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BerekMi
02-22-2016,
Hello.

By surfing on the internet searching information about forex
I run into one of those google ads.
From the info isn't seem some kind of forex trading with options.
Does anyone have already any experience in trading forex options using this system?

I have downloaded a free report form that page where some general info about options are given.

On the last page of the report there is a section called:
"Why trade options?"

Can somebody explain the first 2 statements from this section in the report ?
I don't understand how is this profit potential UNLIMITED?

1. You can limit your risks (maximum potential loss is the premium if you are buyer) and you will still have unlimited profit potential?

2. Options require less money up front than if, for example, you take a regular spot position. This is because you don't buy the asset itself but only the contract that gives you the right to either buy or sell the asset at a given price. Therefore, if you are a buyer, you will only have to pay the premium upfront. On the other hand, if you are the seller of an option, receive the premium upfront, but then have the possibility of an unlimited loss.

Thanks.

BertOMahon
02-22-2016,
f you go long the dow the potential profit is unlimited if it rises forever. Its just highly improbable. This "unlimited" talk is more for limiting exposure which is what options are mainly used for in institutions as far as I'm aware

Beverlyhep
02-23-2016,
Consider a stock trading at a price of $5 right now. You could buy a call option on that stock with a strike price of $7, and expiry in say 3 months time. Say you paid $0.5 for that option (entirely made up numbers, not important).

When expiry comes, what's your profit? Well, that depends on where the stock is trading at expiry.

If, say, the stock is trading at $10, then you will be buying the stock at $7 (the strike price), and selling it at $10 if you so desire, so the p+l on the stock trades is $3. But remember that you paid $0.50 for the option, so all in all, your p+l would be $2.50. But if at expiry the stock is trading at $20, your profit is (20-(7+0.5)) = $12.50 etc etc. Te call option gives you the right, but not the obligation, to purchase a specified quantity of a specified instrument at a specified time and a specified price. So the higher the stock is at maturity, the greater your profits.

If however the stock is below the strike price at maturity, you wouldn't exercise your option (why would you? why buy a stock at $7 if it's trading in the open market at $6.50 say?) so all you've lost is what you paid for the option ($0.50) so hence limited loss, unlimited (at least in theory) profits on your call option position.

In the middle there is a break even point, in this case $7.50 (strike price plus price of your option) at which, upon maturity you would neither make nor lose any money. So the stock needs to have appreciated at maturity by at least as much as you paid for the option for you to have made some profit. But you still exercise as long as it's over $7 (in basic theory - please any options experts out there don't start getting pedantic on me - this is options 101 here).

Equally, if, instead of being the buyer of that call option, you were the one that sold it, the precise opposite scenario prevails. The absolute best you can hope for is that it doesn't get exercised, and you collect the premium. If the stock roars higher all you get is the $0.50, but your liability could be many times that.

In real life you can also hedge some of your risk on that trade by also trading simultaneously in the underlying instrument, but that's next week's lesson kids.

BillieMaul
02-24-2016,
The other posters have explained what it's about. I'd like to add that "unlimited profits" is pure sales talk to get you hooked, as is the "limited risk" part. After all, what they say is true, so there is no legal deception. The fact is, most new guys go for the out of money ones. When the share price jumps, the options take off into orbit. After that, even a fairly good rising share is not enough to keep the option price up, especially with the time wastage that is going to take place towards the end of the option's life, and the price ends up worthless. The problem with the unlimited risk, that traders like, is that it happens almost all of the time!

If you take straddles and all the rest, remember that for every trade you do, there is normally a commission charge, making the whole thing more difficult.

Most of the institutions cover their trades with the shares. Shares that they do not want to sell, but realise that there may be a period of falls, so they write at an exercise price well below where they think they might be exercised. That way, they get the "write" and
hope to keep their shares. If they are exercised, you can be sure that the institution will have made a profit on them.

Since then, though, the wide boys have brought in hedges and what have you so that you do not need the shares. We are beginning to touch the edges of the reason for this latest crash.

biaballeway
02-25-2016,
hey guys, I've had a CFD on an out of the money option go against me and show a loss which obv eats into the margin. You have any idea whether a CFD on an option expires to just the premium or to the p&l?