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Assume that you expect Australian stock market to decline significantly in the current year. Specify three trading strategies involving options which you may employ in this scenario. Critically evaluate the advantage and disadvantage or risk involved in t - Essay Example

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In addition to purchasing stocks, traders online involve in option markets, which can be dynamic and responsive. Options are securities formulated against the value of…
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Assume that you expect Australian stock market to decline significantly in the current year. Specify three trading strategies involving options which you may employ in this scenario. Critically evaluate the advantage and disadvantage or risk involved in t
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Extract of sample "Assume that you expect Australian stock market to decline significantly in the current year. Specify three trading strategies involving options which you may employ in this scenario. Critically evaluate the advantage and disadvantage or risk involved in t"

BASIC TRADING STRATEGIES Introduction Because of the increase in online stock trading, investors have witnessed easier access to the markets. In addition to purchasing stocks, traders online involve in option markets, which can be dynamic and responsive. Options are securities formulated against the value of essential stocks such as an index value or a stock share price. The large number of accessible options on a wide range of securities permits traders to develop trading strategies both conservative and aggressive. The available option contracts include those that go up with the stock price; sell options, and those that go up when the price of stock declines; put options.
Option trading has several expiration times, strike prices below, and above the security price at hand. In case of an expected stock market decline, traders can employ strategies to buy or sell a single option to achieve their trading goal. Similarly, they can put together strategies that involve buying, selling, expiration dates, and/or different strike pieces to profit if the security goes down or up. In this context, if Australian Stock market is to decline, traders need to be aware of the suitable option trades for this market environment or outlook. Further, these trading settings can be categorized as bullish, bearish, volatile, or neutral. As such, trading strategies fall within the four groups.
Summarily, Bearish strategies will work best if the Australian stock market declines. These strategies in options trading are utilized when the options trader anticipate the underlying stock price to go down. Most importantly, one should assess the timeframe in which the decline will occur and how low the price of a given price can go in order to choose the best trading strategy. As much as put options are good at giving investors a chance to speculate on the securities that may decline in price, they do not allow for transparency and thus the option can be lost easily.
If a trader decides to choose strategy two, he or she will enjoy various benefits. Equity options would help the buyer to lock predetermined selling price, and this serves as a security to the shares in the event of a decline. Due to their flexibility, options are capable of providing investors with an opportunity to realize almost all strategic goals including managing risks and enhancing leverage. Sadly, options can be extremely risky. Prior to investing in them, it is vital to understand the strategies you can put in place to limit such risks.
Despite the fact that the above strategies are significant in the event of stock market decline, one should be aware of the specific index option traits. First, the constituent stocks of an index are an essential strategic consideration. One should choose a strategy with well-balanced fundamental equities rather than one heavily weighted in a few firms. Second, investors who are seeking for a hedging strategy ought to find an index, which has equities, close to their portfolio holdings. Just like understanding the various options trading strategies in the field is vital, investors should also know the risks they may be exposed to while employing these strategies.
References
Buying Puts vs. Selling Calls. An Explanation for Rookies. 2009. Assessed October 19, http://blog.mdwoptions.com/options_for_rookies/buying-puts-vs-selling-calls-an-explanation-for-rookies/
What are the best strategies for buying put options. 2012. WiseGEEK. Assessed October 25, http://www.wisegeek.com/what-are-the-best-strategies-for-buying-put-options.htm Read More
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