We have always viewed specific option strategies in terms of risk. Naked contracts, for example, are high-risk. Even basic long options are high-risk because most of them expire, right? Not always. Here is a new and expanded way to look at risk, even for those strategies widely believed to always be high-risk.
In Japanese, a “tasuki” is a sash used to hold up a shirt sleeve, a type of garter. In a tasuki gap, a parallel is found in the three sessions, in which a directional gap is upheld in the third and crucial session. The gap is not filled, so that the direction of movement is strongly supported.
In the 1940s the average holding period for stocks was as high as 10 years. This is unheard of today. Now the average is down below one year and many active traders (day traders, swing traders) are looking at being in open positions for a matter of days, not even weeks or months.
The traditional view of naked call writing is that this is one of the highest-risk strategies possible. But is this necessarily true? Can naked call writing be safer than most of us think? There are ways of looking at risk that challenge traditional thought and even present a scenario for low-risk naked call writing.
Many traders define themselves as conservative. But is this accurate? or does your trading style contradict the standards of "conservative" trading? Here are 5 ways to test how conservative you are in your trading and investing.
Do we really understand investment risk and what it means? I have been trading for 35 years but I find myself re-thinking this question in profound ways.
One of the more obscure candlestick patterns is the side-by-side lines. This comes in four types: white bull, white bear, black bull and black bear. The similarity in appearance and meaning is confusing, so that the side-by-side lines formation is easily overlooked. However, it can provide important reversal signals and, along with other candlestick formations, can be a valuable weapon in every chartist’s skill set.
This descriptively named formation involves three sessions. The first two days form a doji star -- two sessions with a gap in between -- and the third is a session moving in the opposite direction after a gap.
Among the complex patterns you see in candlesticks -- involving three sessions -- two of the more subtle are the inside and outside formations. These consist of two parts: inside patterns begin with a two-session harami and a third decisive day; outside patterns start with a two-session engulfing formation and then a third, decisive day.
The straddle is an options strategy that in its most basic form involves opening options on the same strike. However, there are many variations to this strategy and some straddles resemble spreads as hybrids. It helps to clarify the strategy by defining the 7 basic straddles every trader needs to know -- not only in terms of how they are constructed, but also for risk levels.
Synthetic stock -- created with options -- vastly reduces swing trading risk. It makes more sense to create synthetics than either of the two alternatives (buying/selling stock or swing trading with options alone).
The strategy involves buying one call and selling one put at the same strike (this creates a synthetic long stock position. The combined option values will mirror price movement in the underlying stock. However, because the position includes both a long and a short, the cost is very small. This synthetic position works best at the bottom of the swing, when you expect the price of stock to begin rising.
Shorting stock is a high-risk strategy that most traders avoid. It requires borrowing stock from your brokerage firm, selling it, and hoping the price falls. You have to maintain margin and pay interest on the borrowed stock; and if the stock price rises, margin requirements grow and you could end up losing. You can duplicate the potential profits without all of that risk, by creating a synthetic short sale with options.
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- Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio (paperback)