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Conversion Arbitrage

Introduction

Conversion arbitrage does not typically find its way into books about options trading. It is not surprising, given that the term alone would cause most eyes to glaze over. With a little extra effort, however, this stock and options combination strategy should not be too difficult to fully understand.To help demystify conversion arbitrage, we begin with an uncomplicated model of conversions, making some simplifying assumptions to get at the core concept. Later, as we proceed through other sections of this tutorial, assumptions are dropped as more complex relationships are introduced into the picture.While understanding conversion arbitrage does not require an advanced degree in finance or being a veteran market maker, it will require a basic understanding of put and call options (both buying and selling), familiarity with stock buying/shorting and knowledge of the stock dividend process. Conversions incorporate these elements, and a few others, in their cost and profitability structures and in the dimension of risk assessment, so you should brush up on them before getting started. (To learn more, read Put-Call Parity And Arbitrage Opportunity, When To Short A Stock and How And Why Do Companies Pay Dividends?)Market Efficiency, or Lack Thereof
When we speak of arbitrage of any kind, it is always associated with the idea of taking advantage of some sort of marketplace mispricing – pricing that is out of line with theoretical or fair value. The textbook story is one where the arbitrageur is supposed to play the role of keeping prices efficient by seizing opportunities when prices deviate from fair values, and thus driving them back to efficient levels.

In the options markets, it is the process of conversion and reverse conversion that helps keep put and call prices efficient. If an arbitrage opportunity appears for the options strategist seeking to lock in a potential profit using a conversion strategy, the purchase and sale of conversions act ultimately to remove that opportunity for profit.

Conversions have a long history, which is usually associated with market makers or floor traders who have a trading edge as a result of being on the trading floor, operating with lower margin requirements and having much lower transaction costs.

These key advantages – plus earning interest on short sales in reverse conversions – helped give this approach its reputation of not being for the retail guy. In today’s more level playing field for trading, however, conversion opportunities may be available for any astute trader. (Arbitrage is no longer just for market makers; find out more in Arbitrage Squeezes Profit From Market Efficiency.)

If prices are efficient, there is no way to extract a profit from conversion arbitrage above the risk free rate of interest. You would be better off buying a Treasury bill or CD and saving yourself the trouble – not to mention the transaction costs.

As you will see, it is possible to find profitable conversions, especially when incorporating dividend payments and interest earned on credit balances (for reverse conversions). It is absolutely essential to fully understand exactly how to cost-price these strategies before jumping into positions. Otherwise, you may ultimately make money on the trade only to learn that you could have made just as much, or more, by plunking your money down and buying a CD. Or worse, you may actually experience a loss due to not properly understanding the hidden risks. (To learn more, read Don’t Let Stock Prices Fool You.)

With this in mind, the availability of efficient online trading tools, deep discount commissions and new margin rules offer traders a better opportunity for finding conversions that provide potential profits above a CD rate or risk-free rate of interest. Hopefully this tutorial will encourage you to further explore this approach.


Source: investopedia.com

Options Basics Tutorial

Introduction

Nowadays, many investors’ portfolios include investments such as mutual funds, stocks and bonds. But the variety of securities you have at your disposal does not end there. Another type of security, called an option, presents a world of opportunity to sophisticated investors.

The power of options lies in their versatility. They enable you to adapt or adjust your position according to any situation that arises. Options can be as speculative or as conservative as you want. This means you can do everything from protecting a position from a decline to outright betting on the movement of a market or index.

This versatility, however, does not come without its costs. Options are complex securities and can be extremely risky. This is why, when trading options, you’ll see a disclaimer like the following:

Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.

Despite what anybody tells you, option trading involves risk, especially if you don’t know what you are doing. Because of this, many people suggest you steer clear of options and forget their existence.

On the other hand, being ignorant of any type of investment places you in a weak position. Perhaps the speculative nature of options doesn’t fit your style. No problem – then don’t speculate in options. But, before you decide not to invest in options, you should understand them. Not learning how options function is as dangerous as jumping right in: without knowing about options you would not only forfeit having another item in your investing toolbox but also lose insight into the workings of some of the world’s largest corporations. Whether it is to hedge the risk of foreign-exchange transactions or to give employees ownership in the form of stock options, most multi-nationals today use options in some form or another.

This tutorial will introduce you to the fundamentals of options. Keep in mind that most options traders have many years of experience, so don’t expect to be an expert immediately after reading this tutorial. If you aren’t familiar with how the stock market works, check out the Stock Basics tutorial.

Source: investopedia.com

Beginner’s Guide To E-Mini Futures Contracts

Introduction

E-minis are electronically traded futures contracts that represent a percentage of a corresponding standard futures contract. The e-minis make ideal beginner trading instruments for a variety of reasons, including round-the-clock trading, low margin rates, volatility and liquidity. This guide will discuss the e-mini stock index futures contracts, describe e-mini characteristics and introduce methods to trade these popular contracts.

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Source: investopedia.com

How To Place A Covered Call Strategy With optionsXpress

 Introduction

Retail brokerage firm optionsXpress provides services to traders in the Untied States and internationally. While optionsXpress specializes in catering to options traders, the firm is also notable for its browser based execution platform as well as the variety of markets tradable from within the platform. optionsXpress was acquired by the Charles Schwab Corporation in 2011.

Source: investopedia.com

Commodities Outlook For The Remainder Of 2012

 Introduction

In examining the possibilities for commodities in the second half of 2012, the situation is anything but transparent. There are so many question marks going forward that it is difficult to have an “all-in” mentality. The truth is that some commodities will do better than others and should be treated differently. There are a few commodities that could see significant growth, while others have value.

Source: investopedia.com

Options Pricing

Introduction

Options are derivative contracts that give the holder the right, but not the obligation, to buy or sell the underlying instrument at a specified price on or before a specified future date. Although the holder (also called the buyer) of the option is not obligated to exercise the option, the option writer (known as the seller) has an obligation to buy or sell the underlying instrument if the option is exercised.

Depending on the strategy, option trading can provide a variety of benefits including the security of limited risk and the advantage of leverage. Options can protect or enhance an investor’s portfolio in rising, falling and neutral markets. Regardless of the reasons for trading options or the strategy employed, it is important to understand the factors that determine the value of an option. This tutorial will explore the factors that influence option pricing, as well as several popular option pricing models that are used to determine the theoretical value of options.

Source: investopedia.com

Beginner’s Guide To Trading Futures

 Introduction

Welcome to the Beginner’s Guide to Trading Futures. This guide will provide a general overview of the futures market as well as descriptions of some of the instruments and techniques common to the market. As we will see, there are futures contracts that cover many different classes of investments (i.e., stock index, gold, orange juice) and it is impossible to go into great detail on each of these. It is, therefore, suggested that if after reading this guide you decide to begin trading futures, you then spend some time studying the specific market in which you interested in trading. As with any endeavor, the more effort you put into preparation, the greater your odds for success will be once you actually begin.

Important Note: While futures can be used to effectively hedge other investment positions, they can also be used for speculation. Doing so carries the potential for large rewards due to leverage (which will be discussed in greater detail later) but also carries commensurately outsized risks. Before beginning to trade futures, you should not only prepare as much as possible, but also make absolutely certain that you are able and willing to accept any financial losses you might incur.

The basic structure of this guide is as follows: we will begin with a general overview of the futures market, including a discussion of how futures work, how they differ from other financial instruments, and understanding the benefits and drawbacks of leverage. In Section Two, we will move on to look at some considerations prior to trading, such as what brokerage firm you might use, the different types of futures contracts available and the different kinds of trades you might employ. Section Three will then focus on evaluating futures, including fundamental and technical analysis techniques as well as software packages that might be useful. Finally, Section Four of this guide will provide an example of a futures trade, by taking a step-by-step look at instrument selection, market analysis and trade execution. By the end of this guide, you should have a basic understanding of what is involved in trading futures, and a good foundation from which to begin further study if you have decided that futures trading is for you.


Source: investopedia.com

Introduction to Binary Options

 Sponsored by Nadex

 A binary option is a straightforward yes/no trade. At expiration the option will be worth 100 or zero. No other settlement price is possible. That’s why it’s called a binary option.

The option is, however, tradable at any time during trading hours on the North American Derivatives Exchange, or Nadex. There is no obligation to carry the position until expiration.

And because the risk parameter is well defined, there will never be a margin call, only the initial debit cost of the trade. With a binary option trading at 50 ($50 per contract), neither the buyer nor seller will be margined higher than 50 because neither the buyer nor the seller can lose more than their original investment. (Your initial cost is always your maximum risk exposure to the trade)

Nadex Binary options can have various expirations. These can be a week, a day or even 2 hours in duration and the trade can be entered and exited at any time prior to the binary expiration.

Nadex is a US exchange that matches buyers and sellers on every trade in a regulated environment.


Source: investopedia.com

credit And Debt Management

Introduction

America is addicted to debt. Just call us the credit nation, from the highest levels of government all the way down to Main Street USA. America and Americans are obsessed with credit and rely on debt every day. Even as the nation and its consumers struggle under record debt levels, we continue to rack up more.

Like it or not, we need credit. As we have established during and since the global financial meltdown of 2008, credit keeps the wheels of the global money machine well greased. Concepts, such as buying a home, starting a business, or buying an investment property often could not become realities without some form of credit. In fact, utility companies, banks, landlords and even employers often require credit checks before extending services or employment. Consider the following statistics:

  • As reported by the Federal Reserve Board (FRB), the size of total U.S.consumer debt grew nearly five times in size from $824 billion in 1990 to nearly $2.2 trillion in 2005.
  • According to Experian, without factoring in mortgages, in 2008 the average American held over $16,635 in debt.
  • According to ComScore, in 2008 55% of Americans maintained a running balance on their credit card accounts.
  • According to Visa and MasterCard, in 2006 alone there were 984 million bank-issued Visa and MasterCard credit and debit card accounts in the United States.
  • Mail Monitor, a credit card direct mail tracking service, reports that roughly 4.2 billion credit card offers were made to U.S. households in 2008.
  • An online poll conducted by CardTrak.com reports that the average rate for bank credit cards reached a whopping 19% in March 2007, whereas the average rate in 2003 was 16.5%.

Watch: Prioritizing Debt

Credit and its associated debts are a part of our reality, and will continue to be for the foreseeable future, and it is up to each individual consumer to not let credit ruin them. Unfortunately for many, it already has. The level of consumer debt has grown exponentially in the U.S., where tens of millions of credit consumers find themselves overwhelmed by their personal debts.

If you find yourself in a credit or debt bind, keep reading. This tutorial will provide an overview of credit and debt management concepts that every consumer should know about so they know how to live with credit.


Source: investopedia.com

Credit Crisis

Introduction

The events of the 2008 credit crisis and their consequences will shape the investment landscape for decades to come. Therefore, investors who wish to be successful need to have a comprehensive understanding of the credit crisis and the changes it has produced in the financial community. This tutorial will provide readers with a broad-based overview of the credit crisis. It’s an excellent starting place for developing an opinion about the future of the global financial environment.

The tutorial begins with a brief history of Wall Street, an analysis of the differences between investment and commercial banking, and an overview of the disappearance of the classic investment bank. In the second chapter, we’ll discuss the crisis in more detail, provide a look at some famous historical crises and compare their causes with the 2008 credit crisis. The third and fourth chapters will look more closely at the credit crisis; first by examining its origins and then by analyzing the events that prompted its onset. The tutorial will then provide an overview of the most important events that occurred during the credit crisis before examining governmental efforts to mitigate the crisis and prevent the systemic collapse of the financial system.

We’ll also examine the crisis’s impact on financial markets and investors, and provide an overview of its impact on the financial markets. You’ll also find some timeless investment lessons that the credit crisis has reinforced and that can help you succeed through future market downturns.

While this tutorial is as comprehensive as possible, readers should remember that the credit crisis consisted of an amazing array of previously unimaginable events. In addition, future accounts of the credit crisis may differ somewhat from this tutorial, based upon the perspective that will come from examining events with additional hindsight.


Source:  investopedia.com