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Showing posts with label Commodity. Show all posts
Showing posts with label Commodity. Show all posts
Tuesday, July 12, 2011
Monday, July 11, 2011
Thursday, July 7, 2011
Wednesday, July 6, 2011
Tuesday, July 5, 2011
Monday, July 4, 2011
Sunday, July 3, 2011
Sunday, June 12, 2011
Futures Option Spreads - Delta Neutral Trading
Futures Option Spreads - Delta Neutral Trading
There are many ways to trade futures option spreads. One way is to trade spreads that can profit from time decay. You can sell options which you believe will lose more time value than the options you buy.
Another way is to buy and sell options based on their deltas. Some of these trades are called delta neutral trades. Delta neutral trades are option trades in which the total delta of all the options is Zero. At the money options have a delta of 50.
If you buy an at the money call, you will have a delta of +50.
If you sell an at the money call, you will have a delta of -50.
If you buy an at the money put, you will have a delta of -50.
If you sell an at the money put, you will have a delta of +50.
Basically, the deltas will be determined by where you want the market to go. Think of it this way: If you sold an at the money call option, where would you want the market to move to? You would like it to go lower. So, you would have a delta of -50.
If you look at most at the money options, you will find that they are usually not at 50. That is because they are not exactly at the money. We still refer to these as the at the money options because they are the ones that are the closest to being there. It might have a delta of 47 or 53.
If you purchased one at the money call and one at the money put, you would be delta neutral. The call will have +50 deltas and the put will have -50 deltas. The total is zero. This is a very simple delta neutral trade.
Another delta neutral trade is a ratio back spread. An example of this trade would be to sell an option that is at the money and buy a greater number of out of the money options. You might sell one call option at the money (delta -50) and buy 2 call options out of the money (delta +25 each). You would be delta neutral. You would want to put this on for a credit or at even. You can also put it on for a debit but then you would care a little about market direction.
If you put it on for a credit or even money and the market was lower at expiration of the options, you would break even or earn a small credit. If you put it on for a debit, you would lose the debit amount if the market was lower at expiration of the options. In either case, if the market went sharply higher, you have a chance for unlimited profit, because you have purchased more options than you sold.
Most traders teach that ratio back spreads should be done in the far months only. This is because you have more time to be correct with a big move. The problem that I have found is that you are giving up too much for the time advantage. The options you buy out of the money are not priced at an advantage compared to the ones at the money. You can look at the theta to see how much each option will lose per day or per week.
You can also see that in order to have a lot of time left in the trade, the difference in strike prices between the option you sell and the options you buy are too much. It will take a bigger move before you have unlimited profit potential.
If you are expecting a big move, think differently than the norm and start to look at options that have 20 -40 days left. The options you buy compared to the options you sell, should be priced better. Everything is in relation to something else.
So the next time you hear someone recommending the same old ratio back spreads, take a look at the difference months to see where the real advantage is.
For more information on these non-directional option techniques, click below:
Click Here!
There are many ways to trade futures option spreads. One way is to trade spreads that can profit from time decay. You can sell options which you believe will lose more time value than the options you buy.
Another way is to buy and sell options based on their deltas. Some of these trades are called delta neutral trades. Delta neutral trades are option trades in which the total delta of all the options is Zero. At the money options have a delta of 50.
If you buy an at the money call, you will have a delta of +50.
If you sell an at the money call, you will have a delta of -50.
If you buy an at the money put, you will have a delta of -50.
If you sell an at the money put, you will have a delta of +50.
Basically, the deltas will be determined by where you want the market to go. Think of it this way: If you sold an at the money call option, where would you want the market to move to? You would like it to go lower. So, you would have a delta of -50.
If you look at most at the money options, you will find that they are usually not at 50. That is because they are not exactly at the money. We still refer to these as the at the money options because they are the ones that are the closest to being there. It might have a delta of 47 or 53.
If you purchased one at the money call and one at the money put, you would be delta neutral. The call will have +50 deltas and the put will have -50 deltas. The total is zero. This is a very simple delta neutral trade.
Another delta neutral trade is a ratio back spread. An example of this trade would be to sell an option that is at the money and buy a greater number of out of the money options. You might sell one call option at the money (delta -50) and buy 2 call options out of the money (delta +25 each). You would be delta neutral. You would want to put this on for a credit or at even. You can also put it on for a debit but then you would care a little about market direction.
If you put it on for a credit or even money and the market was lower at expiration of the options, you would break even or earn a small credit. If you put it on for a debit, you would lose the debit amount if the market was lower at expiration of the options. In either case, if the market went sharply higher, you have a chance for unlimited profit, because you have purchased more options than you sold.
Most traders teach that ratio back spreads should be done in the far months only. This is because you have more time to be correct with a big move. The problem that I have found is that you are giving up too much for the time advantage. The options you buy out of the money are not priced at an advantage compared to the ones at the money. You can look at the theta to see how much each option will lose per day or per week.
You can also see that in order to have a lot of time left in the trade, the difference in strike prices between the option you sell and the options you buy are too much. It will take a bigger move before you have unlimited profit potential.
If you are expecting a big move, think differently than the norm and start to look at options that have 20 -40 days left. The options you buy compared to the options you sell, should be priced better. Everything is in relation to something else.
So the next time you hear someone recommending the same old ratio back spreads, take a look at the difference months to see where the real advantage is.
For more information on these non-directional option techniques, click below:
Click Here!
Tuesday, June 7, 2011
How to get margin of safety with Commodities.
How to get margin of safety with Commodities.
According to Warren Buffet "Margin of Safety" are the three most important words in investment. This concept is also the corner stone of the philosophy that Benjamin Graham taught.
To get an answer of what margin of safety would mean in terms of investing in commodities , we need to be able to value a commodity relative to it's price. The lower the price in relation to the value, the higher the margin of safety. Commodities are also non-income producing assets, in fact there is a cost to carry the commodity. This cost is made up by the cost of money as well as the storage cost of the relevant commodity. The prudent commodity investor should thus factor in this cost when calculating value and should be more conservative in valuation to increase the safety margin.
How do we value a commodity? A whole book can be written about the valuation methods for commodities but we will try to capture a few key concepts.
- Production cost
This is the cost of producing the commodity. In the case of grains that will be the cost to produce per bushel. Unfortunately this is a difficult calculation at the best of times.. Sources to get this information would government agencies such as the US Department of Agriculture or the US Department of Energy.
-Producer break-even
This is the price under which some producers will start losing money. If this situation continue for too long, producers will have to stop producing or go insolvent. This method is handy when looking at metals or other commodities that are mined. Sources for information are the corporate reports of mining companies.
Supply/ Demand Ratios
- This method is widely used to determine a relative value number. This method should be used conservatively though, especially when a commodity is priced above production cost. The price might already factor in low supply/demand ratio.
So, this is a mine-field and the best approach is to be as conservative as possible in valuation. As a rule of thumb: If we are close or under production cost, producers are not making money or going out of business and prices have been depressed for a long time, the case for a value investment could be made..
According to Warren Buffet "Margin of Safety" are the three most important words in investment. This concept is also the corner stone of the philosophy that Benjamin Graham taught.
To get an answer of what margin of safety would mean in terms of investing in commodities , we need to be able to value a commodity relative to it's price. The lower the price in relation to the value, the higher the margin of safety. Commodities are also non-income producing assets, in fact there is a cost to carry the commodity. This cost is made up by the cost of money as well as the storage cost of the relevant commodity. The prudent commodity investor should thus factor in this cost when calculating value and should be more conservative in valuation to increase the safety margin.
How do we value a commodity? A whole book can be written about the valuation methods for commodities but we will try to capture a few key concepts.
- Production cost
This is the cost of producing the commodity. In the case of grains that will be the cost to produce per bushel. Unfortunately this is a difficult calculation at the best of times.. Sources to get this information would government agencies such as the US Department of Agriculture or the US Department of Energy.
-Producer break-even
This is the price under which some producers will start losing money. If this situation continue for too long, producers will have to stop producing or go insolvent. This method is handy when looking at metals or other commodities that are mined. Sources for information are the corporate reports of mining companies.
Supply/ Demand Ratios
- This method is widely used to determine a relative value number. This method should be used conservatively though, especially when a commodity is priced above production cost. The price might already factor in low supply/demand ratio.
So, this is a mine-field and the best approach is to be as conservative as possible in valuation. As a rule of thumb: If we are close or under production cost, producers are not making money or going out of business and prices have been depressed for a long time, the case for a value investment could be made..
Tuesday, May 24, 2011
How to get Margin of Safety with commodities- NB
How to get margin of safety with Commodities.
According to Warren Buffet "Margin of Safety" are the three most important words in investment. This concept is also the corner stone of the philosophy that Benjamin Graham taught.
To get an answer of what margin of safety would mean in terms of investing in commodities , we need to be able to value a commodity relative to it's price. The lower the price in relation to the value, the higher the margin of safety. Commodities are also non-income producing assets, in fact there is a cost to carry the commodity. This cost is made up by the cost of money as well as the storage cost of the relevant commodity. The prudent commodity investor should thus factor in this cost when calculating value and should be more conservative in valuation to increase the safety margin.
How do we value a commodity? A whole book can be written about the valuation methods for commodities but we will try to capture a few key concepts.
- Production cost
This is the cost of producing the commodity. In the case of grains that will be the cost to produce per bushel. Unfortunately this is a difficult calculation at the best of times.. Sources to get this information would government agencies such as the US Department of Agriculture or the US Department of Energy.
-Producer break-even
This is the price under which some producers will start losing money. If this situation continue for too long, producers will have to stop producing or go insolvent. This method is handy when looking at metals or other commodities that are mined. Sources for information are the corporate reports of mining companies.
Supply/ Demand Ratios
- This method is widely used to determine a relative value number. This method should be used conservatively though, especially when a commodity is priced above production cost. The price might already factor in low supply/demand ratio.
So, this is a mine-field and the best approach is to be as conservative as possible in valuation. As a rule of thumb: If we are close or under production cost, producers are not making money or going out of business and prices have been depressed for a long time, the case for a value investment could be made..
According to Warren Buffet "Margin of Safety" are the three most important words in investment. This concept is also the corner stone of the philosophy that Benjamin Graham taught.
To get an answer of what margin of safety would mean in terms of investing in commodities , we need to be able to value a commodity relative to it's price. The lower the price in relation to the value, the higher the margin of safety. Commodities are also non-income producing assets, in fact there is a cost to carry the commodity. This cost is made up by the cost of money as well as the storage cost of the relevant commodity. The prudent commodity investor should thus factor in this cost when calculating value and should be more conservative in valuation to increase the safety margin.
How do we value a commodity? A whole book can be written about the valuation methods for commodities but we will try to capture a few key concepts.
- Production cost
This is the cost of producing the commodity. In the case of grains that will be the cost to produce per bushel. Unfortunately this is a difficult calculation at the best of times.. Sources to get this information would government agencies such as the US Department of Agriculture or the US Department of Energy.
-Producer break-even
This is the price under which some producers will start losing money. If this situation continue for too long, producers will have to stop producing or go insolvent. This method is handy when looking at metals or other commodities that are mined. Sources for information are the corporate reports of mining companies.
Supply/ Demand Ratios
- This method is widely used to determine a relative value number. This method should be used conservatively though, especially when a commodity is priced above production cost. The price might already factor in low supply/demand ratio.
So, this is a mine-field and the best approach is to be as conservative as possible in valuation. As a rule of thumb: If we are close or under production cost, producers are not making money or going out of business and prices have been depressed for a long time, the case for a value investment could be made..
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