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Bear Call Spread
When the market is volatile and you are moderately
bearish on it, you might consider a Bear Call Spread...
Sell Strangle
When volatility is very high, and the market has just made a dramatic move and you are expecting it to consolidate and take some time to digest its gains, you
might consider selling a strangle...
Buy Straddle
When volatility is low and you are expecting a large break-out move, but you aren't sure which way it will break out,
you might consider buying a straddle...
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Fundamental Analysis
Option traders try to predict the direction of movement of assets so that they can profit from the moves.
Technical analysis and fundamental analysis are two basic analysis methods used in the options market to help predict future price movements.
Fundamental analysts use fundamental economic and political information (e.g. unemployment rates, economic policies, inflation, and growth rates) about assets they trade. Option prices are affected by the forces of supply and demand, which are affected by economic conditions. Two important economic factors affecting supply and demand are interest rates and the strength of the economy. The strength of the economy is affected by the Gross Domestic Product (GDP), foreign investment and trade balance.
Short term fundamental analysts make trades based on news releases. This requires them to make decisions on how the news release affects the financial strength of the country. For example, evidence of higher inflation in a country is likely to weaken their currency. Interest Rates can have either a strengthening or weakening effect on a particular currency. High interest rates attract foreign investment which will strengthen the local currency but stock market investors often react to interest rate increases by selling off their holdings in the belief that higher borrowing costs will adversely affect many companies, causing a downturn in the stock market which could lead to a downturn in the national economy.
Many reports are put out by the government on a monthly basis. Reports such as Non-farm Payrolls, Purchasing Managers Index (PMI) (a measurement of the cost of producing goods), Consumer Price Index (CPI) (a measurement of the cost of living), Durable Goods Orders, Producer Price Index (PPI), and Retail Sales yield pertinent information on financial strength, inflation, or interest rates, etc. The GDP measures the value of all goods and services within a country. The M2 Money Supply measures the total amount of all currency.
In addition to government reports, there may be many economic meetings where topics of financial strength, inflation, and interest rates, etc. are discussed. Key meetings in the US are the Federal Open Market Committee and Humphrey Hawkins Hearings. The minutes of these meetings and changes to official statements are often disscected by fundamental analysts to help them understand the finacial impacts of the meetings. This not only helps short term traders to immediately profit from unexpected changes, but also helps long term traders to tweak their forecast of future economic conditions and predict the impact on the general strength of the currency in the future.
The reports and meetings occur at predictable times, so a calendar of important economic events can be kept. Your option broker should also be able to help in this regard.
An international trade imbalance which shows a deficit (more imports than exports) is usually an unfavorable indicator. Deficit trade balances means that money is flowing out of the country to purchase foreign-made goods and this can have a devaluing effect on the currency. However, if a county habitually operates with a deficit trade balance it has probably already been factored into the price of its currency. Trade deficits will generally only affect currency prices when they differ from market expectations.
There are 28 major indicators used in the United States. Indicators can have strong effects on financial markets so option traders should be aware of them when preparing strategies. Up-to-date information is available on many websites and many option brokers supply this information as part of their trading service.
When you are analyzing potential option positions, it
helps to have a computer program like Option-Aid that
swiftly calculates volatility impacts, probabilities,
statistics, and other parameters of interest. These
programs can pay for themselves with the first trade that
they help you with.
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