January 26, 2009
Ten Top Tips to Trade Stock Options Successfully - #5
We?re half way there in this 10 part series on how to trade options, you are doing well keep learning, practicing and applying these strategies and you will soon find yourself able to successfully and profitably trade on a regular basis. Last week we looked at ways in which to time the entry of a trade so this week we will discuss how to get out at the right time.
There are several strategies and ways to exit a trade and you must decide which way (or ways) suits you. It is infinitely more difficult to decide when to exit a trade than when to enter it because it is at this time that you will either be making a profit or taking a loss! You will be faced with a myriad of different emotions while you are in a trade, most notably fear and greed. Fear appears in several different forms, fear of losing a profit already made, fear of getting out too early, fear of taking a loss and facing a mistaken trade. Greed also rears its ugly head by encouraging you to stay too long in a winning trade and possibly giving back some or all of your gains. There is an old adage on Wall Street that says ?Bulls can make money, bears can make money but pigs always get slaughtered.?
As I mentioned you must determine what suits you when it comes to deciding how much of a loss you can handle and how much of a profit you want to take. This is a direct reflection of your risk to reward ratio. For example, I often say ?I never feel bad when taking a profit?. I like to take profits when I see them and I generally have a fixed dollar figure or percentage in mind. Unless there is no good reason to exit the trade I will take my profits and if the trade keeps going in my direction after I have exited it doesn?t bother me. Conversely I always have a fixed % loss I will accept. Some people would not be able to handle leaving money ?on the table? so they may prefer to let their trades run, but then they may need larger stop losses as well. When trading options stop losses need to be much larger than when you trade stocks because options are so much more volatile. For example if you set a 10% stop loss it could easily get triggered during a normal intraday move. Bear in mind that there is not as much at risk when trading options as opposed to trading stocks. The capital investment is much smaller so a larger stop loss will not impact your account as much.
Some good rules of thumb are: First if there is profit on the table and the underlying stock breaks down or crosses below its 7 day moving average, take the profit. It is very painful to watch a profitable trade lose value while you wait for it to reverse. Don’t let that happen. However if market conditions have not changed and your technical analysis supports staying in the trade make sure you do not exit too early. Often the most outstanding profits are made by patient traders. Second, always exit the trade if you are at a 50% loss. Chances are if you are in a trade that is losing 50% it will keep going that way. It is imperative you preserve your capital in order to trade again. Third, always exit a trade if there is 30 days or less before expiration. During the month before expiration time decay can rob you blind of the value of your option.
I trust this has given you some things to consider when deciding to exit your trades, stay tuned for next week?s installment where we will discuss how to put together a complete trading plan.
US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).
By: Roger Cox
About the Author:
There are several strategies and ways to exit a trade and you must decide which way (or ways) suits you. It is infinitely more difficult to decide when to exit a trade than when to enter it because it is at this time that you will either be making a profit or taking a loss! You will be faced with a myriad of different emotions while you are in a trade, most notably fear and greed. Fear appears in several different forms, fear of losing a profit already made, fear of getting out too early, fear of taking a loss and facing a mistaken trade. Greed also rears its ugly head by encouraging you to stay too long in a winning trade and possibly giving back some or all of your gains. There is an old adage on Wall Street that says ?Bulls can make money, bears can make money but pigs always get slaughtered.?
As I mentioned you must determine what suits you when it comes to deciding how much of a loss you can handle and how much of a profit you want to take. This is a direct reflection of your risk to reward ratio. For example, I often say ?I never feel bad when taking a profit?. I like to take profits when I see them and I generally have a fixed dollar figure or percentage in mind. Unless there is no good reason to exit the trade I will take my profits and if the trade keeps going in my direction after I have exited it doesn?t bother me. Conversely I always have a fixed % loss I will accept. Some people would not be able to handle leaving money ?on the table? so they may prefer to let their trades run, but then they may need larger stop losses as well. When trading options stop losses need to be much larger than when you trade stocks because options are so much more volatile. For example if you set a 10% stop loss it could easily get triggered during a normal intraday move. Bear in mind that there is not as much at risk when trading options as opposed to trading stocks. The capital investment is much smaller so a larger stop loss will not impact your account as much.
Some good rules of thumb are: First if there is profit on the table and the underlying stock breaks down or crosses below its 7 day moving average, take the profit. It is very painful to watch a profitable trade lose value while you wait for it to reverse. Don’t let that happen. However if market conditions have not changed and your technical analysis supports staying in the trade make sure you do not exit too early. Often the most outstanding profits are made by patient traders. Second, always exit the trade if you are at a 50% loss. Chances are if you are in a trade that is losing 50% it will keep going that way. It is imperative you preserve your capital in order to trade again. Third, always exit a trade if there is 30 days or less before expiration. During the month before expiration time decay can rob you blind of the value of your option.
I trust this has given you some things to consider when deciding to exit your trades, stay tuned for next week?s installment where we will discuss how to put together a complete trading plan.
US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).
By: Roger Cox
About the Author:
Roger Cox hails from New Zealand and now lives in Los Angeles. He was President of an international freight corporation before he started his own consulting company. Roger has successfully traded stock options, for more than four years and loves teaching others to do the same at http://www.prosperitywithoptions.com
Filed under Finance by Administrator
October 26, 2008
Spread Trading - My First Baby Steps Into Trading
When I was engaged on my first baby steps into spread trading, trying to figure out how best to get started, I decided pretty early on that there wasn’t any need to re-invent the wheel, markets were primarily driven by human emotions, and those haven’t really changed over time.
As, ahem, nothing succeeds like success, I’d try and educate myself on the basis of what successful traders, i.e. those actually trading, as opposed to writing books about trading, had done, and then try and emulate that.
The plan was to filter out the key success relevant factors driving their performance out of all the irrelevant noise, trying to unearth the 20% of relevant input that produces 80% of output, in other words.
The biggest success stories starting all the way from Jesse Livermore onwards seemed to be those that had trading styles where the emphasis was not on being right as often as possible, where instead a great emphasis was placed on defense, on keeping their position sizing small enough to survive to the times when they’d be able to capitalize on larger moves that would more than make up for all the previous losses.
Seemed to make eminent sense, as it’s pretty logical not only since the highly laudable Mark Douglas’ insight that anything can happen any time in trading as all it needs is some big order driving your market in a direction your clever analysis would not necessarily have forecast to send your individual trade bang into your stop loss. Good thing is that needing to know what happens next is pretty irrelevant in the big scheme of things, all you have to do is react to what’s happening to emerge net profitable from your trading by cutting your losses short while maximizing your winners.
Some insights that helped me more than anything in my trading progress:
Jesse Livermore:
“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.
Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does the damage to the pocket book and to the soul.
It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself - that is, against human nature.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask for reasons or explanations.
It was never my thinking that made me money but my sitting tight.”
Dan Zanger:
“Be very quick to sell your stock should it return back under the trend line or breakout point.
Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. “
Bruce Kovner:
“Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.”
Richard Dennis:
“The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.”
Gary Bielfeldt:
“The most important thing is to have a method for staying with your winners and getting rid of your losers.”
Paul Tudor Jones:
“I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.”
Michael Marcus:
“Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don’t stay with your winners, you are not going to be able to pay for the losers.”
Ed Seykota:
“The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules.”
Larry Hite:
“It is incredible how rich you can get by not being perfect.”
William O’Neill:
“Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.
The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.”
Bill Lipschutz:
“I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winner trading if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.
It’s very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you’re doing if you’re a successful trader.
So many people want the positive rewards of being a successful trader without being willing to go through the commitment and pain. And there’s a lot of pain.
Avoid the temptation of wanting to be completely right.”
William Eckhardt:
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Brett Steenbarger:
“As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability.”
Trading is simple even if it’s not always easy to stick to the rules during the inevitable rough patches, but it most definitely isn’t even remotely nuclear science, although some egos would like to portray it so to soothe their admiration starved egos, but that’s just counterproductive noise.
Good trading all
By: Andy Richardson
About the Author:
As, ahem, nothing succeeds like success, I’d try and educate myself on the basis of what successful traders, i.e. those actually trading, as opposed to writing books about trading, had done, and then try and emulate that.
The plan was to filter out the key success relevant factors driving their performance out of all the irrelevant noise, trying to unearth the 20% of relevant input that produces 80% of output, in other words.
The biggest success stories starting all the way from Jesse Livermore onwards seemed to be those that had trading styles where the emphasis was not on being right as often as possible, where instead a great emphasis was placed on defense, on keeping their position sizing small enough to survive to the times when they’d be able to capitalize on larger moves that would more than make up for all the previous losses.
Seemed to make eminent sense, as it’s pretty logical not only since the highly laudable Mark Douglas’ insight that anything can happen any time in trading as all it needs is some big order driving your market in a direction your clever analysis would not necessarily have forecast to send your individual trade bang into your stop loss. Good thing is that needing to know what happens next is pretty irrelevant in the big scheme of things, all you have to do is react to what’s happening to emerge net profitable from your trading by cutting your losses short while maximizing your winners.
Some insights that helped me more than anything in my trading progress:
Jesse Livermore:
“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.
Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does the damage to the pocket book and to the soul.
It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself - that is, against human nature.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask for reasons or explanations.
It was never my thinking that made me money but my sitting tight.”
Dan Zanger:
“Be very quick to sell your stock should it return back under the trend line or breakout point.
Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. “
Bruce Kovner:
“Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.”
Richard Dennis:
“The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.”
Gary Bielfeldt:
“The most important thing is to have a method for staying with your winners and getting rid of your losers.”
Paul Tudor Jones:
“I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.”
Michael Marcus:
“Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don’t stay with your winners, you are not going to be able to pay for the losers.”
Ed Seykota:
“The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules.”
Larry Hite:
“It is incredible how rich you can get by not being perfect.”
William O’Neill:
“Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.
The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.”
Bill Lipschutz:
“I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winner trading if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.
It’s very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you’re doing if you’re a successful trader.
So many people want the positive rewards of being a successful trader without being willing to go through the commitment and pain. And there’s a lot of pain.
Avoid the temptation of wanting to be completely right.”
William Eckhardt:
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Brett Steenbarger:
“As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability.”
Trading is simple even if it’s not always easy to stick to the rules during the inevitable rough patches, but it most definitely isn’t even remotely nuclear science, although some egos would like to portray it so to soothe their admiration starved egos, but that’s just counterproductive noise.
Good trading all
By: Andy Richardson
About the Author:
Spread Trader is the nom-de-plume of Andy Richardson a UK based spread trader, who like his inspiration, the late Jesse Livermore is a student of the markets and plays a lone hand. Resident financial spread betting expert Andy publishes a question and answer spread betting guide where one can find objective spread trading information.
Filed under Wealth Building by Administrator
October 14, 2008
How you Can Benefit From Trading Options With Iron Condors
Using Iron Condors, an investor can generate a solid monthly income and can achieve 10% returns every month, consistently. If you’re tired of whipsaws and drawdowns in your trading account, learn more about iron condor options strategies. The unique and powerful ability of iron condors is that they enable you to make money no matter which way the market goes.
Description of an Iron Condor
An iron condor is a type of options spread trade that involves simultaneously buying and selling multiple contracts in order to capture a particular segment of future market movement.
The iron condor is a neutral strategy that is a combination of a two different options strategies: a bull put spread and bear call spread. A bull put spread strategy is when an investor sells a higher striking option and buys a lower striking option on the same stock with the same expiration date. A bear call spread strategy is when the investor buys call options of a certain strike price and sells the same number of call options of lower strike price on the same stock expiring within the same month.
There should always be an even number of options traded, in multiples of four, so that the trade is always weighted equally with no downside or upside bias. This strategy is non-directional because it works independently of market movement, meaning it does not matter whether the market goes up or down.
Benefits of Iron Condors
The great thing about the iron condor trading strategy is that it is a neutral strategy, which gives you the upper hand. Trading options with iron condors can be a risky and costly trade, but there are several advantages that you will find with no other method.
As mentioned, this is a neutral strategy allowing an investor to make a profit within a large region by balancing both kinds of spreads. One of the biggest advantages to this volatility trading is the limitation of losses you will face. Losses are limited if the stock goes against you in one way or another.
Trading Iron condors can be fairly easy and fast using the Condor Options strategy. An investor can make money with as little as ten minutes per week. In addition, each investor can choose how they handle the risk and volatility. A conservative investor can sell fewer options and invest the returns in a high yield bond. An aggressive investor can sell up to 10 iron condors a week and reinvest the returns with expert advice.
There are many different strategies and investments to choose from within the stock market. Trading options with iron condors has several advantages that can potentially give an investor the upper hand in the stock market and manage the inherent volatility to their maximum benefit.
The description of an iron condor is simple, it is a way an investor can generate a solid monthly income and achieve 10% returns every month, consistently. Trading options with iron condors has several advantages that can potentially give you the upper hand in the stock market.
By: Groshan Fabiola
About the Author:
Description of an Iron Condor
An iron condor is a type of options spread trade that involves simultaneously buying and selling multiple contracts in order to capture a particular segment of future market movement.
The iron condor is a neutral strategy that is a combination of a two different options strategies: a bull put spread and bear call spread. A bull put spread strategy is when an investor sells a higher striking option and buys a lower striking option on the same stock with the same expiration date. A bear call spread strategy is when the investor buys call options of a certain strike price and sells the same number of call options of lower strike price on the same stock expiring within the same month.
There should always be an even number of options traded, in multiples of four, so that the trade is always weighted equally with no downside or upside bias. This strategy is non-directional because it works independently of market movement, meaning it does not matter whether the market goes up or down.
Benefits of Iron Condors
The great thing about the iron condor trading strategy is that it is a neutral strategy, which gives you the upper hand. Trading options with iron condors can be a risky and costly trade, but there are several advantages that you will find with no other method.
As mentioned, this is a neutral strategy allowing an investor to make a profit within a large region by balancing both kinds of spreads. One of the biggest advantages to this volatility trading is the limitation of losses you will face. Losses are limited if the stock goes against you in one way or another.
Trading Iron condors can be fairly easy and fast using the Condor Options strategy. An investor can make money with as little as ten minutes per week. In addition, each investor can choose how they handle the risk and volatility. A conservative investor can sell fewer options and invest the returns in a high yield bond. An aggressive investor can sell up to 10 iron condors a week and reinvest the returns with expert advice.
There are many different strategies and investments to choose from within the stock market. Trading options with iron condors has several advantages that can potentially give an investor the upper hand in the stock market and manage the inherent volatility to their maximum benefit.
The description of an iron condor is simple, it is a way an investor can generate a solid monthly income and achieve 10% returns every month, consistently. Trading options with iron condors has several advantages that can potentially give you the upper hand in the stock market.
By: Groshan Fabiola
About the Author:
The description of an iron condor is simple, it is a way an investor can generate a solid monthly income and achieve 10% returns every month, consistently. Trading options with iron condors has several advantages that can potentially give you the upper hand in the stock market.
Filed under Business by Administrator