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What are option strategies?
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...
What is a strangle?
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...
What is a straddle?
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...
What is a bear straddle?
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...
What is Form 6781: Gains and Losses from Section 1256 Contracts and Straddles?
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...
What is the Absolute Breadth Index?
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...
What is market neutral?
Market neutral is a term used to describe strategies of investing that are poised to benefit whether the market goes up or down, or even if it stays stagnant. Some professionally managed funds might take a market-neutral stance in their entirety, or investors might employ market-neutral strategies for specific parts of their portfolio. Market Neutral means that your position as an investor is neither bearish nor bullish, and you may be able to profit whether the market moves up or down, or even if it doesn’t move at all. Options traders, for instance, have a wide variety of market-neutral positions that they can take, since profiting may depend more on the presence of volatility rather than price movement in one direction or another. Continue reading...
What Are the 10 Must-Know Options Strategies for Traders?
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...
What are the basics of options?
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...
What is a covered straddle?
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...
What are currency warrants?
Currency warrants are relatively new to the international Forex market. They function like puts or calls, depending on whether it is a purchase warrant or a warrant to sell, but they have longer durations, usually between one and five years until they expire. They can be purchased to take a position on a currency index or on a currency pair. Warrants were originally issued by corporations, giving investors the ability to redeem the warrant like a call option to purchase a stock at a strike price. Continue reading...
What is the Federal Reserve Bank?
The Federal Reserve banking system was created in 1913, the same year that income taxes were added to the US Constitution. 12 regional Fed banks were established, each of which plays a role in monitoring and implementing interventions to the flow of money in the economy. The Federal Reserve Bank is a 12-bank system in the United States that plays the role of the country’s central bank. Central banks in other countries are typically part of the government and print the actual currency, but in this case the Fed is independent of the actual US government, and the Treasury Department technically prints the money. Continue reading...
How Are Call and Put Options Taxed?
Trading call and put options can be a lucrative endeavor, but it's essential to understand the tax implications. Gains and losses on options can be treated as either capital gains or income, depending on various factors, including the type of option, holding period, and trading strategy. In this article, we will delve into the taxation of call and put options, providing insights into different scenarios and tax treatments. Continue reading...
What is a long position in options trading?
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...
How Can Trading Strategies Optimize Your Options Trading Journey?
Embark on a journey through the dynamic world of trading and unearth the best strategies to navigate the options market. Whether you're a novice trader or a seasoned investor, this comprehensive guide unveils the essentials of trading, the steps to kickstart your trading venture, and the tailored strategies to thrive in the ever-fluctuating market conditions. Discover how the right trading strategies can unlock potential profits, even in volatile markets. Continue reading...
What is an Unrealized Gain?
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...
What is the Nikkei 225?
The “Nikkei” is the most referenced index for measuring Japanese stocks. The Nikkei 225 - often just referred to as “the Nikkei” - is an index that tracks the performance of Japan’s top 225 publicly-traded companies on the Tokyo Stock Exchange. It is to Japan what the Dow Jones Industrial Average is to the United States. The Nikkei is a price-weighted index. What is a Bear Straddle? What is Foreign Exchange? Continue reading...
What is a Breakeven Price?
There will be a premium paid by investors for the right to establish positions using options. The price of the underlying security must move to a certain point for the options position to become profitable. The strike price of an options contract names the price that an investor can use to buy or sell the underlying security, but the breakeven price will be the strike price plus the amount of the investor’s premium or net debit. Breakeven price can apply to a multi-option strategy such as a spread, or to a single option position. Continue reading...
What is Chapter 15?
Chapter 15 bankruptcy is a newer type of bankruptcy filing that has only been around since 2005. It allows foreign companies access to the US bankruptcy court system in certain circumstances. This is part of the US’s compliance with international trade laws. Part of the aim of bankruptcy law is to preserve employment and protect investment. In an increasingly globalized economy it is understandable that the US could offer hearings to corporations which straddle national borders but are not based in the US. Continue reading...
What are the Tax Implications for Making a Profit (or Loss) On a Stock?
Gains on stock investments will be taxable in the current year unless they can be offset with losses. Stocks that appreciate in value do not incur any tax liability while they are held, unless they pay dividends. Dividends will generally be taxable as ordinary income. For this article we will focus on capital appreciation instead of dividends. Capital appreciation can be considered long-term gains or short-term gains by the IRS upon the sale of the shares. A stock held for less than a year will incur short-term capital gains taxes, which are taxed at ordinary income rates. Continue reading...