| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
What are the strike prices of the available options?Final Summary This book has reviewed a variety of strategies that can be applied in various markets. It has avoided trying to forecast market direction or analyzing charts with detailed market patterns, and has not refer enced highly technical data or difficult-to-interpret fundamental information. Although these trading tools may have their place in your trading arsenal, they are exhaustively studied in many other publications. The purpose of this book is to focus on options trading strategies and to demonstrate how professionals trade without overanalyzing the markets. When traders get bogged down in trying to process too much information, the result is what I often call analysis paralysis. I have tried to make the information contained in this book as straightforward as possible. Learning to trade can be quite difficult and perplexing. Each strategy has an infinite number of possibilities when applied to the markets. Each trade is unique, and your task as a trader is to learn from your achievements and your mistakes. There are no absolutes in trading. However, I do believe that you will be able to build a solid trading foundation based on the delta neutral strategies explored in this book. This approach to trading comes from years of experience from my trading team and my own endeavors. To become successful, its up to you to take a systematic approach to becoming a confident market player. However, you must be willing to spend the time and energy it takes to study the markets if you want to learn how to trade successfully. In late October of 1997, the Dow Jones Industrial Average dropped 554 points or 7 percent. By most peoples standards, this constitutes a mini-crash. It was not as severe as the 1987 crash when there was a 22 percent drop, but it definitely shook up the markets. Throughout the day of the mini-crash, I talked with a number of traders and investors to discuss our views on this market decline. At many brokerage firms, clients were being forced to meet margin calls as their positions declined. Eventually, there were more sell orders than the markets could bear and trading closed early at the New York Stock Exchange. Compared to the millions of individuals who lost a great deal of money, traders who were using the strategies included in this book fared much better. They knew how to hedge their positions and either made money or at least minimized the losses to their accounts. This approach to trading offers protection and enables players to keep playing the game. To get started, find one market you like and get to know it very well. Find out how many shares or contracts are traded. What is the tick value? What are the support and resistance levels? What are the strike prices of the available options? How many months of options should be analyzed? Is this a volatile market? Does it have high liquidity? Do you have enough capital to play this market? Once you determine the right market for you, focus your efforts on evaluating which strategies best take advantage of this markets unique characteristics. This can be accomplished by paying close attention to market movement trends. For example, stock shares tend to go up in price over the long run. This means that in many cases I take a bullish bias over the long run in top stocks. Since many futures markets go sideways, I like to apply the appropriate range-bound strategies. By concentrating your attention on one market, you will become familiar with that markets personality. When change occurs, this familiarity will enable you to profit the most from the change. Practice these strategies by paper trading your market until you get the hang of it. I recommend three to six months of paper trading before investing a dime. For every great trade you missed, there will be mistakes that could have wiped out your whole account. Take small steps up the ladder of experience and youll learn what you need to master along the way. In addition, you need to determine what influences a specific market. Markets have spheres of influences. You need to get to know what internal and external forces drive your chosen market. For example, the bond market affects the S&Ps. What affects Dell, Intel, Microsoft, gold, and silver? All of this research combines to increase your overall knowledge of trading, which will help to make you a more successful trader in the years to come. During one of my two-day Optionetics seminars, I kept saying that very few traders and investors really know what is going on in the markets. The very next day, as if by magic, the following article appeared in USA Today. I promptly revealed it to the students at my seminar. Garbagemen Good at Predicting Economy In December of 1994, the economists sent a questionnaire to four chairmen of multinational companies, former finance ministers from four countries, four Oxford University students, and four garbagemen. They were asked to predict average economic prospects including world economic growth, inflation, the price of oil, and the pounds exchange rate against the dollar in the ten years following 1994. The economists said the garbagemen and company bosses tied for first with the predictions. The finance ministers came in last. So, let me get this straight. Politicians supposedly run entire countries, right? Then how come their own finance ministers cannot beat garbagemen at predicting economic prospects? This only emphasizes the point that the markets are great equalizers of education. It is irrelevant whether you have an MBA or a PhD or are a rocket scientist. High school dropouts can do just as well at trading, if not better, if they are disciplined and have the skills and knowledge to succeed. It is actually easier for me to train individuals with very little experience or none whatsoever than those who have years of experience. This is due to the fact that many experienced traders have developed bad habits that need to be broken. Approximately 99 percent of the time that I trade delta neutral, I am able to manage my risk on entering the trade and monitor it each day as the market moves. Delta neutral trading is a scientific system that significantly reduces your stress level. It provides you with the means to limit your risk and make a consistent profit. It directs you to take advantage of market movement by making adjustments. By learning to trade using delta neutral strategies, traders have the opportunity to maximize profits by making consistent returns. OPTIONS-TRADING DISCIPLINE Proper money management and patience in options trading are the cornerstones to success. The key to this winning combination is discipline. Now, discipline is not something that we apply only during the hours of trading, opening it up like bottled water at the opening bell and storing it away at the closing. Discipline is a way of life, a method of thinking. It is, most of all, a serious approach. A consistent and methodical, or disciplined, system leads to profits in trading. On one hand, it means taking a quick, predefined loss because the first loss is always the best. On the other hand, discipline gives you the impenetrable strength to keep holding on to an options position when success is at hand or passing on the trade or an adjustment when you dont have a signal. It also entails doing all our preparatory work before market hours. It is getting ourselves ready and situated before the trade goes off so that, in a focused state, we can monitor market events as they unfold. Discipline can sometimes have a negative sound, but the way to freedom and prosperity is an organized, focused, and responsive process of trading. With that, and an arsenal of low-risk/high-profit options strategies, profits can indeed flow profusely. The consistent disciplined application of these strategies is essential to your success as a professional trader. Finally, as option traders, in order to improve in the area of discipline, we must identify, change, or rid ourselves of anything in our mental environment that doesnt contribute to the strictest execution of our well-planned trading approach. We need to stay focused on what we need to learn and do the work that is necessary. Your belief in what is possible will continue to evolve as a function of your propensity to adapt. On a cautionary note, avoid high commissions, brokers soliciting business, and software that promises or boasts impossible results. High turnaround fees can really eat into your profits. Remember, nothing beats your own ability to trade effectively. No one wants to take better care of your money than you do. CHOOSING THE OPTIMUM OPTION STRATEGY For the skilled investor, stock options can be a very powerful tool. Whether they are used alone or in combination with other options or stock, options offer the flexibility to address any number of unique investment goals and parameters. However, before the search for a suitable strategy can even begin, the investor needs a solid understanding of how option investments work. The options strategist is always faced with a variety of alternatives. To determine which one is best you must consider your investment goals, market outlook, and risk tolerance all of which are key in narrowing down the list of reasonable candidates. The same goals and predictions can also limit the choice of suitable strike prices and expiration dates. Each strategy and each contract has its own advantages and drawbacks. Forecasting the price of the underlying equity is a prime motive behind directional option strategies. Whether the goal is profit or protection, the market outlook certainly narrows the list of strategic alternatives. More often than not directional strategies require the investor to make at least three assessments about the future price of the stock. The first one is obviously direction itself. Based on our market analysis, we need to determine if we expect the price of the stock to rise, fall, or stay at the current level. The second judgment is about the size of the move. This will have a distinct bearing on the choice of strike prices. For some option strategies, it is not enough to decide on a direction. The magnitude of the projected price move may determine which strike prices are suitable candidates. For instance, when analyzing a call option with an out-of-the-money strike price, you will need to determine how high would the underlying stock have to rise to make the position profitable as well as how realistic this move would be based on your research. The third decision concerns the time frame in which the stock price forecast must take place. Options have a limited time span. If both the projected direction and size of the move come true, but only after the option expires, the option strategist still would not have achieved the intended goal. That is why timing is just as crucial in strategy selection as it is for everyday life. So, option strategists who are making a directional call must be right on three levels; the stock price must move in the right direction, by a sufficient amount, and by the expiration date. If the trader is wrong about any of the three projections, it could have an adverse impact on the success of the strategy. For some strategies, it is enough for XYZ to reach a certain level at some point before expiration, but the exact timing is less important. The consequences for being a bit off the mark are much more serious in other cases. There are some that succeed only if the stock price behaves correctly for the duration of the contract. A clear idea about where the underlying equity is likely to move and when, should improve the option strategists chances of success with selecting and implementing an appropriate directional strategy. Finally, even when two traders forecasts are exactly the same, different goals may dictate two very different approaches. For example, is the trade intended primarily to generate income or is it to protect an existing position in the same stock? Or is it a way to set a price objective for entering or exiting a stock position? The answers to these kinds of questions will guide the trader in ruling in some strategies and ruling out others when attempting to select the optimum options strategy. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |