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Trading Compound Options

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http://www.options-trading-education.com/7093/trading-compound-options/ …

http://www.options-trading-education.com/7093/trading-compound-options/

Trading Compound Options

An options trading style similar to the Russian dolls that nest inside one another is trading compound options. Trading compound options is trading an option on an option. In trading compound options there are two exercise dates. As with trading European style stock options the first contract is only exercised at maturity. In the case of a call contract the buyer will exercise the option if the price of the underlying equity has gone up sufficiently above the strike price of the contract. If the price of the equity is not high enough at maturity the contract is still exercised but in such a way as to give the buyer a second chance in trading compound options. The prices in trading compound options reflect the second chance aspect of having two back to back chances for a profit.

Calls and Puts in Trading Compound Options

In trading this trading style one still follows profitable options strategies by analyzing both fundamentals and technical factors. A call in either the first or following option gives the buyer the right to exercise the options contract and purchase the underlying equity no matter how high the price might go up. A put gives the buyer the right to sell the underlying equity no matter how low the market price might fall. In each case the buyer is under no obligation to execute the contract and will do so only if it is profitable. The difference in trading compound options is the second chance aspect of the second contract. If in a call contract the price does not rise sufficiently the options contract is exercised and a second contract takes its place. The same happens with a put contract.
Contract Duration and Time Value

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  • 1. Trading Compound OptionsBy www.options-trading-education.com
  • 2. An options trading style similar to the Russian dollsthat nest inside one another is trading compound options. http://www.options-trading-education.com/7093/trading-compound-options/
  • 3. Trading compound options is trading an option on an option. http://www.options-trading-education.com/7093/trading-compound-options/
  • 4. In trading compound optionsthere are two exercise dates. http://www.options-trading-education.com/7093/trading-compound-options/
  • 5. As with trading European stylestock options the first contract is only exercised at maturity. http://www.options-trading-education.com/7093/trading-compound-options/
  • 6. In the case of a call contract the buyer will exercise the option if the price of the http://www.options-trading-education.com/7093/trading-compound-options/
  • 7. underlying equity has gone up sufficiently above the strike price of the contract. http://www.options-trading-education.com/7093/trading-compound-options/
  • 8. If the price of the equity is not high enough at maturity thecontract is still exercised but in http://www.options-trading-education.com/7093/trading-compound-options/
  • 9. such a way as to give the buyer a second chance intrading compound options. http://www.options-trading-education.com/7093/trading-compound-options/
  • 10. The prices in tradingcompound options reflect the second chance aspect of having two back to back chances for a profit. http://www.options-trading-education.com/7093/trading-compound-options/
  • 11. Calls and Puts in Trading Compound Optionshttp://www.options-trading-education.com/7093/trading-compound-options/
  • 12. In trading this trading style one still follows profitableoptions strategies by analyzing both fundamentals and technical factors. http://www.options-trading-education.com/7093/trading-compound-options/
  • 13. A call in either the first or following option gives thebuyer the right to exercise the http://www.options-trading-education.com/7093/trading-compound-options/
  • 14. options contract and purchase the underlying equity no matter how high the price might go up. http://www.options-trading-education.com/7093/trading-compound-options/
  • 15. A put gives the buyer the right to sell the underlying equityno matter how low the market price might fall. http://www.options-trading-education.com/7093/trading-compound-options/
  • 16. In each case the buyer is under no obligation toexecute the contract and will do so only if it is profitable. http://www.options-trading-education.com/7093/trading-compound-options/
  • 17. The difference in trading compound options is thesecond chance aspect of the second contract. http://www.options-trading-education.com/7093/trading-compound-options/
  • 18. If in a call contract the pricedoes not rise sufficiently theoptions contract is exercisedand a second contract takes its place. http://www.options-trading-education.com/7093/trading-compound-options/
  • 19. The same happens with a put contract. http://www.options-trading-education.com/7093/trading-compound-options/
  • 20. Contract Duration and Time Value http://www.options-trading-education.com/7093/trading-compound-options/
  • 21. The time value of an optionscontract comes from the factthat anything can happen in a volatile market. http://www.options-trading-education.com/7093/trading-compound-options/
  • 22. The longer the time that remains until contractexpiration the more that can happen. http://www.options-trading-education.com/7093/trading-compound-options/
  • 23. The potential back to backaspect of trading compoundoptions gives rise to doublethe time value of a contract. http://www.options-trading-education.com/7093/trading-compound-options/
  • 24. Depending on the exact nature of the contract in trading compound options, it may be possible to exit thecontract during either the first or second phase. http://www.options-trading-education.com/7093/trading-compound-options/
  • 25. This is typically done by simply executing the opposite trade on the same equity with the same set of expiration dates. http://www.options-trading-education.com/7093/trading-compound-options/
  • 26. If the value of the contract ineither its first or second phasehas risen the buyer will make money and if not he or she will exit in order to contain losses. http://www.options-trading-education.com/7093/trading-compound-options/
  • 27. In trading compound optionsas in other options styles theseller of the options contract is obligated http://www.options-trading-education.com/7093/trading-compound-options/
  • 28. to fulfill his end of the bargainand sell in the case of a call or buy in the case of a put if the buyer so chooses. http://www.options-trading-education.com/7093/trading-compound-options/
  • 29. Over the long run selling options tends to be morelucrative than buying them. http://www.options-trading-education.com/7093/trading-compound-options/
  • 30. However, there is always therisk of a big loss when selling options, which commonly http://www.options-trading-education.com/7093/trading-compound-options/
  • 31. limits the business of selling options to those with deep pockets. http://www.options-trading-education.com/7093/trading-compound-options/
  • 32. Practical options tradingtactics should always apply whether one tradescompound options or other styles. http://www.options-trading-education.com/7093/trading-compound-options/

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