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advanced delta neutral

Discussion: Unfortunately, obtaining a license to place a trade does not necessarily make someone a good trader. Like many things in life, sometimes book knowledge isnt enough to create success. When learning to drive a car, someone doesnt just immediately move out onto the freeway after reading a book. Though having a license does teach some important things, it isnt a guarantee that the person will be successful at trading.

2. What is the difference between an investor and a trader?

Answer: An investor takes a long-term, passive approach. A trader takes a more active approach using various options strategies that tend to capitalize on shorter-term market movement.

Discussion: As the term implies, an investor is investing his/her money into a company by buying stock in it. A trader isnt necessarily concerned with ownership, just profits and short-term gains. Most investors are people who buy and hold stock or mutual funds; they are more in step with the Warren Buffett approach to long-term security. A trader seeks profits in the short term, trading stocks and options



with a clear eye on risk management and a friendly ear for volatility. Undoubtedly there are many who dabble somewhere in between.

3. Successful options traders use only that are readily

available and can be invested in a sound manner.

Answer: B-Funds.

Discussion: Though Optionetics teaches traders how to use options to limit risk, there still is a chance that the capital used in trading options could all be lost. As a result, it is wise to only use money that is not needed for bills or other important necessities in life. If you trade using capital you cannot afford to lose, it is very difficult to trade without letting your emotions get in the way.

4. It is critical to accurately assess your to determine

the style of investing that suits you best.

Answer: D-Time constraints.

Discussion: If the capital you plan on using to trade options is also needed for an important life event in the next year or two, it is unwise to use it. Though quick profits can often be made trading options, we still need to trade with a long-term goal in mind. Even a successful options trader might go through a losing streak, and if the capital is needed during this down time, it can be a difficult situation.

5. How can you minimize your losses when you first begin trading options?

Answer: D-All of the above (start small, learn to paper trade, interview several brokers before picking the one most suited to your needs).

Discussion: All of these issues should be used when first starting to trade options. The nice thing about options is that it doesnt take a huge amount of capital to get started. Nonetheless, even if you have a nice nest egg to begin with, start small. Try to learn how the strategies work before taking a bigger leap. You may want to paper trade a new strategy so you wont lose capital during the learning process. Even so, there eventually comes a time when the trader will not be able to learn more until he or she trades with real capital. Using a broker who gets a trade a good fill and is easy to work with is crucial for the long-term success of an options trader. With the number of brokers available, dont be afraid to change brokers if the one you start with isnt working out.



6. What is the most important factor for building a low-stress investment strategy?

Answer: C-Defining your risk in every trade.

Discussion: Those who pay attention to Optionetics instructors and writers will hear this all the time. Options were first developed to help traders limit risk, and Optionetics still believes this is the key. We need to know the risk of every trade before we enter it so that we are prepared for the worst and know what actions are needed to limit this risk.

7. allows a trader to cultivate a matrix of strategies

with which to respond to market movement in any direction.

Answer: A-Flexibility.

Discussion: Though it is a good idea to narrow your choice of strategies, this doesnt mean that a trader shouldnt have a couple of strategies for each type of market. One of the greatest advantages to trading options is their flexibility. You can make money in up, down, and sideways markets using options, so dont limit yourself to just bullish strategies.

8. Successful investors usually in just one or in a few

areas. This allows them to develop strategies that work in certain recognizable market conditions.

Answer: A-Specialize.

Discussion: Specialization has become the thing to do in any profession in our day and age. It is no different when trading options. Though we need to have a wide base of knowledge about options and trading, we do not need to become experts in every available options strategy. As you learn about different options strategies, specialize in the ones that best fit your risk tolerance and expertise.

9. To become a successful options trader you have to have

Answer: B-Patience and persistence.

Discussion: This is very important to remember. Too many new traders expect to become millionaires overnight; this is unrealistic. Traders need to realize that where there is more possible reward, there is usually a higher degree of risk. Even the most successful options traders often lose money in individual trades. However, these traders have learned to limit their risk and have developed a sound plan that allows them to be patient and persistent.



Options Trading: A Primer MEDIA ASSIGNMENT

Learning to use the Internet to further your understanding of the market and options is a vital part of your trading education. The free Optionet-ics web site has a plethora of information. Mainly, take the time to search for information dealing with the initial strategies you want to master. As you progress up the learning curve, read the daily articles to gain an understanding of the markets. You can also read about various options brokers on the Brokers Review link. This will provide information about costs, services, and other important data about most of the options brokers available.

VOCABULARY DEFINITIONS

Bear: An investor who believes that a security or the market is falling or is expected to fall.

Broker: An individual or firm that charges a fee or commission for executing buy and sell orders submitted by another individual or firm.

Bull: An investor who believes that a security or the market is rising or is expected to rise.

Call: An option contract that gives the holder the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time (e.g., if you buy an IBM January 85 call, you have the right to buy 100 shares of IBM at $85 each by the third Friday in January).

Capital: The amount of money you have invested. When your investing objective is capital preservation, your priority is to try not to lose any money. When your objective is capital growth, your priority is to try to make your initial investment grow in value. Capital also refers to accumulated money or goods available for use in producing more money or goods.

Delta neutral: Refers to an options position constructed so that the profitability of the position relies on the magnitude of the move-not the directional bias; it is relatively insensitive to the price movement of the underlying instruments. A delta neutral trade is arranged by selecting a calculated ratio of short and long positions with a combined delta of zero.

Go long: To buy securities, options, or futures with the intent to profit from a rise in the price of the assets.

Go short: To sell securities, options, or futures with the intent to profit from a drop in the price of the assets.



Investor: A person whose principal concern in the purchase of a security is the minimizing of long-term risk, compared to the speculator who is prepared to accept calculated risk in the hope of making better-than-average profits, or the gambler who is prepared to take even greater risks. More generally, it refers to people who invest money in investment products.

Leverage: Enables a trader to buy or sell a security or derivative and receive fair value for it using borrowed capital to increase investment return.

Paper trading: Simulating a trade without actually putting up the money, usually done for the purpose of gaining additional trading experience.

Put: An option contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.

Return: The income earned or a capital gain made on an investment.

Risk: The potential financial loss inherent in an investment.

Risk management: The process of managing trades by hedging risk.

Stop-loss order: An order to sell when the price of the stock declines to, or below, a stated price. The purpose of this is to reduce the amount of loss that might occur.

Trader: Someone who buys and sells frequently with the objective of short-term profit.



CHAPTER 2

The Big Picture

SUMMARY

Trading stocks might be the best-known form of playing the markets, but many individuals specialize in other lesser-known trading instruments. This chapter is designed to give the novice trader a comprehensive view of trading by exploring the wide variety of different trading instruments-including stocks, futures, and options-as well as the multitude of ways to trade them. Particular attention is devoted to trading instrument properties as well as specific examples.

Options are derivatives, meaning they derive their value from an underlying financial instrument. Though options can be entered using stock as the underlying security, indexes and futures also have options available. Futures and options can be used together, but they are two distinctly different instruments and require totally different types of trading accounts. However, both of these instruments provide increased leverage, which means a trader can control a large amount of stock or other instrument with little initial capital outlay.

Options are an extremely versatile instrument and can be used to create a variety of different limited risk strategies. However, like most endeavors, they require practice and discipline, as well as proper money and risk management. In addition, traders must pay significant attention to volatility issues if options are to be successfully utilized. Both historical and implied volatility are important concepts to understand and should be studied in depth to master the options trading game.



QUESTIONS AND EXERCISES

1. A stock is a unit of ownership in a company. The value of that unit of ownership is based on a number of factors, including:

2. Six people form a company together and decide that there will be only six shareholders with only one share each. If this companys assets total $90,000 and it has $15,000 in liabilities, how much is each share worth?

A. $15,000.

B. $12,500.

C. $10,000.

D. $7,500.

3. The computerized market, , is also referred to as the

over-the-counter (OTC) market.

A. Securities and Exchange Commission.

B. Chicago Board Options Exchange.

C. Nasdaq.

D. FOREX.

4. Supply and demand for a companys shares helps to create

A. Momentum.

B. Historical volatility.

C. Liquidity.

D. Time decay.

5. If investors feel a company will beat Wall Street expectations, then

the price of the shares will be as there will be more

buyers than sellers.

A. Higher.

B. Lower.

C. Bid up.

D. Offer down.



6. If the majority of investors feel that the companys earnings will disappoint the Street, then the prices will be .

A. Higher.

B. Lower.

C. Bid up.

D. Offer down.

7. If there are more bidders (buyers), prices will . If

there are more people offering (sellers), prices will .

A. Fall. Rise.

B. Rise. Fall.

C. Stay the same.

D. Be impossible to predict.

8. A companys board of directors decides whether to declare

from time to time to be paid out and distributed to

shareholders on a payable date.

A. Better than expected earnings.

B. Revised expected earnings.

C. Cash flow.

D. A dividend.

9. What are the four unofficial size classifications of stocks?

1.

2.

3.

4.

10. The , which reports the performance of 30 major

companies representing key industries, is the most widely quoted indicator of market performance.

A. Standard & Poors Index.

B. Amex Market Value Index.

C. New York Stock Exchange Composite Index.

D. Dow Jones Industrial Average.



11. Name a few stock sectors.

12. What is the difference between a futures contract and an options contract?

13. were initially used by farmers and producers of

products to hedge themselves or lock in prices for a certain crop or product cycle.

A. Options contracts.

B. Futures contracts.

C. Stock contracts.

D. All of the above.

14. True or False: Hedgers use futures trading to lock in prices and protect themselves from market movement because they are primarily interested in actually receiving or selling the commodities themselves.

15. do not expect to take delivery of a product; they are

in the futures market to try to make money on the price movement of a futures contract.

A. Producers.

B. Speculators.

C. Hedgers.

D. Farmers.

16. If you believe soybean prices will rise over the next three months,

based on whatever information you may have, you could

the corn futures three months out hoping to make a profit.

A. Go long.

B. Go short.

C. Hedge.

D. All of the above.



17. If you believe corn prices will fall during this same period, you

could the corn futures contract three months out

hoping to make a profit.

A. Go long.

B. Go short.

C. Hedge.

D. All of the above.

18. Physical commodities are any bulk good traded on an exchange or in the cash market; examples include grains, meats, metals, and energies. include debt instruments (such as bonds),

currencies, and indexes.

A. Index futures.

B. ETFs.

C. Financial commodities.

D. HOLDRS.

19. The value of primarily depends on interest rates.

A. Bonds.

B. Debt instruments.

C. Eurodollars.

D. All of the above.

20. Typically, there is an inverse relationship between

and most foreign currencies.

A. The U.S. dollar.

B. Interest rates.

C. Bonds.

D. All of the above.

21. A/an is an indicator that is used to measure and

report value changes in a specific group of stocks, commodities, or different sectors of the marketplace.

A. Bond.

B. Moving average.

C. Index.

D. All of the above.



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