IQ Option using political news as an influencing factor in the opening of trading positions

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Naked Call Writing: A High Risk Options Strategy

In options terminology, “naked” refers to strategies in which the underlying security is not owned and options are written against this phantom security position. The naked strategy is aggressive and higher risk but can be used to generate income as part of a diversified portfolio. However, if not used properly, a naked call position can have disastrous consequences since a security can theoretically rise to infinity.

Key Takeaways

  • A ‘naked call writer’ is somebody who sells call options without owning the underlying asset or trading other options to create a spread or combination.
  • The naked call writer is effectively speculating that price of the underlying asset will go down.
  • The naked call seller is exposed to potentially unlimited losses, but only limited upside potential – that being the price of the option’s premium.

How To Write Naked Calls

Naked call writing is the technique of selling a call option without owning the underlying security. Being long a call means you have the right to buy the security at a fixed price. On the other side of the transaction, the counterparty who sold the call is said to be “short” the call, and his or her position can either be secured by underlying ownership (covered call) or unsecured (naked call). This might be confusing so here’s a diagram that summarizes these relationships:

Thus, naked calls are one means of being short a call. This is typically a more advanced level of options trading since there are greater risks. In fact, the broker may not permit the position until the account holder meets stringent criteria i.e. large margin account and/or years of experience.

When selling a naked call, you instruct the broker to “sell to open” a call position. Since you do not have an underlying position, you will be forced to buy the security at the market price and sell at the strike price if those calls go in-the-money.

Many investors aren’t sure if being “short a call” and “long a put” are the same thing. Intuitively, this makes sense because calls and puts are almost opposite contracts but they aren’t the same thing. When you are long a put, you have to pay the premium and the worst case scenario will result in premium loss and nothing else. However, when you are short a call, you collect the premium but are exposed to greater risk, which is discussed below.

Risks and Rewards

A naked call is much riskier than writing a covered call because you have sold the right to something that you do not own. The closest parallel in the equity world is shorting a stock, in which case you borrow the stock you are selling. When writing naked calls, you sell the right to buy the security at a fixed price; aiming to make a profit by collecting the premium.

Assume that ABC stock trades for $100 and the $105 call with one month to expiration trades at $2. You can sell (write) a naked call for $2 and collect $200 in option premium. In doing so, you are speculating that ABC stock will be below $107 ($105 + $2 premium) at expiration. i.e. you make a profit if is below $107.

Consider the payoff diagram:

As you can see, losses mount quickly as the price of the stock goes above the $107 breakeven price. Also note that, at any price below $105, the profit for the seller of the option remains at $200, which is the received premium. The naked call writer is faced with the unattractive prospect of a limited profit and a seemingly limitless loss. You can now see why brokers may restrict access to this options strategy.

It is important to note that, since a naked call position carries major risk, investors typically offset part of the risk by purchasing another call or some underlying security.

Closing Out Naked Calls

In the above example, you need to consider whether the ABC option is in or out of the money before closing the position.. If the call is out of the money, you can buy back the call option at a cheaper price. If the call is in the money, you can a) buy back the call option at a higher price or b) buy shares to offset the call.

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In both cases, your downside is protected.

The Bottom Line

Writing a naked call is an options strategy that carries significant risks because the security can move higher. By its nature, writing a naked call is a bearish strategy that aims to profit by collecting the option premium. Due to the risks, most investors hedge their bets by protecting some downside with securities or other call options at higher strike prices.

7 factors that influence exchange rates

Exchange rates are one of the most watched and analysed economic measures across the world and are a key indicator of a country’s economic health. The exchange rate can be defined as the rate at which one country’s currency may be converted into another. Rates are not just important to governments and large financial institutions. They also matter on a smaller scale, having an impact on the real returns of an investor’s portfolio.

There are several forces behind exchange rate movements and it is useful to have a basic understanding of how these affect one country’s trading relationship with other countries. Strong currencies make a nation’s exports more expensive and imports from foreign markets cheaper, whereas weaker currencies make exports cheaper and imports more expensive. Higher exchange rates adversely affect a country’s balance of trade but lower exchange rates have a positive effect on it. This article looks at 7 of the main factors that cause changes and fluctuations in exchange rates and outlines the reasons for their volatility.

Common Factors Affecting Exchange Rates

Inflation Rates

Changes in inflation cause changes in currency exchange rates. Generally speaking, a country with a comparatively lower rate of inflation will see an appreciation in the value of its currency. The price of goods and services increases at a slower rate when inflation is low. Countries with a continually low inflation rate exhibit an increasing currency value, whereas a country with higher inflation typically experiences depreciation of its currency and this is usually accompanied by higher interest rates.

Interest Rates

Interest rates, inflation and exchange rates are all correlated. Central banks can influence both inflation and exchange rates by manipulating interest rates. Higher interest rates offer lenders a higher return compared to other countries. Any increase in a country’s interest rate causes its currency to increase in value as higher interest rates mean higher rates to lenders, thus attracting more foreign capital, which in turn, creates an increase in exchange rates.

Recession

In the event a country’s economy falls into a recession, its interest rates will be dropped, hindering its chances of acquiring foreign capital. The consequence of this is that its currency weakens in comparison to that of other countries, thereby lowering the exchange rate.

Current Account/Balance of Payments

A country’s current account reflects its balance of trade and earnings on foreign investment. It comprises of the total number of transactions including exports, imports and debt. A deficit in its current account comes as a result of spending more of its currency on importing products than through exports. This has the effect of lowering the country’s exchange rate to the point where domestic goods and services become cheaper than imports, thereby generating domestic sales and exports as the goods become cheaper on international markets.

Terms of Trade

Terms of trade relate to a ratio which compares export prices to import prices. If the price of a country’s exports increases by a higher rate than its imports, its terms of trade will have improved. Increasing terms of trade indicate a greater demand for a country’s exports. This, in turn, results in an increase in revenue from exports which has the effect of raising the demand for the country’s currency and an increase in its value. In the event the price of exports rises by a lower rate than its imports, the currency’s value will decline in comparison to that of its trading partners.

Government Debt

Government debt is public debt or national debt owned by the central government. Countries with large public deficits and debts are less attractive to foreign investors and are thus less likely to acquire foreign capital which leading to inflation. Foreign investors will forecast a rise government debt within a particular country. As a result, a decrease in the value of this country’s exchange rate will follow.

Political Stability and Performance

A country’s political state and economic performance can affect the strength of its currency. A country with a low risk of political unrest is more attractive to foreign investors, drawing investment away from other countries perceived to have more political and economic risk. An increase in foreign capital leads to the appreciation in the value of the country’s currency, but countries prone to political tensions are likely to see a depreciation in the rate of their currency.

All of the factors described above determine foreign exchange rate fluctuations and the exchange rate of the currency in which an investor’s portfolio holds the majority of its investments determines its real return. A declining exchange rate thus decreases the purchasing power of income and capital gains derived from any returns. Overall, exchange rates are determined by many complex factors and although these cannot always be easily explained, it is important for investors to have some understanding of how currency values and exchange rates play a key role both in the economy and in the rate of return on their investments.

Interview with IQ Option account manager Anastasia Potemkina

Because our previous Facebook interview was positively received, I have decided to visit people at IQ Option to ask them a few questions, and to share with you my experience. I meet with Anastasia, a university graduate studying Chinese and English. Besides languages, her other hobbies include yoga, swimming, and martial arts! I met her in a nicely decorated IQ Option office with country flags spread all over the open space. I saw national flags of Turkey, Sweden, Portugal, England, symbolizing some of the languages supported by IQ Option specialists. We both are sitting down beginning our conversation:

  • Could you, please, briefly explain how to trade on your platform?

Anastasia: As to the beginners, I think you should first decide on your trading style: Do you want to achieve your results quickly or are you more of a strategist? In the former case try out binary and digital options. However, if “patience” is one of your qualities you can try Forex, cryptocurrencies or CFD with IQ Option. The rest is not difficult to guess. After choosing an asset you will make an assumption of in which direction the chart is going to move based on technical and/or fundamental analysis . Then you press PUT or CALL (BUY or SELL) and check whether you were correct. As an aid in the early stages, you can use our great video tutorials available at our website and a superb blog updated every week.

  • What are the factors influencing trading?

Anastasia: Obviously, it is the global economic situation that influences the markets. Listening to the latest news each day, we are getting a picture of what’s going on in the world. What about China and the USA? Did they strike a new deal? Tsunami in Japan? Did Putin take a firm stand at a global summit? These are the news headlines that affect the behaviour of the assets. Not everything relates to politics, news about multinational corporations are relevant, as well. Those of you who don’t feel like watching CNN in the morning can use our own news coverage. Simply look up into our economic calendar.

  • Is IQ graph manipulated in some way? From time to time, I hear from the traders that they find it somewhat strange.

Anastasia: No, it’s not. Honestly. if it was we would not have become such a popular broker. If you don’t believe all what I am saying, please, check for yourself. All our historical data is stored in the historical quotes section. By simply dragging and hovering the cursor of your mouse to the right you can “rewind” the chart and see what happened, let’s say, two years ago. You will also see that the chart is using a (ASK+BID)/2 formula. (We have informed you of this method in this article)

  • Sometimes people ask me whether my practice (demo) account is free and how long I can use it. Are the two graphs – on the demo account and on a real account – identical?

Anastasia: The account is absolutely free. You can use it for as long as you wish to. There are no limits there. You are welcome to use it to identify your trading style resulting in a trading pattern that will meet your needs. The virtual default balance amounts to USD 10 000 (or equivalent in your local currency), and you can top it up (also, for free) by additional USD 10 000. If you require a specific amount (for instance reflecting your “lucky number” i.e. 148), you can ask our support team to do it for you. As I mentioned before, the graph on our platform is the same, genuine and free from any manipulation or tampering. If this ever happened we would lose our license.

  • You have already mentioned new products. As far as I know, until recently binary options had been the only product offered by IQ Option. Can you please name all of the trading instruments IQ Option has now?

Anastasia: Surely, I can. What we did first was binary options, a fascinating trading instrument allowing you to trade without buying a stock. Let´s say you expect that a particular asset is going to plummet within the next two minutes. If you had shares of this asset you would sell them to earn plenty of money. However, you do not have the shares. Binary options let you make this trade in the form of a contract to receive a fixed amount of money (displayed in per cent at the website of IQ Option). All what you have to do is to choose an asset and the size of your investment. Next, you must choose the direction in which you believe the price will move based on the charts and technical indicators you normally use in trading. Then you select an expiration period and – go ahead. If your estimate is wrong you will lose all the investment. If you are right you will get a fixed profit (More about binary options).

Digital options vs. binary options – it’s like two cousins. What you have to do in this case is to choose an asset and the direction in which you believe the asset evolve. Don’t forget that in this case each deal is limited by 5 minutes; you cannot choose the expiry time as you wish. The tricky part is that you must choose a strike price (the assets is going to reach) in your mind. So, let’s say you estimate that the price is likely to rise. Well, but how much? The strike price will answer this question. The bigger the distance from the current price, the bigger your potential gain (IQ Option offers the maximum of 900% per investment). The bigger the risk the bigger the reward, and vice versa.

Because we didn’t want to fall behind in cryptocurrency trading, we added this trading instrument to our portfolio. The underlying idea is similar – to predict the price movement of a cryptocurrency, however, here you will not see any expiration time. It is you who opens and closes the deal using data from your chart to make a decision. Please, remember that unlike traditional currencies, cryptocurrencies cannot be withdrawn from IQ Option. You can use them as an investment only.

The last type of trading offered by IQ Option is Forex/CFD, probably the best-known trading instrument. With Forex a trader speculates on the behavior of a specific currency pair. If you believe the market is going to grow you will open a long position. If you think that the evolution will go in the opposite direction you will open a short position. There is no expiration time there either, but what you can use is a multiplier. As the name suggests, the multiplier multiplies your investment. It’s, in fact, a kind of a leverage. Hypothetically, you want to invest $10 per deal, you close the deal and get a $1 profit. However, if you were to use a multiplier of 50, you would have earned $50!

Sounds good, doesn’t it? However, remember that the multiplier also carries a risk. If your loss exceeds 95% of your initial investment the deal will close automatically. The multiplier is what affects how fast this will happen in case your prediction is wrong. The good news is, you can never lose more money than you have invested. Hence, if you invest $10 the maximum to lose is the same amount: $10.

CFD (stands for Contact For Difference) is another trading instrument having a multiplier that you can use with your investment. The biggest difference between IQ Option’s CFD and Forex is the assets: while with Forex you will be using currency pairs, with CFD it is the different types of Indexes.

  • Wow, this must be pretty difficult. Binary options seem to be quite a simple instrument. But what about Forex, cryptocurrencies and CFD? These involve so many factors one must take into consideration. These all make trading difficult, don’t they?

Anastasia: Binary options involve some weaknesses, too. It is hard to perfectly predict how the market will behave in the next minute or two. Forex trading requires more fundamental analysing and the ability to choose the right time to both open and close a trade. Nevertheless, any competitive individual with inclinations towards financial analyses will find IQ Option one of the best trading platforms. We have designed our platform to be as much user-friendly as possible and keep educating our traders. We provide access to our practice (demo) account without any charges, make video guides and keep our blog up to date. Having established a VIP program, we also have the best customer support in the industry, of which I am proud to be part of. Don’t hesitate to call us whatever you need. We are available 24/7.

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Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

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