Share Market

The percentage that a company earns by selling its products over a period of time is called ‘market Share’. Supposing if India allots one million worth business to the different companies/industries here, and one of the companies gets an allotment of 500 crores. This means that particular company has a market share of 500 crores.

A company calculates its market share by taking its sale over a period of time and dividing it by the total sale of the industry for the same period. If the company is a pharmaceutical it shall take into account the total sale of products related to this industry and calculates its sale percentage. A company is said to grow in size and revenue if its market share increases.

Increase of market share allows a company to achieve greater scales in its operation and improve its profitability. Hence a company always looks forward to expand its share in the market.

Investors look at the increase and decrease of market share of a company because that is the barometer that measures the relative competitiveness of the company’s product and services. Therefore companies are always looking forward to increasing their market share and there by their size by appealing to larger demographics, lower prices or through advertisement.

Market share is the key indicator of competitiveness of a company as it grows with it. Not only how well a company is doing against its competitors should be the criteria, but the primary and selective demand of products in the market should be evaluated to judge market growth and decline as well as trends in customer selections among competitors. Generally sales growth from primary demands (total market growth) proves to be more beneficial in increasing market shares than capturing share from competitors.

Market shares may be in ‘dollar market share’ or ‘unit market share’. In India ‘unit market share’ is the trend. It is the unit sold by a company as a percentage of the total market sales, measured in the same unit or currency.

The main advantage of using market share as measure of business performance is that it is less dependent on the macro environmental variables such as state economy and tax policies of a country. However companies selling products outside their countries have the risk of being subject to market share liability a legal doctrine unique especially in the US for plaintiffs.

Before dwelling in the advantages of using LEAPS in option trading let us first try and understand what does one mean by the financial lingo LEAPS. In the world of options, LEAPS which stand for Long Term Equity Anticipation Security are options which have long term until expiry than other common options, say a period of 3,6 and 9 months with no options lasting more than one year. As like all options, LEAPS also contain two forms, calls and puts.

In options, Equity LEAPS always expire January. Say suppose, if a contract is purchased in July 2005 of ABC Company, one would buy a call option of that company which would expire in 2007 or 2008, thus being called a LEAP.

The financial instrument provides a powerful tool risk/reward picture and allows for a significant capital savings. They are generally powerful tool for trend followers.

After a brief understanding of LEAPS, let`s get to the understanding of what are the advantages of instruments. The advantages are as under:

A tool for diversification: The instrument allows a tool for diversification. As buying LEAPS is cheaper than buying an equity instrument, LEAPS can allow more markets to be traded.

A Leverage Tool: The instrument more often can be used as a leverage tool as they cost the fraction of the underlying equity. Say suppose, an equity instrument moves from Rs 5 to Rs 10, it will show a 100% gain. Meanwhile, a LEAP on the same issue will move from 1 to 5 will show a 400% gain.

Minimal Time Decay: While all options decay over a period of time, LEAPS by nature have vast amount of time before expiration, typically nine months of an options. At nine months before expiration, LEAPS become traditional options.

Good use of retirement money: The financial instrument

LEAPS allow traders to trade a trend following method in a retirement tax shelter. LEAPS allow for both sides of the trend to be traded, increasing the number of trends that can be traded, and potential returns.

Options are one of the derivative instruments in the financial world which provide the investor with the right but not the obligation to execute the contract with specification of price and validity period.

Although profitable, options as an instrument can prove to be extremely complex and risky.

While strategies involved in options trading can make them less risky, the fact always remains that the options (especially derivative instruments) involve more risk than equity instruments.

Risks involved in options trading include…

Greed for money: Speculative income (the form of income derived from options) is one of the major reasons in options trading. One has to stay connected to the options world to get the continuous update of their money and protect them from getting the loss with the blink of the eye.

Capital Loss: Since options involve the use of a derivative instrument, the loss faced in percentage as compared to that of trading in equity is ten times greater.

Margin trading: The risk involved in options trading is significantly high. Considering the risk involved, if one involves in margin trading, one can fall in significant debt with the broker if the trade bombs (This happens more than often)

Strategies to save yourself from the risks…

While option trading can make life risky, there are steps which can be taken to reduce the risks and benefit from trading in the financial instrument. Following are the few steps which one can adopt to mitigate the risks involved in options trading:

Stick to your strategies: An old adage says – experience is the best teacher. When you know the risk involved in the instrument, it is always better to have long trading expertise and a standard plan to help detect and avoid the dangers involved in option trading. Wise men in the market always say, “Stick to your plan! “

In time technical analysis: It is learnt that the rules for technical analysis for an option are very different from those of a share or equity. Once learnt, technical analysis in options trading helps in proper timing of the trade, which can indirectly help in mitigating the risks involved in option trading.

Asset/Capital Allocation: Since options are a risky financial instrument, experts are known to have recommended only 2% of the capital to the option trading. Also, reports have known to suggest that one must keep at least 20% of the capital to invest in “buy“ oneself out of the bad trade before it becomes a huge margin responsibility to pay off.

While option trading provides a quick source of income for short term traders, the risks involved in trading the financial instrument causes them to be on the toes and continuously vigilant about their trades. However, to be on the safer side and maintain your stable heartbeats while trading in options, one must ensure that he or she knows various option trading strategies, apply correct technical analysis and be sure not to let greed overtake investment strategies.

Option pricing is based on a variety of factors. There are seven main components that affect the premium of an option.

These are:

• The current price of the underlying financial instrument
• The strike price of the option in comparison to the current market price (intrinsic value)
• The type of option (put or call)
• The amount of time remaining until expiration (time value)
• The current risk-free interest rate
• The volatility of the underlying financial instrument
• The dividend rate, if any, of the underlying financial instrument

Each of these factors plays a unique part in the price of an option. In most cases, the first 4 are pretty easy to figure out. The rest are often forgotten or overlooked. However, although they may be a little confusing, each is important. For example, when it comes to trading with options, reviewing volatility levels can help traders determine the right options strategy to employ.

In addition, it is noteworthy to assess the current risk-free interest rate and whether or not a particular stock is prone to the release of dividends. Higher interest rates can increase option premiums, while lower interest rates can lead to a decrease in option premiums. Dividends act in a similar way, increasing and decreasing an option premium as they increase or decrease the price of the underlying asset. Also, if a stock were to pay a dividend, a short seller would be responsible for that payment. This means that a short seller in securities not only has unlimited risk of the stock price rising, but also is responsible for the dividends paid out.

In the financial world, a binary option is a type of an option where one receives pay off in the form of some fixed compensation if the option expires in the money or nothing if the option contract expires out of the money.

Options are a type of a derivative instrument (an instrument whose value is derived from that of an underlying asset) in the financial world in which one has a right but not the obligation to execute the contract. A call option is the one which conveys the right but not an obligation to buy the contract, while the put option is the one which conveys a right but not an obligation to sell the contract.

In the options lingo, a call option is in the money, when the strike price is less than the market price of the security while it is out of the money when the strike price is greater than the exercise price. A put option is in the money when the strike price is more than the market price of the security and is out of the money when the strike price is less than the market price of the security.

Binary options are of two types, the first one being cash or nothing while the second one being asset or nothing binary option. In the cash or nothing binary option, one pays some fixed amount of cash if the option expires in the money, while in the asset or nothing option, one has to pay the value of the underlying security. Let us understand how the binary option is different from the simple options:

Scenario 1: A simple call options contract –

Suppose X has an understanding with Y to buy 100 shares of company ABC at the end of the month. At the time of the understanding, the company is trading at the price of Rs 50 and X has said that he will buy the shares of the company at Rs 52 (strike price). At the end of the month, if the shares of the company are trading at Rs 67, then X will execute the contract. If otherwise, the shares of the company trade below Rs 52, then the call option will expire worthless.

Scenario 2: A binary option contract –

In this case, suppose, X makes an understanding with Y to purchase binary cash or nothing call option on ABC`s share at a strike price of Rs 100 with a payoff of Rs 500. If then, at a maturity date, the stock is trading above Rs 100; X receives the promised amount of Rs 1,000. If otherwise, the shares of the company are trading below Rs 100, nothing is received.

Options are a form of derivative instrument (an instrument whose value is derived from the value of the underlying asset) in the financial world in which the holder of the option has the right but not the obligation to execute the contract.

To put forth the concept lets take the example of a person X having an understanding with Y to purchase (in case of call option)/sell (in case of put option) 100 shares of ABC Company at Rs 50 (the strike price) by the end of the month.

In case of a call option, if by the end of the month, shares of the company trades above Rs 50, say Rs 60 – then X will exercise the option and buy it from Y; else X would prefer to buy it from the market.

On the other hand in case of a put option, if by the end of the month, shares of the company trade below Rs 50, X will exercise the put option, else the option will go worthless.

While options provide an easy source of income, they are speculative and risky in nature.

Following are the few tips which one can keep in mind when trading in options:

Time frame and patience: Traders need to keep track of the date of termination of the options. This requires a lot of patience as the options expiration can take a lot of time, but not as much as the regular share or a bond.

Limit your losses, avoid greed: A speculative income always consists of a single adjective factor called greed. One mistake which each speculator/trader makes during options is to fall in the trap of greed.

Keep it simple, Silly! There are a number of complex option strategies that are way beyond a simple person`s mind. Some of these include back spread, gamma neutral and butterflies. Hence, it is always easy to know one`s way around the option strategies before indulging in the complex trading sessions.

Have a proper money allocation: Options trading being risky is not a cake walk for everyone. Therefore, one should always keep a budget allocation strategy in mind while trading in options.

Given the guidelines, the basic rule in underlying these options is to know the basics and fundamentals. Always stick to the guidelines and the strategy followed to keep a steady income flowing. Have a happy option trading time ahead!

Before understanding day trading options let us try to understand what does one mean by day trading and options in their individual terms. Day trading is buying and selling financial instruments like equities, equity options, futures contracts, and commodities amongst others. Meanwhile, options are a type of financial instruments in which the buyer of the option has the right but not the obligation to execute the contract.

There are two types of option orders, call and put options. In a call option, the buyer of the option has the right but not the obligation to buy the contract while the seller of the option of contract has the right but not the obligation to sell the contract.

A few terminologies which the option trader should have in mind before plunging into day trading are as follows:

Option price: Option price consists of two components, the intrinsic value and the time value. The intrinsic value of the option is that value obtained by exercising the options now. The time value of the options is a function of the option value less the intrinsic value. It is also seen as the value of not exercising the options immediately.

At the money: An option is at the money when the strike price of the option equals the spot price of the underlying security. It only has intrinsic value, no time value.

In the money: Meanwhile, an in the money option has both – the time value and the intrinsic value. A call option is in the money, when the strike price is below the spot price. Meanwhile, the put option is in-the-money when the strike price is greater than the spot price.

Out of the money: An out-of-the-money option has no intrinsic value. A call option is out-of-the-money when the strike price is above the spot price of the underlying security. A put option is out-of-the-money when the strike price is below the spot price.

Delta: A Greek alphabet in English literature, in options terminology, a delta means a number of positive points which an options or warrants contract will move for each point of positive movement in the underlying market. It ranges between -1.00 and 0.00 for long puts and short calls and between 0.00 and 1.00 for long calls and short puts

With these brief concepts, let us understand two day trading option strategies.

Day Trading Options Strategy 1: Near-month and In-The-Money

Near month-in-the money options consists of little time value and delta of close to 1.0, which are ideal for day trading purposes. Also, if one is going to day trade options, one should day trade near month in the-money options of very high liquid stocks.

Day Trading Option Strategy 2: The Protective Put

In case of day trading for upside moves on a particular share, one can purchase protective puts against the downfall of the share. A protective put is a strategy which involves buying the underlying asset while buying put option contracts.

While keeping in mind these strategies, one also has to keep in mind the effect of time value. For the near-the-money options, while the intrinsic value of the option increases with the underlying price of the security, the gain is offset by the loss of time value. All the best for day trading options!

Options are one of the most commonly used derivative instruments which are speculative in nature. Options provide the holder of the instrument the right to buy or sell the underlying asset at a predetermined price.

While investing in options are no doubt speculative in nature, the instruments provide a route as a strategic investment tool which when used judiciously helps in boosting the profits, decreasing costs and giving a new dimension to the trading approach. The judicious use of options comes to play when greed comes to picture. If greed is controlled in the right direction, options can be great beneficial tools to be included in the portfolio.

In the following article we have discussed a few option trading strategies which will help investors to use to the tool in a beneficial way. The same are as under:

1. Covered Call: A covered call strategy is the one which involves selling the cost of stock against the stock every month. Over the year, it is enough possible to sell the covered calls enough number of times to pay off everything that one initially invested in buying the stock.

2. Selling naked puts: The strategy is used when a person desires to own the stock but observes the price of the stock to be too high. In this strategy, one sells put against the stock each month but at a lower strike price then the current market price. If the stock price increases, you do not exercise the option (option goes worthless) and you have the money; if the stock price drops to your desired price, you buy the stock and wait for the prices to bounce back.

3. Deep in the money options: The strategy involves buying the stock at half the price. Here the investor foresees short term profit in the trade say, a period of couple of months or so. The main thing to note here is that the price of the option moves in the same rate as the stock but half the price. One point to note is that one has to keep in mind the option trading strategies in mind in such strategies than other strategies.

4. Selling the future: Options deal with the promises in the future, and selling a call or a put takes advantage of this with the risk being offset by purchasing another option as a security or insurance. It is a great route to make steady way for compounding profit and is denoted as credit spread strategy.

As said, options provide a beneficiary tool for the portfolio. Various strategic tools adopted while playing with options allows a trader to take advantage of the tool in almost any market conditions, thus making the options a reliable investment tool.

Options are a form of derivative instrument (an instrument which derives its value from that of the underlying asset) in the financial world that provides the buyer of the option the right but not the obligation to execute the contract. Options are not a cup of tea for a regular and neither do they prove an easy cake walk for them. Hence, it is necessary to understand basic terminologies involving option trading before plunging into the trade.

Options are mainly of two types – call and put options. The call option provides the right to buy the underlying asset and puts give you the right to sell the underlying asset. Let`s understand a simple call and a put option with the help of an example.

A Call Option: Suppose X is interested in buying 100 shares of company ABC from Y at Rs 52 at the end of the month. The shares of the company are currently trading at Rs 50. If suppose, at the end of the month, the share price of the company trades above Rs 52 then X will exercise the call option and purchase the shares from Y at Rs 52. If otherwise, the company trades at a price below Rs 52, the option expires worthless. Additionally, to stay put with the agreement, X agrees to pay Rs 2 to Y which equals Rs 200 in total.

A Put Option: Now consider a case where X wants to sell 100 shares of the company ABC to Y at Rs 48 by the end of the month. The shares of the company are currently trading at Rs 50. X certainly agrees to pay Rs 2 for each share to Y to keep the option and expects to execute the option if the share price falls below Rs 48. This naturally would be profitable for X but not for Y.

After understanding the simple call and put options, highlighting some important key aspects in the above example will help us understand the terminologies in the better way.

a) Strike Price: In case of a call option, Rs 52 is the strike price meanwhile in case of put option; Rs 48 is the strike price.

b) Risk Premium: The Rs 2 which X has agreed to keep with Y in either of the cases is called the risk premium. This is the amount which Y is required to keep even if the option expires worthless.

As said above, option trading involves a lot of risks and one has to stick to strict guidelines and techniques while trading in the financial instrument. An important thing one has to remember is that trading in options is not a game of an amateur player. Hence, avoid getting into complex strategies like butterfly spreads and so on while engaging in options trading. Also, the knowledge of fundamentals is strictly important for trading in option strategies. Always be strong fundamentally when trading in the financial instrument.

A ‘’synthetic’’ short sale is a combined option strategy that acts just like shorting a share. Options are a form of a derivative instrument (the asset which undertakes its value from the underlying asset) provides the holder of the option the right but not the obligation to exercise the contract.

An option consists of two types, the call option and a put option. An option which conveys the right to buy the asset is called the call option while the option which conveys the right to sell the asset is called put option. The reference price at which the underlying asset is traded is called the strike price or the exercise price while the process of executing the option and trading the underlying at the said price is called as exercising.

This concept comprises of a short call and a long put opened at the same time, using the same strike and expiration. Let`s understand the concept with the help of an example:

Consider John purchased a long 50-strike call and a short 50 strike put. This will result in purchasing the underlying asset for 50 at exercise or expiration. If the underlying asset is greater than 50 then the call option would be in the money and would be exercised; if the underlying asset is less than 50, then the short put position would be executed, thus resulting in the forced buying of the underlying asset.

This strategy is more often used against shorting a stock, since shorting is the one which many avoid. In sorting, one borrows a stock from a brokerage firm and asks the brokerage firm to sell the share of the company at a higher price. The trader then expects the share of company to fall. (He in turn buys the share of the company when the price drops). However, in the bargain one has to ensure a proper margin and interest on the borrowed share. The risk in turn arises when the share price rises resulting in the increase in the margin requirements and the loss of money.

There two major advantages for opting a synthetic position. The first one 1) one does not need to borrow the share in order to sell it and 2) the cost of the transaction is low with the short and the long offsetting each other.

From this article we can conclude that while derivatives are known to be a cause of major market scandals, these instruments aren’t really so bad to benefit from during a bearish trade rally.