Philip Chua Business Blog

Posts Tagged ‘contracts’

Speculative investors have increased bets that USD/MXN will dip lower, despite the already low level. In the past week speculators added almost 10K contracts to their short USD/MXN position that now amounts to 81% of open interest.

(SINGAPORE) Singapore Exchange will launch contracts for gold, coffee and fuel oil early next year and invest heavily to support high-tech trading, new chief executive Magnus Bocker said yesterday at a derivatives industry conference.
‘I think there is a great opportunity for Singapore and SGX to be more in the forefront of trading and clearing of energy products,’ Mr Bocker, who took over from Hs… more

GAINING exposure to a blue-chip company need not mean buying its pricey shares listed on the Singapore Exchange (SGX).
Investors are making a beeline for an increasingly popular financial derivative product known as Contracts for Difference (CFDs), which enable them to ‘own’ these blue chips without having to stump up the full price of the stock.
Brokerages jostling for a slice of the action inclu… more

Reuters – Central clearing of privately traded derivatives contracts won’t be enough to make the $600 trillion sector safe, while clearing of some bespoke trades may not be desirable, the Bank of International Settlements said.

Reuters – Derivatives pose risks on financial markets that central clearing of contracts would mitigate, the European Commission said on Friday, outlining plans that fell short of more radical U.S. steps.

Hi,

It is good to be here with you again. As promised, I will touch on Option today and how you can leverage on Option to make a gain of 100% or more in your portfolio.

If you are not familiar with Options, kindly go through the video below before proceeding further…

Alright, now that you have the basic understanding of Option, let’s talk about Call Option today.

In my previous blog, I have made a personal recomendation to buy a few ETF.

Lets use OIH ETF as an example in our discussion here. The price of OIH is currently around $100. If you want to buy 1,000 shares of the OIH ETF, you will need to fork out a lump sum of $100,000. With the help of Call Options, you can actually control the same amount of 1,000 OIH ETF shares for only around $17,000 by buying 10 contracts of Jan 10 Call Strke @95 ( Jan 10 Call Strke@ 95 ~ offer price around$17.00)

So suppose if the price of OIH ETF is $130 by the end of December 2009, the price of the Jan 10 Call Strike is in the money and should be worth at least $35 ( Intrinsic Value). The profit by selling the Jan 10 Call Strike @ 95 will be $18,000! ( $35-$17=$18 x 1000) A more than 100% Gain!

The Beauty of Leverage

Here’s another way of looking at it: When I buy an option, I am using
leverage.

Use this analogy:

If I buy a house for $300,000.00, and I put down 10%, and mortgaged 90%,then I have only invested $30,000.00.

If the house goes up in value by 20%, then the house would be valued at $360,000.00 right? So if I sell the house, that’s a $60,000.00 profit.

Although the house went up in value by 20% (from $300k to $360k,) since I only put up $30k, I actually made 100% on my money ($60k profit on my $30k.)

I hope you see the beauty of Using Options as a leverage tool in your investment portfolio.

However, the downside of using Option is that you may lose all your capital if the share go towards the opposite direction. In the above example, if the price of OIH is $95 or below at option expiration in Jan 2010, the value of the 2010 call Strike@$95 is almost nil and you will lose your capital.

As a rule of thumb; below are 07 Important Fundamental Rules that I follow when I buy call Options.

1)Always buy when there are at least 03 technical indicators on the mother share (OIH) that are showing signals to buy ( RSI oversold, MACD inching up,Double bottom chart etc)

2) Always buy 6 months and above time horizon options

3) Always buy deep in the money options ( so that Instrinic Value is 100%; Time Value is zero)

4)Always Buy when the implied volatity is less than the historical volatility ( So that Option is not over-priced).

5) Do not hold the call options till expiry. Time decay is the most in the last 03 months of an option. I will usually close off my position 03 months before the options expiry.

6) Never use more than 10% of your investment capital to buy options. In fact, most of the times, I prefer to sell options than to buy it so that time decay is on my side.

7) Last but not least, Aways have an Exit Plan: You must set the price for yourself to take profit and cut loss when you open a new option position.

Well, if you follow all the above simple rules, then you can use options safely to increase your gain in your investment portfolio.

I hope you have gain some insight into today discussion. Thank you for your time spent and do have a great day ahead!

Sincere Appreciation,

Philip Chua, ChFC CFP FChFP
IARFC AMC B.BUS (Hons)

Mobile: +65-9748-4828

http://www.philipchua.com/

Twitter me @ phichua