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Day Trading Fixed or Floating Pair Options

April 13, 2012 | Comments: 0 | Views: 109

The difference between day trading floating or fixed pair options is subtle but important. It is for that reason it is all the more necessary to know the difference before opening a position in either. Given that yields range from 70% all the way up to 450% it pays to know which contract is which and what conditions are more likely lead to a profitable result. With that in mind we'll look at both types of trades here.

What Are Pair Options Pair options are a specialized type of derivative contract which match similar (household name) securities in something akin to a duel. A trader chooses either of the assets in question, and performance of both securities are tracked and compared over the life of the contract. If the right security performs better, the trader is rewarded with a profit based on the terms of the option at the time of purchase. The duration of any given position can vary from an hour or so to as long as 150 days - depending on the available day trading opportunities and the type of pair options chosen (fixed or floating) - and that is where the differences start to show themselves.

Fixed or Floating Pairs Unfortunately the names fixed and floating don't really help the trader gain any absolute clarity as to which is which - but there are substantial differences. There are two principal differences between these two types of day trading opportunities. The first is the yield or return on investment - and that is where the name of the contact types originated. The fixed pair pays a set yield, whereas the floating option yield varies.

The second difference between the two contracts revolves around the period by which the performance of the compared securities will be measured. The fixed contract will measure the relative performance of the two assets from the time of trade purchase. The floating option on the other hand measures relative performance based on a pre-set period - the beginning of a day, week, or quarter for example.

Floating Pair Options Day Trading Example Yields on float contracts start out even at the beginning of the measurement period but quickly change based on evolving market conditions. In a case such as this one asset (Apple) might start out fast during a weekly options trade. The yield on Apple will begin to drop, while the yield on Google in the pair will begin to rise. Taking day trading positions on Google (in this simple example with Google falling behind initially) would be more risky given the greater likelihood of the floating options landing out of the money - and hence require a higher return on investment than Apple.

Because of some of the confusion and complexity involving these derivative contracts, leading floating pair options brokers often allow new clients to open accounts without an initial deposit. Traders then get to see how these securities work in a no-obligation environment before committing money to open an account. See our in-depth review of Stockpair - a leading broker in the field for more information.

Source: EzineArticles
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