TopicConsider a Digital Put Option Strategy

  • Fri 10th Jun 2016 - 6:17am

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    When it comes to options in trading, many people are at least familiar with the standard or American contract. Traders buy puts and calls on the stocks of their choice and use the additional buying power to increase returns substantially. When market moves are favorable this sort of investment can work out very profitably, with profits multiplied by anywhere from two to ten times (or more) depending on the security purchased. The drawbacks to using options in trading this way mainly revolve around relatively high transaction costs and the risk of being under-capitalized. Costs eat into profits and under-funded accounts can find themselves over-drawn if cash or positions at contract expiration are not managed properly.

    A second type of investment which has grown immensely in popularity is the leveraged ETF. This allows a trader to invest a modest amount of money in a sector or a whole index and multiply the benefit from the favorable movements of that security. The retail buyer does not necessarily have to have the massive amounts of capital needed to create an index portfolio, yet by owning the leverage ETF can have not only the benefits of owning the index but also the multiplied earnings of a better capitalized trader who could use margin to double or triple the holdings of the account. Investors have found the disadvantage of this type of fund is that the promised multiplied returns do not typically show up in earnings results because larger capital firms are able to manipulate the ETFs to effectively arbitrage the funds against the actual securities (and futures contracts) which make up the ETF.

  • Mon 23rd Apr 2018 - 7:42pm

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