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Spread Trading: Great Opportunities For Traders

If it can be said that one concept that has influenced every seasoned trader’s idea of what risk management can be like, that concept would be spread trading. The idea of seasonal spread trading has been around since the inception of the commodities exchanges in the United States. Based on the dual impact of storage and planting, seasonal spread trading has greatly influenced the way all types of traders, retail and commercial, interact with various commodities.

Preparing to Speculate

There are a great number of speculators turned traders. They purchase courses and attend seminars, and they all maintain fantasies of becoming the next George Soros or the next “oracle of Omaha,” Warren Buffett. While these dreams are important to have, they also become an impediment to traders forming their own opinion and view of the markets. It also lays the foundation for reckless behavior and inability to grind it out.

Replacing Traditional Options With Synthetic Options

Option trading can be very liberating for individual traders. Options offer traders the opportunity to have unlimited profit potential with limited risk. No matter who you are, small trader or money manager, if you can limit your risk up front it becomes more comfortable to take the risk. Options have the ability to provide a high level of comfort. There is simply no misunderstanding what you are getting into when you purchase an option. If you invest $400 to purchase a call or a put, your risk is limited to the $400-no more than that, but possibly less if you sell the option early. This is not the case when it comes to all investment products.

Collar at the Inception of a Trade

The collar requires three components: the initial trade, long or short; an out-of-the-money option that is purchased to lock in profits, either a call or a put; and an out-of-the-money option (which sits ahead of your initial trade) that you sell. For instance, if you have a long collar trade on the euro, you purchase a put at support, go long the market, and sell a call at some point of resistance.

Using Options As a Secondary Stop Loss

The second way to use a protective option is in conjunction with a stop. The closer an option is to its underlying asset, the more expensive it will be. It stands to reason that an option placed at a 2 percent loss threshold will be more expensive than an option placed at a 10 percent loss threshold. Whether because of account size, number of contracts placed on the trade, feeling a premium is too expensive, or simply looking for a way to stagger your trades, having a stop loss order in the first position and a protective option as a secondary stop loss can be an advantage.

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