Hedge Fund Trading Styles Overview

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Maybe you have already heard about an option trade being directional or non-directional. What does it mean? In short, this distinction is about how much the trade is exposed to movement in price of the underlying security. This article explains directional trades. Here you can find the second part concerning non-directional option trades. Directional trades are the most common things people do in the markets.

You have two basic possibilities. Here you can read about directional trades with stockswhich is pure and simple buying and selling of stocks. When you expect a stock to rise you are bullishyou buy it and if you are right, you make money. When you expect a stock to fall you are bearishyou sell it short and if you are right, you make money.

If you are wrong and the stock goes in the other direction, you lose money. If the stock stays at the same level, you neither make nor lose any money. This is not always true with options as you will soon see. You can place similar macro directional trading with options trades using options. In other articles we have explained why calls tend to increase in price when the underlying stock goes up, while puts tend to appreciate when the underlying goes down.

So instead of buying the underlying stock, you buy a callwhich is an example of a directional trade with bullish bias. Or instead of selling the underlying stock short, you can buy a put optionwhich is a directional trade with bearish biasas a put increases in price when the underlying asset goes down. Stock goes up by 5, you hold 1, shares, and you make 5, dollars. Stock goes down by 3 dollars and with 1, shares you lose 3, dollars.

But unless the call is deep in the money and has only little time valuethe amount by which the call option will rise is not equal to the amount by which the underlying stock rises. If a call option is in the moneyits intrinsic value increases by the same amount as the underlying stock increases.

But at the macro directional trading with options time, macro directional trading with options the option is getting deeper in the money, its time value declines see why. This mechanism also works to the other side. If the underlying stock falls further and the option gets out of the moneyits time value starts to decrease again the further out of the money, the lower time value. Deep in the money options move almost as fast as the underlying, while out of the money options move very slowly.

This support and resistance trading strategy youtube also valid for put optionsonly the direction is the opposite put option appreciates when underlying stock falls. Nevertheless, the futures and options trading strategies pdf995 factors usually still have some impact.

Buying a call option long call or buying a put option long put are the two simplest directional positions you can create with options. Besides, you can also sell a call short call, a bearish position or sell a put short put, a bullish position. It is important to know the terminology and be aware of the difference between movement in price of an option and movement in price of its underlying.

Unlike with stocks, long does not always mean bullish and short does not always mean bearish with options read more macro directional trading with options. Besides trades with single options there are also many different option spreads like bull call spreadbull put spreadbear put spreador bear call spread and even more complicated combinations of multiple optionswhich in sum create a bullish or bearish exposure to the underlying security.

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Macroption macro directional trading with options not liable for any damages resulting from macro directional trading with options the content. No financial, investment or trading advice is given at any time. Home Calculators Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. Macro directional trading with options Trades with Options. Single Option and Option Spreads.

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To many people hedge funds are a mysterious part of the financial industry. In fact, hedge funds work much like traditional mutual funds. Most of them trade and invest in the same securities, like stocks, bonds or currencies. The difference is in the way they trade these securities, i. Not only do hedge funds as a group differ from traditional funds — most importantly, there are big differences in trading styles within the hedge fund universe.

Understanding the styles, particularly their risk exposures and performance drivers, is essential to successful hedge fund investing. As the name suggests, equity market directional funds trade equities stocks. Unlike stock mutual funds, they often take short positions, apply leverage or trade more frequently. Like stock mutual funds, hedge funds often specialize in a particular industry, geographical area or market capitalization. Decision making is based on in depth fundamental analysis, quantitative models, or a combination of these.

Corporate restructuring funds take advantage of special situations such as mergers, acquisitions or cases when a company is in severe difficulties or even bankruptcy. The securities mostly stocks, bonds and options traded by corporate restructuring funds are often very illiquid or even not exchange traded. Profit is made when an event e. Popular sub-styles include event driven funds, distressed securities funds and merger arbitrage funds. Key characteristic of relative value funds is that their net exposure to the stock or bond market as a whole is zero or very small.

This is achieved by taking long and short positions in similar securities for example two different mining stocks or two bonds with different maturities in equal size at the same time. A trading opportunity arises when relative prices of a pair of securities diverge from their long term average pattern and the hedge fund manager bets on them coming back it is called mean reversion.

Because relative price changes tend to be very small, these funds often apply high leverage, which can be very risky if something unexpected happens. In theory, the performance of relative value funds should be uncorrelated to the direction of the overall market, making them suitable for portfolio diversification. Common sub-styles include equity market neutral stocks , fixed income arbitrage bonds , volatility arbitrage options and convertible arbitrage convertible bonds and stocks.

The last group contains particularly global macro or macro funds, which trade assets driven mostly by macroeconomic trends, such as currencies, interest rates, commodities and stock indices. Some of these funds are managed by experienced economists, relying mostly on fundamental analysis and predicting global macroeconomic and political trends, while other funds are quantitative and trade based on complex computer models. Other common styles within this group are commodity trading advisors CTAs or managed futures funds, which trade mainly futures contracts on commodities and other assets.

Numerous classifications of hedge fund trading styles have evolved over time. Some of them use different names or aggregate the individual sub-styles in different groups, but more or less all approaches recognize the common trading styles explained above.

There are also funds which combine multiple styles multi-strategy funds and funds which invest in other hedge funds funds of funds. Both Dubai and Hong Kong are recognised centres of excellence in delivering personal financial What happened to disaster? Four big groups are: Equity market directional hedge funds As the name suggests, equity market directional funds trade equities stocks. Corporate restructuring hedge funds Corporate restructuring funds take advantage of special situations such as mergers, acquisitions or cases when a company is in severe difficulties or even bankruptcy.

Relative value hedge funds Key characteristic of relative value funds is that their net exposure to the stock or bond market as a whole is zero or very small. Macro trading and opportunistic hedge funds The last group contains particularly global macro or macro funds, which trade assets driven mostly by macroeconomic trends, such as currencies, interest rates, commodities and stock indices.

Different hedge fund style classifications Numerous classifications of hedge fund trading styles have evolved over time. You might also like. Hong Kong Millennials on the money Both Dubai and Hong Kong are recognised centres of excellence in delivering personal financial Join our newsletter to receive exclusive updates.