Option strategies are implemented by investment professionals to profit from the price movement of an underlying strategy, and can also be used as a hedge against losses or to preserve profits. Various option strategies have been developed over the years to take advantage of the behavior of the underlying assets. Some of these are designed to be conservative, and others are intended to be aggressive. Sometimes these strategies are known by epic-sounding names such as Iron Butterfly and Iron Condor. Continue reading...
A Bear Straddle is another name for a short straddle, in which the investor writes (goes short) on both a call and a put, for the same strike price and expiration, on the same underlying stock. A short straddle can be called a bearish position because the investor believes that the underlying will basically hibernate until expiration. As long as the price of the underlying remains close to the strike price, the investor can make a profit, with the maximum profit being the premium collected from the sale of the options which have expired worthless. Continue reading...
A strangle is an options strategy which is profitable if the price of the underlying security swings either up or down because the investor has purchased a call and a put just out of the money on either side of the current price of the underlying. To execute a strangle an investor chooses an underlying security which he or she anticipates will experience some price volatility around a given expiration date for options, but is not sure which way it will go, so a call and a put are both purchased. Continue reading...
Straddles are options strategies that use both a call and put on the same underlying asset at the same strike price and expiration. The Straddle strategy involves either buying a call and a put with the same strike price and expiration, or selling a call and a put with the same strike price and expiration. The former is known as a Long Straddle, and the latter is known as a Short Straddle. Long straddles profit from significant price movement in either direction on the underlying asset. Continue reading...
IRS Link to Form — Found Here Form 6781 is used to calculate and report gains and losses due from Section 1256 contracts, which covers futures on commodities and indexes, as well as their derivatives, and from straddles, which are options strategies defined under Section 1092. 6781 is used to report positions in futures and options at the end of the year even if no gains or losses were realized through trades. The value of the positions will be marked-to-market at the end of the year, and these will serve to compute the gains and losses for these purposes. Continue reading...
A covered straddle is a bullish options strategy, where the investors write the same number of puts and calls with the same expiration and strike price on a security owned by the investor. If an investor owns a stock and is bullish about where it’s price is headed, they may use a covered straddle strategy to provide them the ability to buy more shares at a set price (the call option portion of the straddle) while also giving them the option to sell the security at the same price (the put portion of the straddle). Continue reading...
The Absolute Breadth Index (ABI) is a market breadth indicator, calculated using the absolute value of the difference between the number of advancing stocks and declining stocks to indicate the size of market movement without considering price direction. Larger ABI numbers will indicate more volatility. When breadth is smaller, it means that the market isn’t experiencing significant movement, or movement in a definitive direction. When advances or declines pull away from the other, it indicates the presence of market-wide trends. Continue reading...
Options are contracts used by investors to take a speculative position – or a hedge – based on expected future price movements of the underlying securities. Many investors are scared when they heard the word "option" and perceive it as a risky, speculative investment. Options certainly can be risky, but they don’t have to be. In fact, certain options strategies are far more conservative than many available investments in the marketplace. Continue reading...
If you expect that a security will depreciate, you can sell it on the market without owning it, and, if your expectations prove to be right, you can buy it for less before “covering” your position – keeping the difference in profit. Short selling is done with the help of a brokerage/custodian, who will lend you the security so that you can sell it, and they will charge interest on the loaned amount until you actually purchase the security to “cover” your loan. Continue reading...
In a regular short sale transaction, the seller would locate and borrow the security being sold before the sale. Naked shorting means that the seller has not located or secured the security being short sold, and is in many cases illegal. Naked shorting is illegal because it accompanies an extreme likelihood that the security sold short will be FTD (Fail to Deliver) within the settlement period. Naked shorting is selling something that you do not have, without confirming that you can get the security to deliver, or even that the security exists. Naked short selling has a long history. Continue reading...
A short position is a sale made by an investor for a security which he or she will deliver to the buyer in the near future, but which he or she is hoping will go down in price in the near future so that a profit can be retained from the price collected in the short sale. A short position is a bearish play on a security which an investor believes will decrease in price in the near future. The investor offers shares for sale, and collects the current market price for the shares from the buyer. Continue reading...
A short sale is the sale of a security not owned by an investor, which the investor has borrowed from the broker in order to sell. An investor can use his broker to give him the ability to sell shares that he does not have in his inventory. The investor believes that the stock price will be lower in the near future, and will replace the borrowed shares by purchasing them at the (possibly) lower price in the future. Continue reading...
A short squeeze occurs when many short-sellers attempt to cover their positions at the same time, and it drives prices up rapidly. A short squeeze is a bottleneck situation where many investors who have sold a security short, suddenly become very interested in covering their positions - usually, because the stock starts on a strong uptrend. The squeeze will actually cause the price of the security to rapidly increase, more than it would otherwise, because so much demand has hit the security at once. Continue reading...
Short interest is a term used to describe how many short positions are open for a given security or market at a given time. It is often expressed as a percentage of the total securities outstanding and is used for the short interest ratio. This serves as a gauge of bearish market sentiment, since short-sellers are expecting price action to trend downward. The short interest ratio (SIR) provides a context for the quantity of short interest outstanding by stating this amount in relation to the average daily trading volume. Continue reading...
Taking a short position is selling a security that you don’t own because you anticipate that its value is set to fall. In simple terms, an investor that takes a short position is betting against it. “Shorting” is the opposite of being “long” in a security, where being “long” means to actually own it and to wait for it to appreciate. When you contact your broker or custodian to take a short position on a security, you essentially sell shares you don’t own, and then after a period, you have to return those shares to the custodian. Continue reading...
When a security is sold “short,” it means that the investor did not own the security, to begin with, and the broker can require that the investor return the shares in what’s known as ‘short covering.’ Covering a short position means to acquire the securities which were sold short, and returning them to the custodian/broker that facilitated the short sale. Imagine a shopkeeper who allows a customer to lock-in a certain price for a widget, even though the shopkeeper does not have the widget in inventory. Continue reading...
To be “long” means to own a security, and to essentially be bullish on it. A long position is to own a security and to expect it to appreciate. When people buy stocks, they are “long” those stocks. Listening to fund managers giving market commentary, you may hear them say they are “long” on China or Industrials or Apple Inc., and this means that even though they may have hedged their position with some “short” sales, their outlook for those markets is optimistic and their bullish bets outweigh their bearish ones. Continue reading...
The Short Interest Ratio (SIR) measures investor sentiment for a given company and is calculated using the number of shares being shorted divided by the average daily trading volume of the stock. Also called the short ratio or float short, the SIR is a ratio of the number of shares being shorted divided by the average daily trading volume for the stock over the last 30 days. The ratio can be interpreted as the number of days it takes short sellers to repurchase borrowed shares, or an approximation for the number of shares that have been sold short and not yet covered as a percentage of all trading volume. Continue reading...
The realm of options trading is intricate, offering a diverse arsenal of strategies that cater to various market sentiments and risk appetites. Grasping these strategies is crucial for traders aiming to harness the full potential of options. This article demystifies ten fundamental options strategies that should be in every trader's toolkit Continue reading...
Gains and losses are only "real" when shares are sold or withdrawals are made, but up until that point the gains were more of a notional amount, and are said to be "unrealized." A more salient way to understand unrealized gains is to look at the opposite: unrealized losses. If a person makes an investment of $1,000 and the value of the shares drops sharply the next week, has the person lost any money? The answer of course is no, not unless he sells the shares and takes the lower market price for them. Continue reading...