Wild ride ends down for U.S. stocks

NEW YORK – U.S. stock markets ended the day down, after some of the wildest swings on record, amid fears the credit crunch will further slow consumer spending.

By the close of New York trading, the Standard & Poor’s 500 Index stood at 899.32 points, its lowest level in more than a year, after what Bloomberg News said was its worst week since 1933.


The Dow, meanwhile, saw its widest intraday point swings ever. The index lost as much 697 points – dropping more than 500 points not once but twice: after the opening bell and again in mid-afternoon – then gained as much as much as 322 points in the final hour of trading, before retreating at the close. (Its rebound was credited to a forecast that the bankruptcy auction of Lehman Bros. Holdings debt won’t exacerbate credit-market losses, Bloomberg said. But meanwhile, the cost of credit-default protection on corporate bonds soared to a record high.)

For the day, the S&P was down 10.60 points, or 1.16 percent; the Dow Jones Industrial Average was down 128 points, or 1.49 percent, at 8,451.19; and the Nasdaq Composite Index was up 4.39 points, or 0.27 percent, to 1,649.51.

Yesterday – when only one stock rose for every 20 that fell on the New York Stock Exchange, compared with one gainer for every 11 losers today – the S&P 500 had fallen for a seventh straight day, dropping 7.6 percent, as the Dow lost 7.3 percent and the Nasdaq Composite 5.5 percent. (READ MORE)

European and Asian markets also extended their losses today, into what Bloomberg called “their worst retreats on record.” The Indonesian market remained closed for the third day in a row, while Russia and Ukraine both suspended trading. Europe’s Stoxx 600 fell 7.5 percent today, extending its decline to 22 percent for the week – the deepest slump since records began in January 1987 – and paring its market value to 8.5 times company earnings.

“The problem is, the rules of valuation no longer exist,” said Pierre-Yves Gauthier, founding partner of Alphavalue SAS in Paris, told Bloomberg News. “It’s best to remain cautious. The economic slowdown is here.”

Today’s wild swings boosted the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), also known as the “fear” index, to its fifth consecutive record high.

The VIX – based on the cost of using index options for the S&P 500 to ensure against market declines – gained 6.03 points for the day, or 9.43 percent, to close at 69.95 points, triple its level at the beginning of last month, Yahoo! Finance data show. (The CBOE also has two similar indexes: the VXN, which tracks the Nasdaq 100; and VXD, which tracks the Dow.)

Mkts see-saw; HDFC Bank, HDFC, Satyam gainers

Markets are trading with extreme volatility as technology, FMCG, banking and select capital goods stocks are supporting frontline indices while oil & gas, auto, metal and select power stocks are pulling indices lower. Midcap and small cap indices are not showing any great movement, both are trading flat.

At 12:31 pm, the Sensex declined by 42 points at 14,681 and Nifty down 24 points at 4,406. Market breadth is slightly weak; about 1114 shares have advanced while 1233 shares declined. Nearly 815 shares are unchanged.

HDFC Bank, HDFC, Satyam and Sun Pharma are top gainers while Grasim, Hindalco, Reliance Ind, BPCL and Suzlon Energy are losers.

BSE IT gained 1% and Bankex up just 0.6%. However, Oil & Gas fell 1.9%, Auto and Metal plunged over 1%. Power lost 0.9% and Realty down 0.55%.

Markets are witnessing some volatility and consolidating at current levels for further upmove. Buying is seen in technology, FMCG, banking and select pharma stocks while selling in oil & gas, metal, auto and power stocks.

At 11:21 am, the Sensex rose 15 points at 14,739 while Nifty fell 11 points at 4,419. BSE Midcap and Small cap indices are also flat.

Market breadth is mixed; about 1449 shares have advanced while 1501 shares declined. Nearly 212 shares are unchanged.

Top gainers are HDFC, HDFC Bank, Satyam and Sun Pharma while losers are Hindalco, Grasim, Sterlite Industries and BPCL.

Reliance Capital, Reliance Ind, Vishal Info and ICICI Bank are most active counters on the bourses.

BSE IT Index rose 1.75%. Indian Rupee is trading around 43.23 per dollar.

Bankex jumped nearly 1.7%, FMCG gained 1.1%, Capital Goods and Healthcare 0.8% each. However, Oil & Gas fell 1%, Auto down 0.8% and Metal slipped 0.5%.

Sensex ends up 300pts, Reliance gains 4%

Updated at 1550 hrs: The Sensex opened with a huge negative gap of 292 points at 14,064, and dropped to a low of 14,033. The Sensex zoomed to 14,682 in closing deals - an intra-day swing of 649 points. The Sensex finally closed with a gain of 301 points (2.10%) at 14,657.

All the sectoral indices, except Auto and FMCG, closed with gains. Market breadth was bullish - out of over 2,730 scrips traded, over 1,545 logged gains.

SBI gained over 6% at Rs 1,500. Reliance moved up over 4% to Rs 2,300. HDFC added 5.5% at Rs 2,402. Infosys was up over 3% at Rs 1,640.

Jaiprakash, Reliance Infra, BHEL, Wipro, Tata Steel and NTPC also finished with gains.

RCom dropped nearly 13% to Rs 437. Tata Power declined nearly 4% to Rs 1,116. Maruti, HUL, ACC and Tata Motors also declined.

RCom was the most active counter with a turnover of Rs 631 crore followed by RNRL (Rs 375 crore), Reliance Capital (Rs 348 crore), Reliance (Rs 297 crore) and L&T (Rs 187 crore).

5 smart ways to tackle Income Tax

Submitting proof of investments is an extremely traumatising affair for all salaried individuals. First, you have to deal with the painful task of collecting and organising hordes of receipts. To top it off are the anxiety levels of not knowing if you’ve invested enough and worrying about how much money you’ll lose to tax in the following couple of months. Naturally, we all have tax consultants, who will tell us what we need to do to ensure the least possible impact of tax, but it’s even more helpful if we, ourselves are very clear on exactly how much of our salary can we claim as exempted from tax. This way, we know exactly how much we must invest to minimise tax liability. Make no mistake, investing in order to save tax is absolutely necessary, but knowing deductibles on your salary ensures you don’t overdo your tax saving investments.

Basic salary: high or low?
If you earn a salary of Rs 1,00,000 per month, you are definitely aware that the basic amount in your salary is taxable. A high basic salary will come in good stead when you retire, but the flip side, as mentioned above is the tax liability of the same. Let’s say your basic is Rs 40,000. That would make your HRA as 20,000, which can only be claimed as tax deductible if you submit proof of rent to your employer.

Allowances: Double edged sword
Take note that any allowances included as a fixed component in your salary, like petrol, mobile phone bills, etc will be tax deductible. However, if the same were being given to you separately as reimbursement, these aren’t deductible for tax. So, if your pay package has reimbursements as opposed to allowances and that too separate from your monthly package these can be claimed as exempt from tax.

Provident Fund contribution
The Provident Fund contribution from your salary is deductible. You don’t really need to specify this in your declaration. This is something your employers factor in when deducting tax. If you have switched jobs and requested for withdrawal of PF, then the number of years of service will determine whether that withdrawn PF amount is taxable or not. According to the law, PF withdrawal after continuous service of 5 years (with single or multiple employers) is exempt from tax. So, if you’ve worked for less than 5 years, then the interest component on PF is treated as ‘income from other sources’ and is hence taxable. Also, the employer’s contribution is considered as income and is therefore taxable.

Home loans: boon and bane
There is one oft-used and essential tax-saver – home loans. What is commonly done (if both partners are working) is that one partner shoulders the EMI responsibility while the other handles the household expenses. Instead what can be done is that both the partners become co-applicants to the loan. This mean each can claim the rebate individually. Let’s say, the rebate to the loan is Rs 1,00,000 plus another lakh on principal amount, if you have a co-applicant to the loan, then each of you can individually claim Rs200,000 (that’s Rs400,000 in total). Use the rest of your taxable income for some sensible investment then. Note though, home loan tax benefits will come to both the co-applicants only if each has a source of steady income (and proof of payment made is submitted by both). Dependant partners can be co-applicants but won’t avail tax benefits if they aren’t earning.

And, finally education
Another expenditure to take note of, is the amount you spend on your child’s education. In your child’s school fees, there is the tuition fee component, which is entirely tax deductible (under Section 80 C). So keep those receipts handy. These are some basic deductions, applicable to salaried individuals that need to be factored in before you invest (last-minute) for ‘tax purposes’.

Nifty ends above 4400; Power, CG, O&G, banks stks zoom

It was a strong session for markets on the back of huge buying in capital goods, power, oil & gas, banking, metal, realty and technology stocks. Nifty clawed back above 4400 and Sensex above 14500 levels in today's trade. Markets opened weak in morning trade due to negative global cues and disappointing results from major telcom and realty players but strong buying in heavyweights shrugged off both those negative news in second half of session and both indices regained that entire loss.

The Sensex closed with a gain of 300.94 points or 2.10% at 14,656.69. It touched an intraday high of 14,682.33 and low of 14,032.87, swung more than 600 points in a day. Nifty closed at 4413.55, up 80.6 points or 1.86%, which hit a high/low of 4422.95 and 4235.70, respectively.

Amongst frontliners, Jaiprakash Associates rose 8.67%, PNB 7.07%, Suzlon Energy 7.04%, SBI 6.05%, HDFC 5.51%, Siemens 5.02%, Reliance Infra 4.71% and BHEL 4.61%. However, Reliance Comm lost 12.65%, Tata Power -3.76%, Maruti Suzuki -2.50%, Tata Motors -2.04%, HUL -1.90% and ACC -1.33%.

On the weekly basis, Sensex gained 2.8% and Nifty up 2.5%. BSE Metal Index shot up by 6.2% followed by Oil & Gas Index with 5.8% and IT up 5%. Amongst heavyweights, Suzlon rose 13%, Tata Power 10%, HDFC 8.5% while Reliance Communication lost 13%.

Reliance Communication fell over 13% on the back of disappointing quarterly results. Macquarie in their report says among the worst quarterly results have seen in the Indian telecom sector. They downgraded Reliance Comm to neutral with target price of Rs 475, reports CNBC-TV18.

Capital Goods Index outperformed other indices, jumped by 3.84% or 448.20 points at 12,132. Kalpataru Power, Crompton Greaves, Siemens, Punj Lloyd, BHEL and ABB have gained 4-6.4%.

Power stocks charged up fully. Suzlon Energy, GMR Infra, Reliance Infra, NTPC, Power Grid Corp and Reliance Power shot up 2.75%-7%. Power Index rose 87.48 points or 3.4% at 2,661.75.

Oil & Gas Inded ended with a gain of 317.39 points or 3.26% at 10,046.87. Oil stocks like Essar Oil, Reliance Ind, RNRL, IOC, GAIL, Reliance Petro, BPCL and HPCL surged 2-6%.

Bankex jumped up by due to buying in Bank of Baroda, PNB, Canara Bank, Federal Bank, Bank of India, SBI and Kotak Mahindra, which rose 6-8%. Bankex shot up by 212.24 points or 3.26% at 6,728.65.

IT Index moved up 110.49 points or 2.99% at 3,800.06. Technology stocks like Rolta, Wipro, Mphasis, I-Flex Solution, Infosys, HCL Tech and Satyam shot up 2.85-4%.

Metal stocks also ended in green, which includes JSW Steel, Jindal Saw, Ispat Industries, Tata Steel, Sesa Goa, Welspun Guj, SAIL and Jindal Steel. Index gained 337.70 points or 2.62% at 13,250.31.

Realty Index was up 120.19 points or 2.37% at 5,199.20, as buying is seen in Omaxe, Parsvnath, Anant Raj Ind, Peninsula Land, Unitech and DLF, which gained 2-5%.

Pharma stocks like Opto Circuits, Pfizer, Dr Reddys Labs, Sun Pharma, Aurobindo Pharma and Ranbaxy Labs were up. Healthcare Index rose 0.69% at 4,190.84.

UCO Bank Q1 net profit up at Rs 133.4 cr

UCO Bank has announced its first quarter results. The company's Q1 standalone net profit was up at Rs 133.4 crore versus Rs 132.9 crore.

Its standalone NII was down at Rs 408.4 crore versus Rs 415.7 crore.

Shipping Corp Q1 net profit up at Rs 279.6 cr

Shipping Corporation of India has announced its first quarter results. The company's Q1 standalone net sales were at Rs 1,061.9 crore versus Rs 885.9 crore.

Its standalone net profit was up at Rs 279.6 crore versus Rs 206.1 crore.

Indian ADRs: MTNL gains 6.9%, Dr Reddy's Lab up 1.8%

US markets pull off modest gains on better than expected economic reports and crude cools further to 123 dollars. Better than expected reports of durables, new home sales and consumer sentiment eased concerns of economic slowdown.

The Dow closed up 21 points at 11,370 while the Nasdaq ended 30 points up at 2,310. S&P 500 ended higher by 5.22 points at 1257.76.

For the third consecutive week, crude falling 1.8% to 123.30 dollars per barrel.

EQUITY

Stock Market Fundamentals

What are the basics of financial instruments?
Let us understand the two fundamental types of investments, namely bonds and stocks with an example. Eg. Imagine you want to start your own grocery store. You will need a capital amount to get started. You acquire the requisite funds from a friend and write down a receipt of this loan ' I owe you Rs 1, 00,000 and will repay you the principal loan amount plus 5% interest'. Your friend has just bought a bond (IOU) by lending money to your company.

Thus a bond is a means of investing money by lending money to others. When you invest in bonds, the bond you buy will show the amount of money being borrowed (face value), the interest rate (coupon rate or yield) that the borrower has to pay, the interest payments (coupon payments), and the deadline for paying the money back (maturity dates).

There are several Pro's and Con's to investing in bonds
Pro's
Ø Bonds give higher interest rates compared to short-term investments.
Ø Bonds are less risky when compared to stocks.

Con's
Ø Selling bonds before they're due, may result in a loss, known as a discount.
Ø If the issuer of the bond declares bankruptcy, you may lose your money. Hence you must critically evaluate the credibility of the issuer of the bond, ensuring that he has the capability to repay the bond amount.

Now, let us continue with the same example. To accrue more capital for your new grocery store, you sell half your company to your brother for Rs 50,000. You put this transaction in writing 'my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company.

Thus, to explain stocks:
Stocks, also known as Equities, are shares in a company. It is the certificate of ownership of a corporation. In simple terms, when you invest in a company's stock or buy its shares, you own part of a company. Thus, as a stockholder, you share a portion of the profit the company may make, as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value and yield higher dividends.
Dividend: A sum of money, determined by a company's directors, paid to shareholders of a corporation out of its earnings.

How to Identify the Best Stocks to Invest In

Everyone, who are investing in stocks; are crazy about how to indentify the best stocks to invest in? They are trying every trick to ensure greater profit and reduce the loss. But even then there are people who are getting bankrupt and there are some who are making fortunes at the stock exchange. Why is that? There is no magic in this and stock investment is not about luck. To identify the best stocks to invest, you need to have information and you also need to know how to analyze that information and of course how to use them. Only then you can make profitable investments at the stock market. Here we have discussed a few factors that are instrumental in judging the potential of the company and its stock.

Sales Revenue - Sales revenue is a crucial parameter to judge the financial health of a company. Sales revenue is the amount of money that a company makes in a financial year. Sales revenue also includes some portion of the cost and loss as well.

Earnings - Earnings of the company or the net income of the company shows if the business is making profit or loss. It shows the present financial condition of the company as well as helps to predict the future of the company as well. If a company is posting profit year after year, it is quite obvious that the company has a good future ahead.

Debt - Debt is the financial liability to any company. If a company is running with debt, then major share of its earnings will go to pay up the debts and obviously, the net profit will decrease. So it is always better to invest in stocks that have lower debt level.

Liquidity - Liquidity of a company reveals the cash holding position of the company. It is quite natural that a company with better liquidity is more likely to expand its business and grow in the near future. So it is important to look at the liquidity of the company as well.

Valuation: Valuation is the worth of the company. Most widely used and easiest way to find out about the valuation is the P/E Ratio. According to the experts, it is always better to invest in stocks that have a P/E ratio between 5 and 50.

These are just some of the points that you need to consider for choosing the best stocks to invest in. There are so many other factors that also need to be considered for better stock picks, such as the overall market trend, direction of the market, the prevailing trend in the sector in which you are likely to invest and so on.

Looking at Online Stock Trading

While trading online stocks you always must consider the risks involved with trading stocks. If your a beginner you will need to get a feel for using the internet and trading your stocks. You need to learn to walk before you can run, the simplest way I learned to trade stocks was to read about it and do some simulated stock games found around the internet.

Never use money you are not willing to risk, when you finally feel comfortable with online trading you will have to keep this in mind. You must realize the value of waiting it out, if a stock is going down should you pull yourself out of it? Not necessarily, sometimes you will need to wait out the storm to reach a calm safe zone. Play around with stocks a bit, learn if it's for you or not. If you are the type of person who cannot risk money to make money, maybe you might have better luck investing your money somewhere that is safer.

There is much money to be made online trading stocks, millionaires and billionaires have been made and struck down in a single breath from the stock market. Even when you feel everything is going well it could all of a sudden backfire and you could be left out in the cold. I personally invest in many different stocks, I am the kind of person who doesn't put all the eggs in one basket. I have learned from experience that doing this will leave a cold feeling in your heart towards trading stocks. So I went out and learned, sure I lost a few dollars here and there but I have been coming out of it for sometime now. I waited out the storms and stood my ground. I now make a pretty penny with online trading, but I had to find a comfortable spot to trade in.

If your new, like I once was your going to find many ups and downs. This is your learning period. Take in as much as you can while your in this learning mode. Don't go crazy and think your going to make millions if you only invest in this "one stock" forget the hype and play it safe until you find a comfortable place to hang your hat.

What Stock Should I Buy

Often, one of the first questions an investor asks is "What stock should I buy?" This question can involve a great deal of time and analysis. In many cases, the average investor will want to find out what the company does; review its financial statements; see if it pays a dividend, as well as how long that dividend has been paid and whether or not it will continue to be paid; discover whether the company's earnings are rising or falling; analyze its products; and so on. In other words, the investor does a great deal of fundamental research to find out if that stock is the one to purchase.

This analysis answers the question of what to buy. However, it says nothing of when to buy. The best stocks have periods when they perform worse than the market, just as the weakest stocks have times when they perform better than the market. If no one is going to buy the so-called best stocks, then they are not going to rise. On the other hand, if a large number of investors buy a fundamentally weak stock, then it is headed higher.

At DWA we use point and figure charts to determine when to buy stocks. By charting stocks with this method, we see the movement that determines whether supply or demand is in control of the stock. If it is supply, then the probability is high for that stock to decline. The odds favor a rise in the price if demand is winning the battle. You will also want to keep in mind that there are no dis-interested investors. Back in the 1920s, there was no Securities and Exchange Commission to regulate companies and when and what they reported. Rumors were rampant, and it was not surprising to see wealthy and knowledgeable investors pool their money to trade. These pools gave them a huge advantage over the individual investors.

Today the Internet creates stock movement. There are chat rooms everywhere and practically anyone can offer ideas. Remember that the person who is wildly promoting or recommending a particular stock more than likely already owns it. You will also want to keep in mind that the investor who is badmouthing a stock has probably just sold that stock or has sold it short, hoping to buy it back at a lower price.

In this environment, you need something that will help you sort through the morass of opinions out there to determine whether demand or supply is in control. We recommend using technical analysis, preferably the point and figure methodology. Let the fundamental analyst help determine what you buy. But let the technical analyst determine when you buy that particular stock. When the market is topping, typically the news stories are all good, and that is not when you want to buy.

Investing in the Stock Markets

You have recently decided to start investing in the stock market, but you don't have any idea how it works, so you're doing a lot of research, but do you know what kind of investor you are?

There are a broad range of stocks available to invest in, and ideally, you want to pick the stocks that best match your investing style. What is your investing style you may ask yourself? Well, if are you interested in short-term growth with higher risks, than you may want to look at penny stocks. If you would rather not take as much of a risk, but allow your investment to grow over time, you may want to consider some type of income stock, which sometimes can even pay a dividend on the shares that you own. A dividend is a profit sharing incentive offered by some companies on the shares of their stock to help make up for the slower growth those stocks experience.

If you wish, you can invest in technology stocks, such as Google, or Yahoo, hoping to be a part of the next dot-com rush by maybe finding a company that will experience some explosive growth, or you can invest in health care stocks like Johnson and Johnson. Technology and health care stocks are known as sector stocks, one of the many available investment options that are available to you as an investor. Other types of sector stocks may include Public Utilities, Mining stocks, or even Pharmaceutical stocks.

You can find stocks that are cyclical in nature, their price is affected by what is happening in that industry, and if that industry is doing well as a whole, then those stocks will perform better and experience more growth, whereas if that industry is performing poorly, the stocks will reflect that and now show as much growth. The automobile industry is a good example of a cyclical investment, as consumers have more money to spend due to a good economy, they may decide to purchase a new vehicle, but when times are tough, they may choose to just repair the old vehicle.

There is also another classification of stock, which goes beyond growth, income, cyclical, or sector. Here we are talking about Preferred stock and Common stock. Some of the differences between the two are that in most cases, if a dividend is offered on the stock, a preferred stock dividend is pretty constant in the amount that is paid to the investor, meaning that the payout will not rise and fall as much as the dividends that are paid out on a share of common stock, which may fluctuate higher or lower.
If the company declares bankruptcy, and the assets are liquidated, those that hold preferred stock will be paid back before those that hold common stock, but in some cases, all the investors could loose their money.

Picking a stock can take some time as you see, and it requires a lot of research, but one of the first steps you want to look at is what do you want to achieve, and armed with that knowledge, you will soon find an investment option in stocks that best suits your needs.

The Art of Making Money in Stock Market

Most people know that the stock market is unpredictable. Losses in stock market investment are an inevitable part of the trading process. Therefore every stock market trader, howsoever shrewd and experienced he may be, is bound to incur a loss at one time or another.

So before you start trading in the stock market, you must be prepared to suffer losses like every other trader. This, however, does not mean that making money in stock market is more a matter of luck or chance.

This only means that you should make a thorough search, both fundamental and analytical, about the profitability of the stock before investing in it. Having done that you must be prepared to suffer loss since, as already said, the stock market always remains unpredictable.

You have to develop a mind set which should be prepared to take losses in your stride.

What is the use of developing this kind of mind set?

If you understand that losses are part of the stock trading, you will look at your losses with detachment and equanimity like a good sportsman. You will not be shocked and perturbed. You will not lose your perspective and you will be able to prepare yourself for the next game, next trade with a cool mind.

A disturbed mind cannot react properly. It is likely to misinterpret the graphs and charts of the market trends and draw wrong conclusions.

A constantly nagging fear of suffering another loss in the next trade may prevent a trader from investing which would mean that the loss incurred in the previous trade would not be recouped.

If you have a positive mind set and understand that you have to make money in an inherently mercurial market, you try to be realistic instead of perfectionist in stock trading.

A good trading day for a realistic and positive trader will not be one when he makes money. It would be the one when he has made both an extensive and intensive research in the stock he wants to trade in. He has made a thorough planning with discipline and focus and follows each step as per his planned strategy. Making money in stock market for such investors will become easy.

Experts in trading psychology believe that it is important to concentrate upon things which you can easily control. You should not try to lose your focus on attending things which you cannot control.

For example, while you cannot control the price trend, you can control your losses by using the stop loss tool effectively. You can understand the concept of support and resistance levels and use them successfully in your trading.

According to Tim Renolds, you should develop three basic strategies to stop your losses. These are price based, time based and indicator based strategies.

In order to use the price based stop loss strategy, you will have "to make a hypothesis about the trade and identify a low point in that particular stock market." Having done that, you should "set your trade entries near your points, thus making sure that losses will not be overly excessive if the hypothesis fails."

The time based stops involves making optimum use of your time. You should fix up a certain holding period to achieve your target in trading a particular stock. If you cannot achieve your target within that time frame, you should not keep that stock and sell it off.

The indicator based strategy involves understanding market indicators. As an intelligent trader you should become aware of the market indicators and utilize your experience to analyze them to your benefit. The market indicators include volume, advances, declines, new highs and lows and so on.

Experts in stock trading psychology recommend that you should set stops and "rehearse them mentally". It will help to ensure that you follow these strategies thoroughly and benefit from them.

Another important point is that you should immune yourself from the influence of mass psychology. It means that you should resist the temptation to do what the majority of stock traders are doing. You must make up your own mind whether or not you have to buy or sell a stock. You can make up your own mind only when you have done your own independent research and do not listen to the secrets and tips offered by your friends and stock market experts.

Options Trading Glossary - Terms Associated to Options Trading

There are specific terms associated with options trading and it is absolutely necessary that you know them by heart before you delve into the world of options. Here are some basic options trading terms to get you started.

But first, you must understand that options is an investment instrument that stems from stocks, and the fundamental principle of its function is to confer a options holder the right to buy or sell shares from the options seller at a stipulated amount within a stipulated time frame. You can equate this to placing a cash guarantee to purchase something within a time frame and preventing the seller from selling that item to any other interested parties.

Now why would you want to do this?

Well, for one, you might need to raise money to purchase that item and do not want the seller to talk to other potential buyers whilst you do your fund raising. For many, options trading is also a good investment instrument to make money off stocks they cannot afford. For others, options are a good way to protect their investments.

Before you learn how trading options can do the above, it is best that you learn all the terms relating to options trading.

CALLS AND PUTS

There are primarily two types of options - Calls and Puts.

A call option gives its buyer (holder) the right to buy 100 shares of the underlying security at the strike price, anytime prior to the options expiration date. The buyer is not obligated to exercise the option, thereby letting the option expire. The seller (writer) of the option has the obligation to sell the shares should the buyer exercise his option.

The opposite of a call option is a put option, which gives its buyer the right to sell 100 shares of the underlying security at the strike price, anytime prior to the options expiration date. The buyer is not obligated to exercise the option, thereby letting the option expire. However, the seller of the option has the obligation to buy the shares should the buyer exercise his option.

STRIKE PRICE

The strike price is the price at which the owner of an option can purchase (call) or sell (put) the underlying stock.

EXPIRATION DATE

The date on which an option and the right to exercise it cease to exist.

EXPIRATION FRIDAY

The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.

EXERCISING THE OPTION

The buyer of a Call or Put option may choose to buy (in the case of a call) or sell (in the case of a put) the underlying shares of his option anytime, as long as it is within the effective date of the option. If he chooses to do so, this activity will be known as exercising the option.

ASSIGNMENT OF OPTION

When somebody exercises the rights of an option he owns, the Options Clearing Corporation will notify the seller of the option. Upon receiving the notification, the option seller is obligated to buy or sell the underlying stock at the strike price. This is known as the assignment of option.

OPTIONS PREMIUM

The price you pay to procure an option is called the "premium". An option's price is called the "premium".

WRITER

A writer is somebody who sells an option that is not owned through an opening sale transaction. While this position remains open, the writer is subject to fulfilling the obligations of that option contract. He will be obligated to sell stock (in the case of a call) or buy stock (in the case of a put) if that option is assigned. An investor who sells an option is called the writer, regardless of whether the option is covered or uncovered.

COVERED OPTION

An open short option position that is fully offset by a corresponding stock or option position. That is, a covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises his rights, the writer of the option will not have a problem fulfilling the delivery requirements. Trading options using this strategy is secured because you can limit your losses.

NAKED OPTION

A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts. This is a more risky options trading strategy because your losses are potentially unlimited, although it can be quite rewarding on the upside too.

UNDERLYING SECURITY

The security an option seller must deliver (in the case of call) or purchase (in the case of a put) upon assignment of an exercise notice by an option contract holder.

EXPIRATION FRIDAY

The Expiration day for options is the Saturday following the third Friday of the month. Therefore, the third Friday of the month is the last trading day for all expiring options. This day is called "Expiration Friday". If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately proceeding this exchange holiday. After the option's expiration date, the contract will cease to exist. At that point the owner of the option who does not exercise the contract has no "right" and the seller has no "obligations" as previously conveyed by the contract.

IN, AT, OUT-OF-THE-MONEY

The strike price, or exercise price, of an option determines whether that contract is in-the- money, at-the-money, or out-of-the-money.

If the strike price of a call option is less than the current market price of the underlying security, the call is said to be in-the-money because the holder of this call has the right to buy the stock at a price which is less than the price he would have to pay to buy the stock in the stock market. Likewise, if a put option has a strike price that is greater than the current market price of the underlying security, it is also said to be in-the-money because the holder of this put has the right to sell the stock at a price which is greater than the price he would receive selling the stock in the stock market.

The converse of in-the-money is out-of-the-money.

If the strike price equals the current market price, the option is said to be at-the-money.
This article was written by Richard T. Tyler, a veteran with over 20 years of experience in stock trading. Please read his other articles on options trading at Invest Money Stocks for a better understanding of using options as an investment instrument.

Options Trading - an Overview of Call Options and How You Can Make Money With Them

Understanding how Call Options work and your choices in various scenarios relating to the fluctuation of the related stock prices are the fundamentals of Options Trading. This article gives an overview of Call Options and how you can make money through purchasing and selling Call Options.

A Call Option gives its buyer (holder) the right to buy 100 shares of the underlying security at a fixed price per share, at any time between the purchase of the call and the stipulated date when the option expires. The buyer has a choice and is not obligated to exercise the option. The seller (writer) of the option however, is obligated to sell the shares should the buyer exercise his option.

A buyer of a Call Option takes the position that the stock will appreciate (rise in value) within the effective date of the option, because that will result in a corresponding increase in value for that call. This means that there will be a higher market value in the call, which can be sold and closed at a profit. If not, he can also choose to exercise his option, which means that he buys the stock at a fixed price lower than the current market value.

On the other hand, the seller of a Call Option takes the position that the stock will depreciate (fall in value) within the effective date of the option, because that will result in a corresponding decrease in value for that call. This means that there will be a lower market value in the call. How this benefits the option seller is through the fact that the option buyer will not be willing to exercise his option as he will be paying a higher price than the fixed price in the contract. It will not make logical sense for him to do so as he would be losing money and he may as well exercise his option if he wants to purchase the underlying stock at all.

In such cases, the option buyer is most likely to either sell his option at a loss or move on or wait it out in the hope that the underlying stock price would rise. However, once his option expires, he loses his premium, which is the initial fee he paid to purchase the Call Option.

For a better understanding, let's further go on to illustrate various scenarios relating to the price of the underlying stock and take a look at the choices for action within each. Remember that this is in relation to Call Options.

Scenario 1 - The Market Value of the Underlying Stock Appreciates

In such a scenario, the value for the related Call Option will also appreciate. The buyer of such an option will have two choices. He can either choose to exercise his option and buy the underlying stock at a below current value price, or he can sell his Call Option for a profit.

Scenario 2 - The Market Value of the Underlying Stock Remains Stagnant

In such a scenario, the price of the underlying stock has not seen a change, or the change is too insignificant to create an opportunity for profit. The option buyer has two choices. The first choice he can make is to sell the Call Option before its expiration date. As the price of an option is determined by the remaining time before its expiration, the option buyer will most certainly see a loss if he sells his option without the underlying stock price seeing an appreciation. The magnitude of the loss will depend on how much time is remaining in the option before expiration. The second choice he can make is to hold on to the Call Option in the hope that the stock's market value will appreciate before expiration.

Scenario 3 - The Market Value of the Underlying Stock Depreciates

In such a scenario, the value for the related Call Option will also depreciate. The buyer of such an option will have three choices. He can sell off his option and accept his losses, sit it out in the hope that the stock value will appreciate, or simply let his option expire if his option is already nearing its expiration date.
This article was written by Richard T. Tyler, a veteran with over 20 years of experience in stock trading. Please read his other articles on options trading at Invest Money Stocks for a better understanding of using options as an investment instrument. You can also receive tons of free investment advice here.