speculating

Speculation

Options contracts can provide a buyer with an opportunity to buy stock for a significantly smaller price. Speculating is based on predicting a price direction in the future.

Some traders find speculating with call options to be a great opportunity because they can give leverage. If a speculator presumes the price of a stock will grow, they may use an out-of-the-money call option in order to obtain stocks at a lower price. We will illustrate this with an example.

Let’s say one contract is 100 shares of YX stock, and the current price is $100 per share. A call writer can give an option that one contract’s strike price is $2 and that it has one month till expiration. A speculator can use this leverage and buy 100 shares for a premium of $200 instead of spending $10,000. Controlling the same amount of stock bought at a much lower price gives the speculator the leverage.

Nevertheless, this is only lucrative if we predict the movement of the stock price correctly, as well as the magnitude of the price change. The time frame plays a great role as well. Depending on the trend of the stock, this could potentially provide huge gains. On the other hand, it could lead to premium loss of 100% if the prediction was wrong. This contributes to the fact that speculating is, in the end, risky.

speculating

Hedging

Hedging was invented to protect the investor by reducing the risk. It is similar to paying insurance. If we pay a fixed amount every month to ensure our property, we only lose the known amount in case something happens. With hedging, the principle is the same.

Some might argue that if we feel like we need a hedge, we shouldn’t be investing at all. The practice has shown, however, there are benefits of such a precaution. If we buy stocks and use put options, we can protect ourselves against the downturn by limiting our downside risk. In case the prediction was wrong and a short squeeze occurs, short sellers can use call options to limit their loss.

Spreads

Using an option called spread entails combining speculation with loss limiting through hedging. Spreads usually cost less; however, they can limit the potential upside.

A spread is an option that combines multiple options with similar features. That means we can buy one option and sell another option of the same class. We call it a vertical spread because the second option will be of the same type and have the same expiration date. However, they will differ in strikes.

Combinations

Combinations are strategy options where we can take both the call and the put position of the same stock.

The combination trade known as ‘’synthetic’’ is very popular. The goal of this move is controlling the position of the assets without actually buying them. Taken that we have a stock YX we are interested in, we can use a combination strategy to create a synthetic long position in this stock.

combination trade

Entering a synthetic trade would mean selling at-the-money put and purchasing at-the-money call that both have the same expiration and strike. However, this combination of a long call and short put doesn’t give us the ownership of the stock. Nevertheless, it influences the long position of it.

If there are reasons of legal or regulatory nature that restrict us from buying the stock, we can still use options to create a synthetic position. In addition, having an asset like an index that poses as difficult to recreate from individual components may call for this option.

Businessman-hand-touching-Candlestick-ChartCandlestick charts are a technical analysis tool that packs data for multiple time frames into individual price bars. There are many significant benefits of candlesticks. While a line chart gives you only one data point for a stock at any point in time, candlesticks actually give you five: open, close, low, high and direction of movement. This is a major advantage when your trading decisions are based entirely on price action.

Completed candlestick charts are used in stocks, equity, foreign exchange and commodities trading to predict price direction. Proper color coding adds depth to candlesticks.
Today, candlestick charts are used internationally by day traders, swing traders, investors, and premier financial institutions. Candlesticks can be used in all time frames, whether you are a long term investor or a day trader.

What are some of the benefits of candlestick charts?

Easy to understand

Whether you are an amateur with regard to technical analysis or professional stock exchange trader, you can easily understand candlestick charts.

Give unique and more detailed market insights

Unlike bar charts which show only the trend of the move, candlestick charts additionally show the force that has brought about the move.candlestick

Provide early indications of market turning points

Candlestick charts can send reversal signals in a few sessions , rather than the several weeks needed for a bar chart reversal signal. This helps a trader to enter and exit the market with better timing.

Ideal for all markets

Candlestick charts can be used in the stock market, forex market, commodity market and can be a powerful trading tool for option trading.

Different parts of a candlestick chart

A candlestick chart has various parts with each of them having a different meaning.

Upper shadow – This is the top of a candlestick chart and shows the highest price.hand-drawing-a-market-bar-chart The body – A candlestick chart can have a green or red body. A green body signifies a bullish trend while a red body signifies a bearish movement. The shape of a candlestick body can either be short or long. A green , long body suggests that buyers are the ones controlling the market and the price is increasing. On the other hand, a red, long body suggests that sellers are controlling the market and the price is decreasing.

If a candlestick has a short body, it means that the market is uncertain. The shorter the body, the harder it becomes to predict the direction of the market.
When a candlestick lacks a body, its termed as Doji, meaning the trend is neutral. Neither the buyers nor the sellers are in control.

Lower shadow – This is the bottom of a candlestick chart and it shows the lowest price.

Basic candlestick patterns

Long black candle

It represents a bearish period in the market. During a trading session, the price of the stock was high and low in a wide range and it opened near the high and closed near the low of the day.

Long black candle

It represents bullish period, meaning prices were all over the map during the day, but the stock opened near the low of the day and closed near the high.

Spinning tops

These are small , black or white bodies. This pattern signifies a very tight trading range between the open and the close, and its considered somewhat neutral.

Doji lines

These ones show periods in which the opening and closing prices for the period are very close or exactly the same.

There you have it. These are the major things you need to know about candlestick charts. Overall, these charts help stock traders to predict emotions surrounding a stock hence helping them to make better predictions about where that stock might be headed.