Sceeto Stock Trading Indicators: Jul 21, 2012

Saturday, July 21, 2012

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A naked put, also called an uncovered put, is a put option whose writer (the seller) does not have a position in the underlying stock or other instrument. This strategy is best used by investors who want to accumulate a position in the underlying stock, but only if the price is low enough. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game.
If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner (buyer) can exercise the put option, forcing the writer to buy the underlying stock at the strike price. That allows the exerciser (buyer) to profit from the difference between the stock's market price and the option's strike price. But if the stock's market price is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium (fee) paid for it (the writer's profit).
The seller's potential loss on a naked put can be substantial. If the stock falls all the way to zero (bankruptcy), his loss is equal to the strike price (at which he must buy the stock to cover the option) minus the premium received. The potential upside is the premium received when selling the option: if the stock price is above the strike price at expiration, the option seller keeps the premium, and the option expires worthless. During the option's lifetime, if the stock moves lower, the option's premium may increase (depending on how far the stock falls and how much time passes). If it does, it becomes more costly to close the position (repurchase the put, sold earlier), resulting in a loss. If the stock price completely collapses before the put position is closed, the put writer potentially can face catastrophic loss. In order to protect the put buyer from default, the put writer is required to post margin. The put buyer does not need to post margin because the buyer would not exercise the option if it had a negative payoff.
A buyer thinks the price of a stock will decrease. He pays a premium which he will never get back, unless it is sold before it expires. The buyer has the right to sell the stock at the strike price.
Writing a put
The writer receives a premium from the buyer. If the buyer exercises his option, the writer will buy the stock at the strike price. If the buyer does not exercise his option, the writer's profit is the premium.
"Trader A" (Put Buyer) purchases a put contract to sell 100 shares of XYZ Corp. to "Trader B" (Put Writer) for $50 per share. The current price is $55 per share, and Trader A pays a premium of $5 per share. If the price of XYZ stock falls to $40 a share right before expiration, then Trader A can exercise the put by buying 100 shares for $4,000 from the stock market, then selling them to Trader B for $5,000.
Trader A's total earnings (S) can be calculated at $500. The sale of the 100 shares of stock at a strike price of $50 to Trader B = $5,000 (P). The purchase of 100 shares of stock at $40 = $4,000 (Q). The put option premium paid to trader B for buying the contract of 100 shares at $5 per share, excluding commissions = $500 (R). Thus S = ( P - Q ) - R = ($5,000 - $4,000 ) - $500 = $500.
If, however, the share price never drops below the strike price (in this case, $50), then Trader A would not exercise the option (because selling a stock to Trader B at $50 would cost Trader A more than that to buy it). Trader A's option would be worthless and he would have lost the whole investment, the fee (premium) for the option contract, $500 ($5 per share, 100 shares per contract). Trader A's total loss is limited to the cost of the put premium plus the sales commission to buy it.

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text courtesy Wikipedia
A put or put option is a contract between two parties to exchange an asset (the underlying), at a specified price (the strike), by a predetermined date (the expiry or maturity). One party, the buyer of the put, has the right, but not an obligation, to sell the asset at the strike price by the future date, while the other party, the seller of the put, has the obligation to buy the asset at the strike price if the buyer exercises the option.
If the strike is K and maturity time is T, if the buyer exercises the put at a time t, the buyer can expect to receive a payout of K-S(t), if the price of the underlying S(t) at that time is less than K. The exercise t must occur by time T; precisely what exact times are allowed is specified by the type of put option. An American option can be exercised at any time before or equal to T; a European option can be exercised only at time T; a Bermudan option can be exercised only on specific dates listed in the terms of the contract. If the option is not exercised by maturity, it expires worthless. (Note that the buyer will not exercise the option at an allowable date if the price of the underlying is greater than K.)
The most obvious use of a put is as a type of insurance. In the protective put strategy, the investor buys enough puts to cover their holdings of the underlying so that if a drastic downward movement of the underlying's price occurs, they have the option to sell the holdings at the strike price. Another use is for speculation: an investor can take a short position in the underlying without trading in it directly.
Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging. Note that by put-call parity, a European put can be replaced by buying the appropriate call option and selling an appropriate forward contract.
The terms for exercising the option's right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration.
The most widely-traded put options are on equities, but they are traded on many other instruments such as interest rates (see interest rate floor) or commodities.
The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited (its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss). The put buyer's prospect (risk) of gain is limited to the option's strike price less the underlying's spot price and the premium/fee paid for it.
The put writer believes that the underlying security's price will rise, not fall. The writer sells the put to collect the premium. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received. Puts can be used also to limit the writer's portfolio risk and may be part of an option spread.
The put buyer is short on the underlying asset of the put, but long on the put option itself. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price. The writer (seller) of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put.

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text courtesy Wikipedia
Prediction markets (also known as predictive markets, information markets, decision markets, idea futures, event derivatives, or virtual markets) are speculative markets created for the purpose of making predictions. The current market prices can then be interpreted as predictions of the probability of the event or the expected value of the parameter. For example, a prediction market security might reward a dollar if a particular candidate is elected, such that an individual who thinks the candidate had a 70% chance of being elected should be willing to pay up to 70 cents for such a security.
People who buy low and sell high are rewarded for improving the market prediction, while those who buy high and sell low are punished for degrading the market prediction. Evidence so far suggests that prediction markets are at least as accurate as other institutions predicting the same events with a similar pool of participants
Prediction markets suffer from the same types of inaccuracy as other kinds of market, i.e. liquidity or other factors not intended to be measured are taken into account as risk factors by the market participants, distorting the market probabilities. Prediction markets may also be subject to speculative bubbles. For example, in the year 2000 IEM presidential futures markets, seeming "inaccuracy" comes from buying that occurred on or after Election Day, 11/7/00, but, by then, the trend was clear.
There can also be direct attempts to manipulate such markets. In the Tradesports 2004 presidential markets there was an apparent manipulation effort. An anonymous trader sold short so many Bush 2004 presidential futures contracts that the price was driven to zero, implying a zero percent chance that Bush would win. The only rational purpose of such a trade would be an attempt to manipulate the market in a strategy called a "bear raid". If this was a deliberate manipulation effort it failed, however, as the price of the contract rebounded rapidly to its previous level. As more press attention is paid to prediction markets, it is likely that more groups will be motivated to manipulate them. However, in practice, such attempts at manipulation have always proven to be very short lived. In their paper entitled "Information Aggregation and Manipulation in an Experimental Market" (2005),[12] Hanson, Oprea and Porter (George Mason U), show how attempts at market manipulation can in fact end up increasing the accuracy of the market because they provide that much more profit incentive to bet against the manipulator.
Using real-money prediction market contracts as a form of insurance can also affect the price of the contract. For example, if the election of a leader is perceived as negatively impacting the economy, traders may buy shares of that leader being elected, as a hedge.[13]
[edit] Other issues

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text courtesy Wikipedia
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option.[1] The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or "writer") is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right.
The buyer of a call option purchases it in the hope that the price of the underlying instrument will rise in the future. The seller of the option either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for examples).
Call options are most profitable for the buyer when the underlying instrument moves up, making the price of the underlying instrument closer to, or above, the strike price. The call buyer believes it's likely the price of the underlying asset will rise by the exercise date. The risk is limited to the premium. The profit for the buyer can be very large, and is limited by how high the underlying instrument's spot price rises. When the price of the underlying instrument surpasses the strike price, the option is said to be "in the money".
The call writer does not believe the price of the underlying security is likely to rise. The writer sells the call to collect the premium and does not receive any gain if the stock rises above the strike price.
The initial transaction in this context (buying/selling a call option) is not the supplying of a physical or financial asset (the underlying instrument). Rather it is the granting of the right to buy the underlying asset, in exchange for a fee — the option price or premium.
Exact specifications may differ depending on option style. A European call option allows the holder to exercise the option (i.e., to buy) only on the option expiration date. An American call option allows exercise at any time during the life of the option.
Call options can be purchased on many financial instruments other than stock in a corporation. Options can be purchased on futures on interest rates, for example (see interest rate cap), and on commodities like gold or crude oil. A tradeable call option should not be confused with either Incentive stock options or with a warrant. An incentive stock option, the option to buy stock in a particular company, is a right granted by a corporation to a particular person (typically executives) to purchase treasury stock. When an incentive stock option is exercised, new shares are issued. Incentive stock options are not traded on the open market. In contrast, when a call option is exercised, the underlying asset is

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text courtesy Wikipedia
Non exchange-traded binary optionsBinary options contracts have long been available Over-the-counter (OTC), i.e. sold directly by the issuer to the buyer. They were generally considered "exotic" instruments and there was no liquid market for trading these instruments between their issuance and expiration. They were often seen embedded in more complex option contracts.
Since mid-2008 binary options web-sites called binary option trading platforms have been offering a simplified version of exchange-traded binary options. It is estimated that around 90 such platforms (including white label products) have been in operation as of January 2012, offering options on some 125 underlying assets.
Binary options are high risk financial instruments where a prediction is made regarding the price of an asset at a certain period of the day. The predictions made relate to very small price modifications, which are extremely hard to predict, hence the high risk factor.
In finance, a binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. Thus, the options are binary in nature because there are only two possible outcomes. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and Fixed Return Options (FROs) (on the American Stock Exchange). Binary options are usually European-style options.
For example, a purchase is made of a binary cash-or-nothing call option on XYZ Corp's stock struck at $100 with a binary payoff of $1000. Then, if at the future maturity date, the stock is trading at or above $100, $1000 is received. If its stock is trading below $100, nothing is received.
In the popular Black-Scholes model, the value of a digital option can be expressed in terms of the cumulative normal distribution function.

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text courtesy Wikipedia
Example of a Binary Options TradeA trader who thinks that the EUR/USD strike price will close at or above 1.2500 at 3:00 p.m. can buy a call option on that outcome. A trader who thinks that the EUR/USD strike price will close at or below 1.2500 at 3:00 p.m. can buy a put option or sell the contract.
At 2:00 p.m. the EUR/USD spot price is 1.2490. the trader believes this will increase, so he buys 10 call options for EUR/USD at or above 1.2500 at 3:00 p.m. at a cost of $40 each.
The risk involved in this trade is known. The trader’s gross profit/loss follows the ‘all or nothing’ principle. He can lose all the money he invested, which in this case is $40 x 10 = $400, or make a gross profit of $100 x 10 = $1000. If the EUR/USD strike price will close at or above 1.2500 at 3:00 p.m. the trader's net profit will be the payoff at expiry minus the cost of the option: $1000 – $400 = $600.
The trader can also choose to liquidate (buy or sell to close) his position prior to expiration, at which point the option value is not guaranteed to be $100. The larger the gap between the spot price and the strike price, the value of the option decreases, as the option is less likely to expire in the money.
In this example, at 3:00 p.m. the spot has risen to 1.2505. The option has expired in the money and the gross payoff is $1000. The trader's net profit is $600.
Cash-or-nothing callThis pays out one unit of cash if the spot is above the strike at maturity. Its value now is given by,

[edit] Cash-or-nothing putThis pays out one unit of cash if the spot is below the strike at maturity. Its value now is given by,

[edit] Asset-or-nothing callThis pays out one unit of asset if the spot is above the strike at maturity. Its value now is given by,

[edit] Asset-or-nothing putThis pays out one unit of asset if the spot is below the strike at maturity. Its value now is given by,

[edit] Foreign exchangeFurther information: Foreign exchange derivative
If we denote by S the FOR/DOM exchange rate (i.e. 1 unit of foreign currency is worth S units of domestic currency) we can observe that paying out 1 unit of the domestic currency if the spot at maturity is above or below the strike is exactly like a cash-or nothing call and put respectively. Similarly, paying out 1 unit of the foreign currency if the spot at maturity is above or below the strike is exactly like an asset-or nothing call and put respectively. Hence if we now take , the foreign interest rate, , the domestic interest rate, and the rest as above, we get the following results.
In case of a digital call (this is a call FOR/put DOM) paying out one unit of the domestic currency we get as present value,

In case of a digital put (this is a put FOR/call DOM) paying out one unit of the domestic currency we get as present value,

While in case of a digital call (this is a call FOR/put DOM) paying out one unit of the foreign currency we get as present value,

and in case of a digital put (this is a put FOR/call DOM) paying out one unit of the foreign currency we get as present value,

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text courtesy of Wikepedia
In a prediction market, binary options are used to find out a population's best estimate of an event occurring - for example, a price of 0.65 on a binary option triggered by the Democratic candidate winning the next US Presidential election can be interpreted as an estimate of 65% likelihood of him winning.
In financial markets, expected returns on a stock or other instrument are already priced into the stock. However, a binary options market provides other information. Just as the regular options market reveals the market's estimate of variance (volatility), i.e. the second moment, a binary options market reveals the market's estimate of skew, i.e. the third moment.
In theory, a portfolio of binary options can also be used to synthetically recreate (or valuate) any other option (analogous to integration), although in practical terms this is not possible due to the lack of depth of the market for these relatively thinly traded securities.
In theory a portfolio of options can synthetically recreate any other financial instrument, including conventional options.
[edit] Structured Binary Options StrategiesIt may come as a surprise to many interested in the options space that put options were not introduced on the CBOE until 1977, nine years after call options were. The binary options market at present is in the same 'no-mans-land' where there is a vibrant FX binary options market with sophisticated binary options strategies, while at the other extreme there are a plethora of platforms offering one-hour bets dressing themselves up as 'investments'.
But the binary options market too has its range of straddles, strangles, call spreads, butterflies, condors etc.. which as yet have not been explored by the mainstream exchanges. Tunnels, aka rangebets, aka corridors are reasonably well-known and are priced in the manner of a conventional call spread although the tunnel is primarily a volatility trade. Others such as the Eachway Calls & Puts, Tug of War, Accumulators provide a rich seam of varied instruments providing distinct and unique P&L profiles.
As indicated above, binary options are generally perceived as European-style options that cannot be exercised before expiry. The American-style binary options are out there but are usually referred to as one-touch options. A comprehensive list of binary options strategies would include European and American binary options, 'knock-in' binary options, 'knock-out' binary options and two-asset binary options.
[edit] References

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text courtesy Wikipedia
Exchange-traded binary optionsIn 2007, the Options Clearing Corporation proposed a rule change to allow binary options,[1] and the Securities and Exchange Commission approved listing cash-or-nothing binary options in 2008.[2] In May 2008, the American Stock Exchange (Amex) launched exchange-traded European cash-or-nothing binary options, and the Chicago Board Options Exchange (CBOE) followed in June 2008. The standardization of binary options allows them to be exchange-traded with continuous quotations.
Amex offers binary options on some ETFs and a few highly liquid equities such as Citigroup and Google.[3] Amex calls binary options "Fixed Return Options"; calls are named "Finish High" and puts are named "Finish Low". To reduce the threat of market manipulation of single stocks, Amex FROs use a "settlement index" defined as a volume-weighted average of trades on the expiration day.[4] The American Stock Exchange and Donato A. Montanaro submitted a patent application for exchange-listed binary options using a volume-weighted settlement index in 2005.[5]
CBOE offers binary options on the S&P 500 (SPX) and the CBOE Volatility Index (VIX).[6] The tickers for these are BSZ[7] and BVZ,[8] respectively. CBOE only offers calls, as binary put options are trivial to create synthetically from binary call options. BSZ strikes are at 5-point intervals and BVZ strikes are at 1-point intervals. The actual underlying to BSZ and BVZ are based on the opening prices of index basket members.
Both Amex and CBOE listed options have values between $0 and $1, with a multiplier of 100, and tick size of $0.01, and are cash settled.[6][9]
In 2009 Nadex, the North American Derivatives Exchange, launched and now offers a suite of binary options vehicles.[10] Nadex binary options are available on a range Stock Index Futures, Spot Forex, Commodity Futures, and Economic Events.