Trading for Options Under Different Strategies - Free Essay Example

Sample details Pages: 5 Words: 1536 Downloads: 9 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Contents Introduction: Strategies: Strategy 1: The reason why I choose this Trade: What was worked? What did not work? Improvement in the trade: Strategy 2: Trading an option and the underlying asset: The reason why I choose this Trade: What was worked? What did not work? Improvement in the trade: Strategy 3: Spreads: The reason why I choose this Trade: What was worked? What did not work? Improvement in the trade: Conclusion: . Don’t waste time! Our writers will create an original "Trading for Options Under Different Strategies" essay for you Create order Introduction: Different types of strategies can be used for hedging including: Principal protected notes Trading an option and the underlying asset Spreads Three selected companies are the Apple, Google and Intel Corporation. The above three strategies are discussed in detail with respect to each company. Strategies: Strategy 1: The first strategy that was applied through the interactive brokersà ¢Ã¢â€š ¬Ã¢â€ž ¢ application was for the Apple Company. The reason why I choose this Trade: Apple Inc. (Apple) designs and manufactures the markets mobile communication and media devices, personal computers, and portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. Its stocks show a strong position in the market due to the diversified business of the Apple Company. The Companys products and services include iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and a variety of accessory, service and support offerings. The Company also delivers digital content and applications through the iTunes Store, App StoreSM, iBookstoreSM, and Mac App Store. The Company distributes its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. In February 20 12, the Company acquired app-search engine Chomp. Below is the detail of the companyà ¢Ã¢â€š ¬Ã¢â€ž ¢s stock from May 2013 to 1 May 2014. The closing price is $592.3 which is quite risky if we trade in this stock. The reason of choosing to trade in Apple stock is due to the fact of increasing stock price of Apple shares since May 2013 up to now. What was worked? On April 30, 2014, I bought a call option at 492.5 USD which was the share price and would expire at 2 May 2014. On the same date, I bought Apple stock of 100 shares at the price of 592.34 USD. On the same day I sold 100 shares of Apple at 596 USD each. On May 1, 2014, I sold call option for 99.2 USD. The overall profit realized is low because of that call option. What did not work? Instead of buying one call option, I bought 2 call contracts and the realized profits was low because of that extra call option. I should have to sell 100 shares of Apple which would increase my profits instead of buying a call option and selling them together with the stock. Improvement in the trade: Instead of buying 100 shares of Apple stock, I would have to buy all 300 shares and sell them at a high price which would eventually produce a good profit on the other 200 shares. Instead I can use the combination of an option with the zero- coupon bonds which is called the principal protected note strategy. This strategy is good for conservative investors where the return is dependent on the performance of the stock. Here the Apple stock is performing well and this strategy can produce a good return for the investor. In this case the value of the principal is protected i.e. (300*592.34) 177,702 USD would be protected and grown too because zero coupon bond pays principal as well as strike price of the call option. This would be the case if the price of the portfolio goes up. But if the portfolio goes down, the value of the option would have no value but the original principal would be protected. Strategy 2: Trading an option and the underlying asset: The second strategy is trading an option with the stock and this is applied for the Google stock. The reason why I choose this Trade: The reason why I choose google is because it is the biggest company in IT sector. Google is one of the richest company in terms of revenues and net profits. Its price earnings ratio is 27.6 and its earnings per share is 19.09. So it is a healthy company to invest in its stock. Its estimated target share price for one year is 1324.63 USD. The chart above shows the last day activity and one year activity of the stock which is showing a deficit closing. As can be seen from the chart the closing price of the day for google stock is 526.66 USD which is also a risky stock with more returns. Overall the google stock has shown a moderate variations in its price over the year. What was worked? On April 30, 2014, I bought 300 shares of google at the price of 536.15 USD. I would need to hold the stock of google because the unrealized loss which would be realized if I would sell it is 2,228 USD. What did not work? Call option need not be implemented because of the lower price of the google stock. The shares would not be purchased at this time because the google shares are already traded in loss. Improvement in the trade: The number of strategies can be used for this single stock. We can use writing a covered call option where in which portfolios consists of a long positions in stock and a short position in the European call option. There is a protection for investors from a long position stock on the payoffs from a short call. The short call payoffs becomes necessary when there is a sharp rise in the stock prices of the google. If the option would have been exercised, I would sell all the 300 shares of the google stock at the strike price. Now I would have to wait for the option to be exercised so that I can sell whole of my stock. Strategy 3: Spreads: The third strategy of spread is applied to Intel Incorporation. The reason why I choose this Trade: The reason of choosing the Intel Incorporation is that its share prices have shown a decent trend from previous two months. In Jan 24, 2014, it was at 24.58 USD and today on 30 April, it closes on 26.69 USD. This portfolio of investment is not as risky as the previous two portfolios. Previously Intel Corporation misjudges the mobile wave of tablets and smartphones but now it is recovering well and its stock prices are the most consistent ones in the stocks of all the trades in the U.S. They are now in the wearable technology which triples from 10 billion USD to 30 billion USD in 2013. The stock of Intel is about 28% in previous year and its revenues are at 53 billion USD. Due to all these facts I choose the Intel Incorporation as the third company for stock trading. What was worked? I bought 100 shares of Intel Incorporation at call option of 26.74 USD I sold 100 shares of Intel Incorporation at call option of 26.70 USD. So the loss is 4 USD. What did not work? The call option would need to be implemented in combination for Intel Incorporation stock so that Profit can be obtained from the combination of the stock of two call option. Improvement in the trade: Different options should be implemented for this Intel stock such as different options with different strike prices should be used. This is called the butterfly spread. This spread can be created by buying a call option with relatively low strike price and buying the call option with relatively high strike prices and selling the two call options with the strike price that is in between the two high and low prices. Conclusion: A number of common trading strategies involve a single option and the underlying stock. For example, writing a covered call involves buying the stock and selling a call option on the stock; a protective put involves buying a put option and buying the stock. The former is similar to selling a put option; the latter is similar to buying a call option. Principal-protected notes can be created from a zero-coupon bond and a European call option. They are attractive to some investors because the issuer of the product guarantees that the purchaser will be receive his or her principal back regardless of the performance of the asset underlying the option. A number of factor may affect the share prices of the companies and corporations and one would need to be updated with the changes in the prices of stock. These changes may occur due to the change in events such as for technology companies changes in technologies would be kept in mind before making any trade in that company. Mo stly mobile companies and electronic companies are the most risky companies in terms of stock purchasing and selling and financial data for these companies should be kept in mind specially the financial statements. There is also a need to get experience from the market by working in trading companies and brokerage houses. The starters should begin with the stocks of the company rather than investing in indices, swaps and futures which are most risky and volatile in nature. The tradeoff for dealing with futures canà ¢Ã¢â€š ¬Ã¢â€ž ¢t be compared with the tradeoff for the shares or stocks.