Open Interest is mostly used to confirm a trend for a particular futures  contract, For eg, lets look at Reliance 1000 May CALL, the open interest  might tell us that there have been 5 options open in the month of May, a  trader might then wonder does this refer to the number of contracts bought or sold.

*Working*
When a trader buy’s or sell’s an option, the transaction needs to be  entered as either an opening or a closing transaction. If he buy’s 5  RELIANCE May 1000 CALL, he is buying the calls to ‘open’, i.e he is opening  his position in a futures contract, which causes the Open interest to rise  by 5, and then after sometime(within) the month he decides to sell his  contract i.e close his position in a particular contract, then he is  causing the open interest to go down by 5.

Open interest applies primarily to the futures market, it helps the measure  the flow of money into the futures Market. For each seller of a futures  contract (eg RELIANCE 1000 CALL) there must be a buyer of that contract.  Thus a seller and a buyer combine to create only one contract.

A rise in open interest in a futures contract along with its price  indicates bullishness, which means investors are creating long positions  and vice versa.

The open interest position that is reported each day represents the  increase or decrease in the number of contracts for that day, and it is  shown as a positive or negative number.

*Advantages of monitoring Open Interest*
Changes in the Open Interst as mentioned earlier can help a trader  interpret the future trend of a particular contract.

*Open Interest RISING ->* Indicates that the present trend (up, down, flat)  will continue

*Open Interest FALLING->* Indicates that the prest trend(up, down, flat) is  likely to change or is coming to and end.

With respect to this booklet’s usage of the word, longdescribes a position (in stock and/or options) in which youhave purchased and own that security in your brokerageaccount. For example, if you have purchased the right to buy100 shares of a stock, and are holding that right in youraccount, you are long a call contract. If you have purchasedthe right to sell 100 shares of a stock, and are holding thatright in your account, you are long a put contract. If youhave purchased 1,000 shares of stock and are holding thatstock in your brokerage account, or elsewhere, you are long1,000 shares of stock.When you are long an equity option contract:n You have the right to exercise that option at any time priorto its expiration.n Your potential loss is limited to the amount you paid forthe option contract.

Note: This time decay increases rapidly in the last several weeks of an option’s life.When an option expiresin-the-money, it is generally worth only its intrinsic value.

The amount by which an option, call or put, is in-themoneyat any given moment is called its intrinsic value.Thus, by definition, an at-the-money or out-of-the-money option has no intrinsic value; the time value is the total option premium.This does not mean, however, theseoptions can be obtained at no cost. Any amount by which anoption’s total premium exceeds intrinsic value is called the time value portion of the premium. It is the time value portion of an option’s premium that is affected by fluctuationsin volatility, interest rates, dividend amounts and the passageof time.There are other factors that give options value,therefore affecting the premium at which they are traded.Together, all of these factors determine time value.

Equity call option:

In-the-money = strike price less than stock price

At-the-money = strike price same as stock price

Out-of-the-money = strike price greater than stock price

Equity put option:

In-the-money = strike price greater than stock price

At-the-money = strike price same as stock price

Out-of-the-money = strike price less than stock price

Option Premium = Intrinsic Value + Time Value

ELLIOT WAVES

2. The derivatives market helps to transfer risks from those who have them
but may not like them to those who have an appetite for them.

3. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market
witnesses higher trading volumes because of participation by more players
who would not otherwise participate for lack of an arrangement to transfer
risk.

4. Speculative trades shift to a more controlled environment of derivatives
market. In the absence of an organized derivatives market, speculators
trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kind of mixed markets.

5. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a
history of attracting many bright, creative, well-educated people with an
entrepreneurial attitude. They often energize others to create new
businesses, new products and new employment opportunities, the benefit
of which are immense.

2. Increased integration of national financial markets with the international
markets.

3. Marked improvement in communication facilities and sharp decline in their costs,

4. Development of more sophisticated risk management tools, providing
economic agents a wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual
financial assets.

· Let profits run. Now to the “letting profits run” side of the equation. This is even harder because who knows when those profits will stop running? Well, of course, no one does, but there are some things to consider. First of all, be aware that there is an urge in all of us to want to win…even if it’s only by a narrow margin. Most of us were raised that way. Win – even if it’s only by one touchdown, one point, or one run. Following that philosophy almost assures you of losing in the futures markets because the nature of trading futures usually means that there are more losers than winners. The winners are often big, big, big winners, not “one run” winners. Here again, you have to fight human nature. Let’s say you’ve had several losses (like most traders), and now one of your positions is developing into a pretty good winner. The temptation to close it out is universally overwhelming. You’re sick about all those losses, and here’s a chance to cash in on a pretty good winner. You don’t want it to get away. Besides, it gives you a nice warm feeling to close out a winning position and tell yourself (and maybe even your friends) how smart you were (particularly if you’re beginning to doubt yourself because of all those past losers).

· That kind of reasoning and emotionalism have no place in futures trading; therefore, the next time you are about to close out a winning position, ask yourself why. If the cold, calculating, sound reasons you used to put on the position are still there, you should strongly consider staying. Of course, you can use trailing stops to protect your profits, but if you are exiting a winning position out of fear…don’t; out of greed…don’t; out of ego… don’t; out of impatience…don’t; out of anxiety…don’t; out of sound fundamental and/or technical reasoning…do.You can avoid the emotionalism, the second guessing, the wondering, the agonizing, if you have a sound trading plan (including price objectives, entry points, exit points, risk-reward ratios, stops, information about historical price levels, seasonal influences, government reports, prices of related markets, chart analysis, etc.) and follow it. Most traders don’t want to bother, they like to ”wing it.” Perhaps they think a plan might take the fun out of it for them. If you’re like that and trade futures for the fun of it, fine. If you’re trying to make money without a plan – forget it. Trading a sound, smart plan is the answer to cutting your losses short and letting your profits run.

· Do not overstay a good market. If you do, you are bound to overstay a bad one also.

· Take your lumps. Just be sure they are little lumps. Very successful traders generally have more losing trades than winning trades. It’s just that they don’t leave any hang-ups about admitting they’re wrong, and have the ability to close out losing positions quickly.

· Trade all positions in futures on a performance basis. The position must give a profit by the end of the second day after the position is taken, or else get out.

· Program your mind to accept many small losses. Program your mind to “sit still” for a few large gains.

· Learn to trade from the short side. Most people would rather own something (go long) than owe something (go short). Markets can (and should) also be traded frown the short side.Watch for divergences in related markets – is one market making a new high and another not following?

· Do not over-trade.

· Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you.

· Trade with the trends, rather than trying to pick tops and bottoms.

· Don’t trade many markets with little capital.

· Don’t just trade the volatile contracts.

· Calculate the risk/reward ratio before putting a trade on, then guard against the risk of holding it too long.

· Establish your trading plans before the market opening to eliminate emotional reactions.Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don’t change during the session unless you have a very good reason.

· Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached, or the fundamental reason for taking the position changes.

· Use technical signals (charts) to maintain discipline – the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools. Use discipline to eliminate impulse trading.

· Have a disciplined, detailed trading plan for each trade; i.e., entry, objective, exit, with no changes unless hard data changes. Disciplined money management means intelligent trading allocation and risk management. The overall objective is end-of-year bottom line, not each individual trade.

· When you have successful a trade, fight the natural tendency to give some of it back.

· Use a disciplined trade selection system…an organized, systematic process to eliminate impulse or emotional trading.

· Trade with a plan – not with hope, greed, or fear. Plan where you will get in the market, plan how much you will risk on the trade, and plan where you will take your profits.

PRODUCTION OF GOLD
Till now the total gold is extracted from the mines is about $1 trillion dollar, which is accumulated in physical form is enough to built Eiffel tower. Annual gold production worldwide is about US$35 billion and by far the one of the largest-trading world commodity. Worldwide, gold mines produce about 2,464 tonnes in the year 2004 from total supply of 3328 tonnes but unable to meet identifiable demand of 3497 tonnes. Gold is mined in more than 118 countries around the world, with the large number of development projects in these countries expected to keep production growing well into the next century. Currently, South Africa is the largest gold producing country, followed by the United States, Australia, Canada, Indonesia, Russia and others, some of these countries also account for highest gold reserves from potential 50,000 tonnes of world-wide reserves.

Why central banks hold gold
Monetary authorities have long held gold in their reserves. Today their stocks amount to some 30,000 tonnes – similar to their holdings 60 years ago. It is sometimes suggested that maintaining such holdings is inefficient in comparison to foreign exchange. However, there are good reasons for countries continuing to hold gold as part of their reserves. These are recognized by central banks themselves although different central banks would emphasize different factors.

Diversification: In any asset portfolio, it rarely makes sense to have all your eggs in one basket. Obviously the price of gold can fluctuate – but so too do the exchange and interest rates of currencies held in reserves. A strategy of reserve diversification will normally provide a less volatile return than one based on a single asset.

Gold has good diversification properties in a currency portfolio. These stem from the fact that its value is determined by supply and demand in the world gold markets, whereas currencies and government securities depend on government promises and the variations in central banks’ monetary policies. The price of gold therefore behaves in a completely different way from the prices of currencies or the exchange rates between currencies.
Physical Security: Countries have in the past imposed exchange controls or, at the worst, total asset freezes. Reserves held in the form of foreign securities are vulnerable to such measures. Where appropriately located, gold is much less vulnerable. Reserves are for using when you need to. Total and incontrovertible liquidity is therefore essential. Gold provides this.

Unexpected needs: If there is one thing of which we can be certain, it is that today’s status quo will not last forever. Economic developments both at home and in the rest of the world can upset countries’ plans, while global shocks can affect the whole international monetary system.

Owning gold is thus an option against an unknown future. It provides a form of insurance against some improbable but, if it occurs, highly damaging event. Such events might include war, an unexpected surge in inflation, a generalised crisis leading to repudiation of foreign debts by major sovereign borrowers, a regression to a world of currency or trading blocs or the international isolation of a country. In emergencies countries may need liquid resources. Gold is liquid and is universally acceptable as a means of payment. It can also serve as collateral for borrowing.

Confidence: The public takes confidence from knowing that it’s Government holds gold – an indestructible asset and one not prone to the inflationary worries overhanging paper money. Some countries give explicit recognition to its support for the domestic currency. And rating agencies will take comfort from the presence of gold in a country’s reserves. The IMF’s Executive Board, representing the world’s governments, has recognized that the Fund’s own holdings of gold give a “fundamental strength” to its balance sheet. The same applies to gold held on the balance sheet of a central bank.

Income: Gold is sometimes described as a non income-earning asset. This is untrue. There is a gold lending market and gold can also be traded to generate profits. There may be an “opportunity cost” of holding gold but, in a world of low interest rates, this is less than is often thought. The other advantages of gold may well offset any such costs.

Insurance: The opportunity cost of holding gold may be viewed as comparable to an insurance premium. It is the price deliberately paid to provide protection against a highly improbable but highly damaging event. Such an event might be war, an unexpected surge of inflation, a generalized debt crisis involving the repudiation of foreign debts by major sovereign borrowers, a regression to a world of currency and trading blocs, or the international isolation of a country.

2. RISK
Futures Contracts have symmetric risk profile for both the buyer as well as the seller. While options have asymmetric risk profile. In case of Options, for a buyer (or holder of the option), the downside is limited to the premium (option price) he has paid while the profits may be unlimited. For a seller or writer of an option, however, the downside is unlimited while profits are limited to the premium he has received from the buyer.

3.  PRICES:
The Futures contracts prices are affected mainly by the prices of the underlying asset. While the prices of options are however, affected by prices of the underlying asset, time remaining for expiry of the contract & volatility of the underlying asset.

4. COST:
It costs nothing to enter into a futures contract whereas there is a cost of entering into an options contract, termed as Premium.

5. STRIKE PRICE:
In the Futures contract the strike price moveswhile in the option contract the strike price remains constant.
6. LIQUIDITY:
As Futures contract are more popular as compared to options. Also the premium charged is high in the options. So there is a limited Liquidity in the options as compared to Futures. There is no dedicated trading and investors in the options contract.

7.  PRICE BEHAVIOUR :
The trading in future contract is one-dimensional as the price of future depends upon the price of the underlying only. While trading in option is two-dimensional as the price of the option depends upon the price and volatility of the underlying.

8. PAY OFF:
As options contract are less active as compared to futures which results into non linear pay off. While futures are more active has linear pay off .

The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn’t prevent a negative event from happening, but if it does happen and you’re properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.

Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another.

Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.
Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can’t help us escape the hard reality of the risk-return tr adeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.

How Do Investors Hedge?

Hedging techniques generally involve the use of complicated financial instruments known as derivat ives, the two most common of which are options and futures. We’re not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.

Let’s see how this works with an example. Say you own shares of Educom. Although you believe in this company for the long run, you are a little worried about some short-term losses in the education industry. To protect yourself from a fall in Educom you can buy a put option on the company, which gives you the right to sell Educom at a specific price (strike price). This strategy is known as a married put. If your stock price tumbles below the strike price, these losses will be offset by gains in the put option.

Keep in mind that because there are so many different types of options and futures contracts an investor can hedge against nearly anything, whether a stock, commodity price, interest rate and currency – investors can even hedge against the weather.

The Downside

Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isn’t to make money but to protect from losses. The cost of the hedge – whether it is the cost of an option or lost profits from being on the wrong side of a futures contract – cannot be avoided. This is the price you have to pay to avoid uncertainty.
We’ve been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isn’t a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.

What Hedging Means to You

The majority of investors will never trade a derivative contract in their life. In fact most buy-and-hold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because they let their investments grow with the overall market.

So why learn about hedging?

Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.

Conclusion

Risk is an essential yet precarious element of investing.  Regardless of what kind of investor one aims to be, having a basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves. Whether or not you decide to start practicing the intricate uses of derivatives, learning about how hedging works will help advance your understanding the market, which will always help you be a better investor.

■ Reversal Traders:
Counter-trend traders will look for signs that a stock is topping or bottoming out before they place a trade in the opposite direction. For example, reversal traders use tools such as the TICK, TICKI, Put Call Ratio, volume, etc. to anticipate a change in trend.

■ Range Traders:
Range traders find stocks that have been trading within support and resistance levels and buy when a stock hits support and sell when it hits resistance. Range traders will be most successful in markets that are choppy and that have no real direction. Regardless of the type of trader, the most important aspect of day trading is the discipline to follow a set of rules and establishing your own money management principles which you live by.

However, many day traders find themselves losing due to poor day trading money management.

How Much Should You Risk
The size of your trading position, is in direct proportion to the value of your portfolio. The key to day trading success is to avoid big losers. I can not tell you how many times early in my trading career, that I would be up huge over a 5-day period, only to have a big loser wipe out 50% of my gains. So, to avoid this bad habit, you should only risk a total of 1% of your portfolio on any one trade. Most traders take this rule of thumb, and just put a 1% stop loss out there and when that is hit, they just take the loss. If you have put on around 1,000 day trades or more, you know all too well that a 1% loss can happen. So, in order to avoid taking constant hits, you should allow yourself to take a 2% hit on your position, where the dollar loss from this trade will only represent 1% of your overall account value. Now that I have confused both of us, let me try to say that a little easier. You simply want the total dollar amount invested per position, to equate to 12.5% of your total marginable equity. So, if your account value is $100,000 you will have $400,000 dollars in margin buying power, and should use $50,000 for each trade. Remember, this $50,000 you use only represents 12.5% of your marginable equity. This way if you take a 2% hit, it will only be 1% of your total account value.

Stops are not meant to be hit
It really upsets me when I hear so called professionals advise new traders to set stop loss amounts. Doesn’t that seem like a general rule? Trading is a game of precision, and does not operate in the realm of gray. Yes, you need a stop loss order for every trade, but it is a fail safe. In this article we have discussed the power of a 2% stop rule and overall day trading money management. But do you think you should let every losing trade hit your stop? Of course not. Now I am not suggesting that we all become rogue traders and trade without stops. The minute you see that the trade is wrong, get out with small hit. Because in the end, the goal here is to see a small number of .25% or .5% losses, while your winners are in the range of 1%-3%. This is how you will win the game. Again, the 2% stop loss is for the unexpected sharp counter move, and it is not your goal to have this stop hit. You should know well before your stop is hit if you are in a bad trade.

Operate in Cash
Day trading is a cash business. The only loan you should be using is with your day trading margin buying power. Do not start or continue to day trade, if you have to take out loans, credit, or use part of your retirement to get in the game. Traders that operate with a positive cash flow and utilize day trading money management rules, have a much higher success rate than traders that start out in the red.