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Trading Options on Foreign Stocks
Many investors look offshore for profits. Traders also buy and sell foreign stocks. Trading options on foreign stocks is also a route to profits. For most traders the most effective means of trading options on foreign stocks is with American Depository Receipts, ADR’s. These shares represent offshore companies listed on the New York Stock Exchange, NASDAQ or over the counter. An ADR is a negotiable security of a non-US based company which trades in United States markets. Such stocks are denominated in US dollars and, when they pay dividends, pay in US dollars. Many investors use this route to invest in offshore companies as these companies must live by the same rules of transparency as other companies listed on US stock exchanges. When using ADR’s in trading options on foreign stocks one can apply the same fundamental and technical analysis that one does for home grown stocks. There is no great need to understand a foreign language or deal with a foreign stock exchange. Both European style stock options and American style stock options can be used in trading options on foreign stocks.
Choosing Foreign Stocks
When trading options of foreign stocks a trader uses the same approach as when he wants to trade options on domestic stocks. He looks for volatile market sectors and volatile stocks. In trading options on foreign stocks a trader searches for a foreign market that is likely to grow. Mexico and Brazil are large and growing Latin American markets. In fact Brazil is the first named of the so called BRICS nations. These nations are expected to reach the first rank of economic success within a generation. Here are a few examples from Brazil, Russia, India, China and South Africa. ADR’s of Russian stocks include the oil and gas giant, Gazprom, Sberbank, and Novolipetsk Steel. Chinese based ADR’s include China Eastern Airlines, China Southern Airlines, Shanghai Petrochemical Company Ltd and Yangzhou Brewery Company Ltd. ADR’s of Indian stocks include Tata Motors, Infosys Ltd, and HDFC Bank. When you think of South African ADR’s think of De Beers and diamond mines. Brazil based ADR’s include Petroleo Brasile, Rio Tinto Plc Co, Telefonica Brasi, and CPFL Energia S.A.
Analysis of Foreign Stocks
A level 3 ADR requires the same amount of transparency and information as any American stock. These companies must adhere to the strictest set of rules when offering stock in the USA. They are issuing stock to raise capital in the USA and must adhere to SEC rules consistent when what US based stocks must do.
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