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#369 - What Does BP Effect In Stocks Mean?: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “What does BP effect in stocks mean or more specifically, what does buying power effect in stocks mean?”...

#369 - What Does BP Effect In Stocks Mean?: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “What does BP effect in stocks mean or more specifically, what does buying power effect in stocks mean?”...

A partire dalThe "Daily Call" From Option Alpha


#369 - What Does BP Effect In Stocks Mean?: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “What does BP effect in stocks mean or more specifically, what does buying power effect in stocks mean?”...

A partire dalThe "Daily Call" From Option Alpha

valutazioni:
Lunghezza:
4 minuti
Pubblicato:
Sep 26, 2018
Formato:
Episodio podcast

Descrizione

Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be answering the question, “What does BP effect in stocks mean or more specifically, what does buying power effect in stocks mean?” When you're actually trading, it’s actually pretty simple to understand. But when you’re trading, whether it’s stocks or underlying options, whether you're buying options, selling options, doing simple strategies or complex strategies, all that BP or buying power effect means is that is the amount of money that comes out of your account or gets set aside in your account to cover that position. Now, I say that it’s two of those because it's not necessarily both. That money is always coming out of your account. For example, if you buy stock, money would come out of your account for the purpose of purchasing shares of that stock. Now, you have stock that's valued at the same amount as where you purchased the shares, but you actually forfeited the right to the money by buying the shares and delivering money to somebody else. In the same way, when you are buying options, whether a single strategy or an option spread, money goes out of your account and gets transferred to the option seller in exchange for the options contracts. Now, where this is a little bit confusing sometimes is where it comes into play with option selling. When you are doing an option selling strategy, whether you’re selling an individual contract or you are a net seller of a spread, you do still see a buying power effect in your account. And so, what people often get confused on is – “Well, what happens? Because I'm not actually buying anything, so I’m just selling options. Why is there a reduction in my buying power?” And the reduction in your buying power comes into play because the brokers know that you have to have a certain amount of money in your account to cover the potential risk in the position. For example, I'm just looking at EWZ right now because we’re actually trading EWZ right now. But if I was to sell a simple $1 wide spread in EWZ and I took in a credit of $27, my buying power effect that would come out of that account would be about $73 per spread that I’m selling. If I did 10 contracts, I did $730 in buying power effect. Now, again, that's not money that's actually being transferred out of my account in this case. I’m not delivering that to anybody because I am the option seller. I’m selling the spread. But what happens is that the broker basically set aside this money and say, “Look. You can’t trade with this chunk of money, this little sub-grouping of money because it's used to cover this EWZ position if it were to go bad.” That's what buying power effect really tells you. It tells you how much money you have left to basically buy or sell options or to get into all these positions. And so, once your buying power effect goes all the way to zero, you don't have any ability to get into new existing positions. You basically are forced then to start closing positions to liquidate some cash. Hopefully that helps out. As always, if you guys have any questions, let me know and until next time, happy trading.
Pubblicato:
Sep 26, 2018
Formato:
Episodio podcast