Friday, January 15, 2010
Sunday, July 12, 2009
Reasoning Behind Spreads
Hello all,
I have been tracking your progressive on this long journey of "learning to trade options" via short updates from Bob. What I am observing (from afar) is that your meetings are being held back to the lowest common denominator of knowledge. I do not mean to be offensive in any way, but unlike the IBD meetings where the intent is to be able to discuss the market and evaluate some potential trades, I believe the Options Group would like to be able to actually learn how to trade options. That is an entirely different objective and requires some structure and meeting objectives in order to move ahead.
I suggest that you find a course, any course on trading options that you can all follow along as a discussion guide. You have to be able to at least get through the basics as a group or you will never go beyond rehashing what a "put" is every meeting.
That brings me to my title topic. Options were developed as a hedging device for stocks. Because we can also use options against indices, etc., we use the term "underlyings" with options. As options have evolved and grown in popularity, they have been used solely by themselves without owning a specific stock at all. That is where spreads came into play. The spread becomes a hedge using just options. This is very important because trading single options can be very risky. By using a combination of longs and shorts, calls and puts, we can define the risk to an acceptable level.
This can get very complicated. It is not simple. It is not something you learn at a weekend seminar. It is also not "Rocket Surgery" (a Bushism). Its' complexity comes from having so many variables that can effect your profitability. With stocks, they either go up, sideways or down. The key to options, is understanding how to take advantage of whatever the market gives you. The more you understand how the options instruments change with the market, the more prepared you are to act upon that advantage.
To gain this advantage, it helps a great deal to understand how each individual segment of the spread acts under different market conditions. As part of learning the basic mechanisms, I encourage you to disect each of the four instruments (long call, short call, long put, short put) using the TOS analyzer, to see how they react to market changes and what they contribute to your profits. Take notes on your observations and share them with the group. Once you have done this, you can move on to combining the individual segments into spreads and seeing how they behave as well.
The thing to remember is that options are simply "premium" for a risk. An option is made up of: the value of the underlying, volatility (perceived risk) and time exposure. That's it. You change any of these three and you change the premium. It is very easy to enter one the four instruments into TOS and then manipulate these three variables while observing the effects on the premium. This way you learn the "personality" of the instrument. You make your observations using the graph above and the "slice" lines below. The three Greeks you use are Delta for the value, Vega for the volatility, and Theta for the time. You can change any one or all of them.
You absolutely have to learn how the Greeks work, because later on you will manage your portfolio using the Greeks. Depending upon market conditions, you will want to add or subtract Delta, Theta or Vega by adding or closing different types of trades.
I have told Bob that if you get on a structured learning process, I would be happy to come in and help get over some of the rough spots.
Good luck on your journey,
Tom
I have been tracking your progressive on this long journey of "learning to trade options" via short updates from Bob. What I am observing (from afar) is that your meetings are being held back to the lowest common denominator of knowledge. I do not mean to be offensive in any way, but unlike the IBD meetings where the intent is to be able to discuss the market and evaluate some potential trades, I believe the Options Group would like to be able to actually learn how to trade options. That is an entirely different objective and requires some structure and meeting objectives in order to move ahead.
I suggest that you find a course, any course on trading options that you can all follow along as a discussion guide. You have to be able to at least get through the basics as a group or you will never go beyond rehashing what a "put" is every meeting.
That brings me to my title topic. Options were developed as a hedging device for stocks. Because we can also use options against indices, etc., we use the term "underlyings" with options. As options have evolved and grown in popularity, they have been used solely by themselves without owning a specific stock at all. That is where spreads came into play. The spread becomes a hedge using just options. This is very important because trading single options can be very risky. By using a combination of longs and shorts, calls and puts, we can define the risk to an acceptable level.
This can get very complicated. It is not simple. It is not something you learn at a weekend seminar. It is also not "Rocket Surgery" (a Bushism). Its' complexity comes from having so many variables that can effect your profitability. With stocks, they either go up, sideways or down. The key to options, is understanding how to take advantage of whatever the market gives you. The more you understand how the options instruments change with the market, the more prepared you are to act upon that advantage.
To gain this advantage, it helps a great deal to understand how each individual segment of the spread acts under different market conditions. As part of learning the basic mechanisms, I encourage you to disect each of the four instruments (long call, short call, long put, short put) using the TOS analyzer, to see how they react to market changes and what they contribute to your profits. Take notes on your observations and share them with the group. Once you have done this, you can move on to combining the individual segments into spreads and seeing how they behave as well.
The thing to remember is that options are simply "premium" for a risk. An option is made up of: the value of the underlying, volatility (perceived risk) and time exposure. That's it. You change any of these three and you change the premium. It is very easy to enter one the four instruments into TOS and then manipulate these three variables while observing the effects on the premium. This way you learn the "personality" of the instrument. You make your observations using the graph above and the "slice" lines below. The three Greeks you use are Delta for the value, Vega for the volatility, and Theta for the time. You can change any one or all of them.
You absolutely have to learn how the Greeks work, because later on you will manage your portfolio using the Greeks. Depending upon market conditions, you will want to add or subtract Delta, Theta or Vega by adding or closing different types of trades.
I have told Bob that if you get on a structured learning process, I would be happy to come in and help get over some of the rough spots.
Good luck on your journey,
Tom
Saturday, July 11, 2009
Candlesticks
At our July 8th meeting we touched briefly on candlestick charts and it was noted that at 9:00PM that very night there was to be an Options-University sponsored webinar on the subject. It was presentation by Steve Nison the guy who was primarily responsible for introducing the centuries old Japanese system to the WEST. There is a lot of good basic stuff on candlesticks in the 1.5 hour webinar. Just ignore the promo stuff for Steve's DVDs. Here is the link.
Tuesday, June 16, 2009
At our June 10th meeting I promised to send a report [“The Ten Laws of Day Trading” a 8-page PDF file] written by Peter Rezicek of shadowtrader.net (one of the Think or Swim companies). I think there are some very important concepts in the report no matter what you are trading (stocks or options) or what your time horizon is (Day, Swing, or Invest). You can get that report by going to http://www.shadowtrader.net/. Once at the website, enter your e-mail address to get the report as well as Peter Rezicek’s short, weekly, video concerning the market for the coming week that will be sent to your e-mail address every Sunday night.
If you have a Think or Swim account, you can listen/watch Peter Rezicek’s daily commentary on the markets during every day’s market hours. Here is the “path” once logged on:
“Support/Chat” (upper left to the right of “Account Info” on the TOS home page)/”Chat Room” tab/Shadow Trader/left click “Watch’ and “Listen” in the lower right hand corner.
If you have a Think or Swim account, you can listen/watch Peter Rezicek’s daily commentary on the markets during every day’s market hours. Here is the “path” once logged on:
“Support/Chat” (upper left to the right of “Account Info” on the TOS home page)/”Chat Room” tab/Shadow Trader/left click “Watch’ and “Listen” in the lower right hand corner.
Talyor asked that I send the first three chapters of the following excellent book on options: "Options Trading 101, from Theory to Application" by Bill Johnson of optionsatoz.com http://www.optionsatoz.com/ . Book is $19.79 at Amazon.com. The first three FREE chapters can be downloaded at:
http://www.optionsuniversity.com/Options101/Book/3FreeChapters.pdf (copy and paste if necessary)
Friday, June 5, 2009
A "Base" Lesson
Check out this interesting (and short) discussion about "Base Stages" in one IBDS's "Daily Stock Analysis" presentations. There are three stocks discussed, and the third (NFLX) concerns the "Base" discussion of interest. If I read it right, base count for all charts starts with the FIRST base to emerge as the result of the recent Bear Market correction.
Saturday, May 30, 2009
Not sure I should give anyone my thought as I have been mostly in cash but have taken some short plays through ETFs and options. Needless to say not good trading at this point. I did look up Schwabs ratings on the WFT and they gave it an "F" however not sure what the pricing was when you were looking at it. It has done well the past week or so and given what I see it should do well in the short run.
I don't understand what I am seeing in IBD. They say we are in an uptrend which I agree but the stocks in the "20" and "100" boxes mostly have D and E so how can that be good.
Those of you who bought the drillers after our last meeting should be looking good.
I still do not like the market. It has been up a low volume and poor leadership. It should be all about the fundamentals however people still are subscribing to "less bad is good" and seeing what they want to see. Saying all that, the trend overall is UP and as they say "the trend is your friend".
Conclusion: I don't like the market but the tend is your friend. There, I can't be wrong.
I don't understand what I am seeing in IBD. They say we are in an uptrend which I agree but the stocks in the "20" and "100" boxes mostly have D and E so how can that be good.
Those of you who bought the drillers after our last meeting should be looking good.
I still do not like the market. It has been up a low volume and poor leadership. It should be all about the fundamentals however people still are subscribing to "less bad is good" and seeing what they want to see. Saying all that, the trend overall is UP and as they say "the trend is your friend".
Conclusion: I don't like the market but the tend is your friend. There, I can't be wrong.
Monday, May 25, 2009
Trading Services
Ray:
I amswering your question in a new post rather than commenting on your post as did the Salmons.
No, I don't subscribe to any of the services you mentioned. As you know, I am a big fan of TOS (and related companies) and am considering subscribing to ShadowTraderPro Swing Trader, a daily newsletter service delivered by none other than thinkorswim's Chief Technical Strategist and ShadowTrader broadcast moderator, Peter Reznicek (the guy you can listen to (and watch) during the trading day at the ShadowTrader "Chat Room" at TOS. Check out http://shadowtrader.net for a full description of the $20/Mo newsletter as well as other free stuff. Finally, I get a free daily newsletter called "Market Plot" from another of TOS's companies "redoption." you can get it too at http://www.redoption.com/resources.php
I amswering your question in a new post rather than commenting on your post as did the Salmons.
No, I don't subscribe to any of the services you mentioned. As you know, I am a big fan of TOS (and related companies) and am considering subscribing to ShadowTraderPro Swing Trader, a daily newsletter service delivered by none other than thinkorswim's Chief Technical Strategist and ShadowTrader broadcast moderator, Peter Reznicek (the guy you can listen to (and watch) during the trading day at the ShadowTrader "Chat Room" at TOS. Check out http://shadowtrader.net for a full description of the $20/Mo newsletter as well as other free stuff. Finally, I get a free daily newsletter called "Market Plot" from another of TOS's companies "redoption." you can get it too at http://www.redoption.com/resources.php
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