Last weekend I attended Wealth Academy Options course conducted by Mr Ron Ianieri from Options University. Ron is a former floor trader, market maker and specialist on the Equity Option and Foreign Currency Option Trading Floors. (His Bio). Ron is also a well-respected option trainer and he has been invited to speak on U.S markets and movement on CNBC Asia TV channel several times. (CNBC's Interview)

Option is a derivative product. It is tradable at stock exchanges and its price is derives from the underlying product. There are options for stocks, indexes, currency, commodities, bonds, etc. The advantages of option are cost efficiency, better percentage return, limited loss and portfolio protection.

In this beginning course, you get to learn things like Volatility, The Greeks, Options Pricing Model, synthetic positions, trading strategies and morphing techniques. Besides learning these that I mentioned, you also entitled to ‘Options 101 Home Study Course’ learning materials from Options University (Click on my blog recommended course).

Before you begin with options trading, it is important to understand the basic knowledge such as volatility and the Greeks. Learning this basic knowledge will certainly help you to decide which and when to apply the correct strategies. Have you ever wonder why the current market situation causes the VIX to hit the record of 80? Why volatility has to do with options pricing? I heard many experienced options traders mentioned the phase ‘buy options when volatility is low, sell options when volatility is high’. I got my answers through this course.

Volatility is one of the factors that affect the option prices (on the extrinsic value). Volatility is widely discussed in any options trading books. It is defined as dispersion of an asset’s returns from their mean and usually modeled through a bell shaped curve with the standard deviation values. Understanding the volatility will able to help you to better understand what is Historical Volatility (HI) and Implied Volatility (IV). Knowing the HV and IV, you will able to determine the theoretical value of option prices (most of the broker software platforms have this value available, so you do not have to worry about applying the complex mathematical formulas) and thus allowing you to make judgment of why options are priced at respective values.

I invite you to check out this course and take some time to go through it if you are thinking of taking your first step into becoming a professional option trader.

The Frog and the Roo

Recently the CBOE Volatility Index hit a record high of 80. Most of the experts have commented that they never see such a high value before. When volatility becomes high, the price of the options increases as well. I did some searching and found this the Frog and the Roo illustration in a option book easy to digest.

To understand the role of volatility and options prices, just imagine you are at carnival with a unusual game called a frog jumping game. A frog starts in the middle of a floor and it can only jump left or right. The frog jumps randomly to left or right with equal probability. At the end of one minute, the frog’s final destination is marked and you are paid $1 for every foot the frog is to the right of the starting point. If the frog happens to land on the left, you get nothing.

How much would you pay to play this game? There is no right or wrong answer but just pick a number that you think it is reasonable. Now, let’s change the game with the same set of rules except now it’s a kangaroo.

How much would you pay to play this game now? There is no right or wrong answer but just estimate how much wills this game worth to you. It should be obvious that no matter how much you choose for the previous frog game, you are willing to spend more for this kangaroo game. Why is it so? That’s because the kangaroo has the ability to jump further, and that means you could win more money and so this game worth more to you.

Notice that although the reward for both games are different, both have the same negative downside of risk. That is because for both games, you are limited to the risk of losing your $1 bet for every foot to the left of the starting point. In the other hand, your upside is the one that worth the most. Looking at the payoffs of both games, it is obvious that the kangaroo game is more valuable.

To understand how volatility affects option prices, just replace the frog and kangaroo with ATM calls on two different stocks. Which call is more valuable to you? It is the one which has the higher ability to move or in other words it is the stock with higher volatility.

Of course, there are still many reasons that affecting option prices but at least for now, I get a better understand of this unique relationship between the ‘V’ word and option pricing.

INVEST Fair'08

Remember to mark your calendar for the up coming INVEST Fair'08 on 16th - 17th August 2008, 10am - 7pm. This year event returns with a larger scale to Suntec Convention and Exhibition Centre.

According to the website, there are over 50 free seminars by financial institutions and listed companies such as keynote presentations by popular investment experts, panel discussions moderated by ChannelNewsAsia presenter Melvin Yong, lucky draw and investment games with attractive prizes.

This is a good opportunity to learn more about the latest financial products and services, understand the market outlook and hear from the experts as to how to invest in the current volatile investment climate.

I was flipping through my notes and came across interesting terms given by investment community to classify companies with different market capitalization. I listed here for easy quick reference.

Mega Cap
More than $200 billion market capitalization

Large (Big) Cap
Between $10 billion and $200 billion

Mid (Middle) Cap
Between $2 billion and $10 billion

Small Cap
Between $300 million and $2 billion

Micro Cap
Between $50 million and $300 million

Nano Cap
Less than $50 million

Before starting your journey, there are several questions you should carefully consider if you are a newbie. I came across this step by step way to develop a strategy for trading and investing in Invest magazine. The article is by Jack Wong from Optionetics. I posted the questions in my blog for your reading.

What is your business plan?
First of all, you need to have a business plan regardless of your decision to invest or trade. Your business plan should specify your goals and the milestones clearly. Your milestones could be short term, mid-term or long term. It is important to have a business plan because without one, the chances of failure will be high.

What is your time commitment?
Next, you have to be clear about your time commitment based on your personal circumstances. Traders are looking for short-term reward while investors prefer to achieve financial goal over longer period. If you are holding a full time job and works 50-60 hours a week, you really have to consider carefully whether you can become a trader who does day trading?

Which markets do you intend to participate?
The key point here is you shouldn’t get into any financial activities in a market where you absolutely have no clue. Choose to stay with the market where you are more familiar but at the same time keep an open mind and slowly extend your reach to other markets.

What instruments do you intend to use?
Most people are familiar with basic trading instrument as stock. There are alternative instruments available such as options, futures, forex and etc. You can try to keep an open mind to understand and appreciate these instruments and take time to learn how they may be used to diversify your investment.

Remember to keep a diary or journal of all your trading activities so that you may use it as a way to evaluate your past mistakes and seek to improve yourself. As a newbie, you should never stop learning.

If you have been following the stock market, you probably heard people discussing about sector rotation. I first learned about this sector rotation from Conrad Alvin Lim when I attended wealth academy investor seminar by Adam Khoo Learning Technologies Group (AKLTG).

The sector rotation model is based on Sam Stovall’s Standard & Poor’s Sector Investing. The model states that different sectors are stronger at different stages in economic cycle. This strategy involved the movement of money from one industry to another in the attempt to beat the market up down cycle.

Sam Stovall is the chief investment strategist for Standard & Poor’s Equity Research Services. His famous column, Sam Stovall’s Sector Watch appears on http://www.businessweek.com/investing.

I placed the link to an article I found in investopedia.com, Sector Rotation: The Essentials

Stockchart.com’s interactive SPDR Sector Rotation Chart is found at http://www.stockcharts.com/charts/performance/SPSectors.html