Initially used in Europe as another way to trade currency options, single-payment options
trading (SPOT)
options have gained acceptance in other markets as well. Investors who are
learning to invest might consider using them, as they offer another way to
possibly generate profit and lower risk.
What are SPOT Options?
SPOT options allow an investor to set the conditions that must be met to receive a desired payout. Setting up this type of option involves three steps:
What are SPOT Options?
SPOT options allow an investor to set the conditions that must be met to receive a desired payout. Setting up this type of option involves three steps:
- The
investor defines a trading scenario that, according to his/her analysis,
has the best prospects, including the risk-reward tradeoff.
- The
broker determines the probability the conditions will be met and proposes
an appropriate premium. The price of
the option or the premium quoted by the broker will depend on the
likelihood of the scenario occurring.
- The
investor can agree to either pay the premium and then buy the option or
turn it down. Normally, the price of the option or premium represents a
percentage of thatpayout.
SPOT options are vanilla put and
call options whose value is set by the conditional scenario, not just the price
and the expiration date.
The Advantages and Disadvantages
Like most investing techniques, there are advantages when using SPOT options:
The Advantages and Disadvantages
Like most investing techniques, there are advantages when using SPOT options:
- While
a bit different from normal options, SPOT options are easy to trade. With
a normal option you might not be able to close out the position, since no
one is willing to take the opposite side. With SPOT options, this is never
a problem, since there is never a need to close out the position - it is a
one-sided trade.
- SPOT
options give you the opportunity to create different scenarios that allow
choosing exactly what you believe will happen in the market. In fact,
investors who use SPOT options define the specifics of the trade.
- With
SPOT options, the downside risk is limited to
the premium paid.
- The option scenario defines the reward, so it is known before entering the trade. Before committing to the trade, you know the risk-reward tradeoff....
