Options spread

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As we are well aware, Shipping is a very risky and volatile industry. In the past, both the dry bulk and the tanker markets have highly dropped or increased within a few days only and any projections are very difficult short term or even impossible long term. In order to manage their market risks, the market players may use various instruments.

However, this measure is not flexible at all since the vessel is tied up for freight trading weekly options strategy long period and getting out of a period contract can be costly. Fleet diversification is another traditional instrument which is used by shipowners. By diversifying the fleet, a shipowner participates in several markets, where the market risks are shared.

In order to overcome the disadvantages of the traditional strategies for managing the market risks, recently a more advanced tool is developed: In shipping, this means that the Shipowner and the charterer will not have an actual fixture between them — they will not have the obligation to deliver an actual vessel or load a specific cargo — but they just take a market position in a future period.

Exchange traded derivatives are standardized contracts which are traded in a central marketplace freight trading weekly options strategy guaranteed through a clearing house. OTC traded contracts are negotiated directly between the buyer and the seller or their brokers and the counterparties may be exposed to credit risk since not all the trades are cleared however recently clearing of the OTC bookings is also developed.

There are two types of derivatives used in Shipping:. We also meet swaps, however in other aspects of the shipping industry finance, accounting in order to manage the risk from the interest rate fluctuations interest rate swaps. They are also freight trading weekly options strategy for freight projections.

By looking into the derivatives transactions, one can take a picture of the future movements of the physical market. Studies have shown that Freight trading weekly options strategy can be used to predict the direction of the spot market for up to about 2 months forward.

Finally, derivatives are also used for speculation purposes since the transaction costs are much lower than in physical markets. Speculators —who are not necessarily shipping professionals — help the derivatives market since they provide market liquidity. All trades were anonymous and guaranteed by the London clearing house while the contracts, the dates and times of trading and other financial and legal requirements were all laid down in detail. As soon as the trading account had been opened and all freight trading weekly options strategy were in place, the client could buy or sell future contracts.

Forward Freight Agreements, as we know them today, were initially appeared in shipping in developed by H. Ltd but their use was increased after the and they are very popular nowadays. However, after a few years of their use, organized exchanges and trading platforms were also appeared, therefore we now see both exchange-traded and OTC-traded FFAs.

For buying or selling FFAs, there are broking companies who specialize in this service and have registered staff. But how FFAs work? A Buyer and a Seller agree to trade an FFA contract and through their broker, they will agree on the route, period and negotiate a price. Trades are not published and all deals are done on trust. When the contract expires settlement dateif the agreed price is higher than the settlement price, the seller will compensate the buyer for the difference.

On the other hand, if the fixed price is lower than the settlement price, the buyer will compensate the seller for the difference. On February a trader buys three grain cargoes from NOPAC to Japan, of which the transportation is going to take place when the grain season starts: One cargo in August, one in September and one in October.

The trader fears that the shipping market will go up in August and wants to secure his freight against such a potential increase. On the other hand, a panamax shipowner who has fixed his vessel in time chartering opening mid July freight trading weekly options strategy Far East is afraid freight trading weekly options strategy the market may keep on softening and for this reason, he is looking to sell a FFA.

Since the FFAs were initially traded Over-the-Counter, there was a counterparty risk which was borne by each party. This was the main problem when trading FFAs binary and digital options brokers usa these early years, since the losses from counter-party defaults were high.

For this reason, a clearing system was developed by which the FFA contracts either exchange traded or OTC traded are guaranteed.

With this clearing system, upon fixing an FFA contract, each counterparty deposits on his account with a clearing member an initial margin deposit. FFA trading volume was increasing from to when they reached the 2 million lots 1 lot is equal to 1, mt of cargo or 1 day of charter hire for dry bulkers. However, after the financial crisis ofthere was a high drop. Since it has remained steady at about 1. Inthe dry FFA volume was estimated at 1. This happens since the market risk and volatility is much higher in the capesize and panamaxes while minimum to handies.

In the wet FFA volume, almost Options are the most modern derivative products which are used more and more in shipping recently. This happens since, as freight trading weekly options strategy will freight trading weekly options strategy below, they give even more flexibilities than the common FFAs. In contrary to the forward and future contracts which impose an obligation on the counterparties to trade, the option allows the buyer to freight trading weekly options strategy whether or not to exercise same and then trade.

However, the seller of the option has no choice if the buyer chooses to exercise same. Options are also traded both in exchanges or OTC.

There are two types of options. The call options and put options. Call options give someone the right to buy an asset at a specified price while the put options give someone the right to sell an asset.

For buying an option, one pays the premium while no margin is required to be placed by the buyer since he has the option to exercise same and therefore there is no risk for its counterparty. On the other hand, a margin is required to be placed by the seller as a security. There are 4 main strategies which are commonly used in Options trading:. The seller has the obligation to sell if the option is exercised by the buyer. The seller has the obligation to freight trading weekly options strategy if the option is exercised by the buyer.

Again, in this case, the sale or purchase does not refer to a physical asset but a market position. We have December and a shipowner of a panamax bulker is afraid that the market will experience a decline in February due to the Chinese holidays. Therefore, we see that in options trading the parties lock their minimum earnings their downside while they keep the upside.

Of course, the buyer of an option has to pay a premium which is not the case in FFAs however even in FFAs freight trading weekly options strategy parties should place a deposit. OpenSea team understands the importance for Shipowners and Charterers to manage their market risks. For this reason, we have built a transparent marketplace where both parties can see the available vessels and cargoes and they can take an idea of the market trends.

Notwithstanding this, after you fix freight trading weekly options strategy vessel or cargo in our platform, you freight trading weekly options strategy visit an online exchange or a specialized FFA broker and fix a derivative contract in order to hedge your future market risks, in case you are afraid of same. In any case, we strongly encourage all our users to get a clear picture of how FFAs and other derivative products work, in order to avoid getting exposed to further risks instead of managing their current ones.

Just place your open inquiries freight trading weekly options strategy find suitable positions. Get started for free. Like what you're reading? Get the latest updates first. And how you may use them to manage risks As we are well aware, Shipping is a very risky and volatile industry. What is a derivative? There are two types of derivatives used in Shipping: Forward Freight Agreements Forward Freight Agreements, as we know them today, were initially appeared in shipping in developed by H.

Ship chartering is easy with us Just place your open inquiries and find suitable positions. Subscribe to our blog articles Analytics, inspiration and fresh ideas for ship chartering community.

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Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates.

The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved. Vertical spreads , or money spreads, are spreads involving options of the same underlying security, same expiration month, but at different strike prices.

Horizontal, calendar spreads , or time spreads are created using options of the same underlying security, same strike prices but with different expiration dates.

Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates. They are called diagonal spreads because they are a combination of vertical and horizontal spreads. Any spread that is constructed using calls can be referred to as a call spread, while a put spread is constructed using put options. If a spread is designed to profit from a rise in the price of the underlying security, it is a bull spread. A bear spread is a spread where favorable outcome is obtained when the price of the underlying security goes down.

If the premiums of the options sold is higher than the premiums of the options purchased, then a net credit is received when entering the spread. If the opposite is true, then a debit is taken. Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads.

There are also spreads in which unequal number of options are simultaneously purchased and written. When more options are written than purchased, it is a ratio spread. When more options are purchased than written, it is a backspread.

Many options strategies are built around spreads and combinations of spreads. For example, a bull put spread is basically a bull spread that is also a credit spread while the iron butterfly can be broken down into a combination of a bull put spread and a bear call spread.

A box spread consists of a bull call spread and a bear put spread. The calls and puts have the same expiration date. The resulting portfolio is delta neutral. For example, a January box consists of:. A box spread position has a constant payoff at exercise equal to the difference in strike values.

Thus, the box example above is worth 10 at exercise. For this reason, a box is sometimes considered a "pure interest rate play" because buying one basically constitutes lending some money to the counterparty until exercise. The net volatility of an option spread trade is the volatility level such that the theoretical value of the spread trade is equal to the spread's market price.

In practice, it can be considered the implied volatility of the option spread. From Wikipedia, the free encyclopedia. For the American football offensive scheme, see Spread offense.

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