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CFD Trading Market

As the current market is, many day traders and beginner traders are opting to make their way into the CFD trading market. For anybody who is wondering just what that is, the abbreviations stand for Contract for Difference. This sort of trading is an arrangement involving two individuals, whom wish to exchange the difference between the opening price and the closing cost of the contract; it is then multiplied by the amount of shares, calculated at the close of the contract.

If you ever are going to start as an amateur in CFD trading, you don’t need a great deal of cash upfront. The following is one example, if you wish to use a 10% margin you could buy £20,000 shares of JPL CFDs, you would merely need to have upfront cash of £2,000. Saying that you were to lose on this trade, you would only lose £2,000 and not £20,000.

Exactly how do you make money on this form of CFD trading? While using example above we will use this scenario. Right now JPL’s CFD stock value is £10.00. You intend to buy 1000 of their CFDs today. On day two JPL’s price increases to £11.00; your profit is now at £1000 less applied fees. You can make money from the movement when the CFD has mirrored the principal stock.

Should you be a skilled trader, then you are well aware of an increasingly popular CFD trading tactic which requires watching the FTSE 100 index, and purchasing the new CFD stocks when they are going to be coming into the market. The way this process works is that a trader will purchase the pertinent CFD a few days prior to when the index entries are officially released. Then the trader would sell the CFD the night prior to the stock enters the FTSE. This reason this is typically done, is that the prices of the shares will plummet quickly.

Just like any form of trading or investing there’s always the financial risk you will be taking. It is best that should you be beginning in CFD trading, you will want to employ something called stop losses. This will help you to trade automatically throughout the day, instead of waiting till evening. This can help avoid loss, as it will not allow your losses to continue to run.

Reported by some experts in the UK, it seems that CFD trading now accounts for between 25-30% of present equity trades involved in the London Stock Exchange. Take note, CFD trading is not permitted in all countries.

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01. Mar, 2011
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Binomial Options Pricing Model

As far as concepts in modern financial theory are concerned, option pricing binomial model is considered as one of the most important. This method is being used to determine the value of any given option or stocks.

There are said to be a number of advantages in using the Binomial model. This includes transparency, inclusion of probabilities and a widened- perspective in terms of viewing underlying asset price. These advantages are said to be one of the reasons why Option pricing binomial model is also used in option valuation.

Identifying the Binomial Model also means allowing for important factors and points. Specifications such as points in time or periods between the valuation and expiration period are also considered as prime determinants. The Option pricing binomial model also reduces possible changes on option price, shortens the options’ period and is more likely to interpret a suitable and efficient market for potential income.

Advantages of Binomial Options Pricing Model

  • Multi- period View – Unlike the Black-Scholes model, the Binomial model provides results by means of calculating the asset and option based on multiple periods. A list of probable results are also provided, given a range of not just one but a couple of time periods. As a result, any changes in asset price from a given period to another can be easily viewed. This will likewise help the user to determine the best move in trading options.
  • Transparency – This advantage is very much related to multi-period view in terms of providing the user details regarding price movements and option valuation. While the Black-Scholes need five relative inputs for calculation, it is proven that it is not as efficient in providing users with period-based information. This is where the Option pricing Binomial Model sets in, as it provides one with changes on underlying asset price from period to period.
  • The use of probabilities – Using the same probability to determine success and failure in trading options is what the Option Pricing Binomial Model tends to initially produce. However, given the many periods involved, the model can actually deliver information by including other known probabilities and factors. We all know that trading options is all about movements, price changes and trends. With use of the Binomial model, it is relatively easier to determine which factors/ probabilities have an effect to underlying asset price, thus giving a user a clearer view of what to expect as time progresses. Inclusion of additional and new information is also necessary as underlying asset prices have the tendency to change within a given time frame. Meaning, you can never rely on just one factor to evaluate the pricing and relative changes.

Example:

The oil industry is said to be one of the most unpredictable industries today. Given the present economic status of major oil players and recession-related woes, it is quite hard to identify the changes in price and options. Let us say that for a given period, there is a 60/40 chance that underlying assets will grow in value. However, the second period shows that underlying assets will increase by another 10%, thus making it 70/30. These changes are very suited if the Binomial model will be used in valuation, as it allows for multi-period views and use of ever-changing factors.

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11. Jan, 2011