The 3Dimensional Trading Breakthrough

The 3 Dimensional Trading Breakthrough
The Options
Options were primarily developed as financial tools used to manage business risk,
because they allow business operators to pay an up-front defined premium (or
fee) for the chance to protect themselves from adverse price movements due to
unforeseen circumstances (volatility). Many people mistakenly assume that options
strictly exist as speculative instruments and have only been created recently.
However, the use of options as risk-hedging tools has actually been in practice
for many centuries. In the past few decades, options have become popularized.
Options continue to be used as a risk-management strategy by professional traders
and large commercial firms. I am going to demonstrate how individual traders can
successfully incorporate the use of options into a “low-risk” management trading
style used in conjunction with futures contracts.
As you should already be aware, an option is simply a method of paying a limited
amount of money for the option to execute a business transaction at a certain price
and time. Whether or not the buyer desires to execute the purchased option is
completely up to the buyer – in American markets. The seller, however, is obligated
to honor the buyer’s option at any given price up to the specified expiration date.
The Call Option:
First, there is the call option. When buying a call option, the trader has unlimited
profit potential, limited risk. In buying the call option itself, you are “long” the
market, and of course, the risk is limited solely to the premium paid for that option.
However, if you sold “short” a call option (because you thought the market may be
going down) you have limited profit potential coupled with unlimited risk. Needless
to say, if you sold a call option and the market was to go up, the loss potential is
unlimited and could be very devastating.
The Put Option:
Next…the put option. When buying a put option, the trader has unlimited profit
potential, limited risk. In buying the put option itself, you are “short” the market,
and of course, the risk is limited solely to the premium paid for that option. This
is not the same as the call option, because each instrument is traded for different
directions in the market, and you should know what these directions are.
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