get paid a premium. Assume you own a thousand BHP shares and have no intention of selling them in the near future. You bought them at (let us say) $32 and you hope that they will go up in price by (say) $3 sometime in the next three months. While you are waiting for the price to go up, you may write a call option against the shares at a strike price of $35 at expiry. You will then earn an extra income. That income is the premium you receive. If the price does not go up by $3 or more you anticipated, you end up keeping the premium you received and the option becomes worthless at expiry. But what if the price of the underlying goes up by $5? Under that scenario, you will sell the shares at $35 (32 being the purchase price plus the $3) and forfeit the other $2. But the important thing here is that whilst you sell the shares at $35, you will still end up keeping the premium and bridge the gap between the $35 and $37.
- Spread trading
Do you want to learn how to optimise your profit and limit your risk? Then it is time you learn about spread trading.
In my seminars I teach how you can control your greed and fear. I make no apologies when I speak about an inherent trait in all of us that as human we all have elements of greed and fear. Those of us who can control their greed and fear turn to be more successful. Well If I told you with every trade you can measure your greed and fear (so to speak) and ensure that your greed to fear ratio is better than one and is controlled before you enter a trade, would you be surprised?
Well it is simple if you consider that greed is your maximum reward and fear is the maximum risk in any one trade. Are you with me?
Well if we know what our reward and risk and their respective ratio before you enter a trade, you can go to the beach without your laptop and relax without having to worry about losing your shirt.
What is spread trading?
Spread trading is when you buy one contract (futures or futures options) and sell a related contract at the same time. When you do this you are trading the difference or spread between the two contracts.
An example of a spread is if you bought December09 XYZ commodity at $100 and sold March10 XYZ commodity at 90. In this case the spread is $10.00. To make profit we expect the spread to widen. You can also enter into a spread with two different commodities or instruments when at the same time you enter a trade you go long (or short) in one instrument and go short (or long) in another. You always go in different directions on each instrument. You may want to go long on Crude Oil and short on Natural Gas, as an example.
Traders are always searching for strategies that can produce consistent profits without crushing draw downs. Trend following systems have produced below average returns for three years running as evidenced by all major Commodity Trading Advisor (CTA) indices. Day trading, which is most popular in stock indices, has also suffered as a result of several years of low volatility and choppy markets. Option writers in stock indices have done well in recent years but history shows us that when the inevitable burst of high volatility comes, very few of these option writers will survive.
Why trade spreads?
- Lower Margin — Margins on spread trading can be very low and can allow the trader to produce a much higher return on their margin*.
- Less Risk — Spreads are generally considered less risky than outright futures positions**.
- Many spread markets to choose from — There are many spreads to trade and this provides flexibility to trade under different scenarios and projections.
- Diversification – Not all commodities or market segments are related and hence we can diversify our projections and expectations.
- Roll over effects – When the front month is close to expiry, major players roll over their positions. This has a major effect on the value of spreads generating opportunities for major profits.