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Re: Options education & trading



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Great post! Thank you for the insight from someone who walks the walk.
Pete
----- Original Message -----
From: Gitanshu Buch <onwingsofeagles@xxxxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Monday, October 23, 2000 1:15 PM
Subject: Options education & trading


> >wondering if you would be willing to give me some advise as to where to
get
> some good solid information and or education on Stock Options.
>
> Hopefully some of this will help. There is a lot of literature available,
> mostly for free, and that is sufficient for someone starting out.
Practising
> what one learns is essential to - in turn - relearn what one thought one
> learnt. Any single strategy, consistently applied across the multitude of
> stocks that one can trade these days - will teach one the subtleties of
each
> strategy. There are plenty of strategies and plenty of stocks and plenty
of
> market situations, so it is not going to be a question of whether one can
> trade options, but which ones, when and why.
>
> At the end, one needs to find out how a particular method or choice of
> instrument can make money / how much more or less as compared to the
trading
> of the stock by itself.
>
> A spreadsheet or a calculator will help, regardless of who invented it.
>
> Once needs to arrive at an understanding of how fast what moves, and how
> much, in the desired direction - at the light-tunnel end of it all.
>
> This is what I did, in sequence:
>
> a/ Attended a few CBOE seminars. The basic ones were/are free, the
advanced
> ones were $100. I attended multiple times either because I was still
> learning and had unanswered q'ns, or because I wanted to refresh the
> concepts or needed explanations to some issues that came up in my trading
> experiences relative to what the seminar instructors had expounded on. The
> most consistent input came from the person formally known as The Doctor -
a
> fellow listmember and ex-CBOE VP. The Options Industry Council has free
> literature which also has an educational bent.
>
> The www.cboe.com website has an exhaustive Education section. I would
start
> there.
>
> Follow-up work included
> - trading the concepts learnt, and comparing real life experiences with
> classroom notes.
> - ordering every free video & understanding every strategy in the free
> videos released by any exchange (eg one gets a bunch from CBOE and CBOT).
> - reading up on the strategy notes at each exchange's website, or that of
> the Options Industry Council.
> - CBOE also has a free CD-ROM/downloadable program that gets you the
> concepts published in the books referenced below.
>
> b/ Read up & digested every word in 2 books:
> - Option Volatility & Pricing - Sheldon Natenberg --> core book.
> - Options as a Strategic Investment - Larry MacMillan --> ancillary book.
>
> c/ Read up on all the Lessons & strategy updates published by Robert
Pisani
> and later Len Yates at www.tradingmarkets.com - the site has everything
> archived is commercial but this is NOT an advertisement.
>
> d/ Made spreadsheets that created "pictures" of what an option position
does
> to the P&L. Played with what-if scenarios of changing underlying price,
> keeping every other variable constant, and then changing each variable
> (mostly volatility & interest rates) with the same & different underlying
> prices. Memorized each strategy-picture combination.
>
> Traded to build those pictures which met my risk/reward conditions.
>
> e/ Kept exhaustive notes on each trade taken, regardless of whether I
> understood what I was doing or not (eg - wrote down the Vega & the Theta
> numbers even though, at one time, I didn't understand why they mattered to
> my style of trading).
>
> Revisiting these notes before & after a seminar, or during a vacation
> basically helped me understand what/when/where/why/how my p&l got
impacted.
>
> f/ Cumulatively, I am still learning - as markets change, new opportunity
> opens up to use some strategy filed away somewhere - as my account value
> changes, I get an understanding of my own appetite for risk / reward per
new
> strategy trade taken.
>
> Its not anything new under the sun.
>
> I guess the above tells you what you wanted to know re the where to go and
> what to look for.
>
> The understanding of strategies gets better as the trading account gets
> larger - and surprisingly, this aspect is never addressed in any
educational
> material. A lot of the lower-risk strategies are capital-intensive.
>
> One tends to forget that lowered risk - usually - brings lowered rewards;
> and yet options are often viewed as a proxy for a margin account on
steroids
> so automatically builds in expectations of low-risk high-reward trading
> outcomes.
>
> The latter is more a function of the trader and less of the instrument
> employed.
>
> Second fallacy is treating lowered capital outlays as lowered risk.
>
> Eg - "I'm only committing $400 to buy this call, so my risk is only $400
in
> my $25,000 account".
>
> True, the risk is "only $400" + $78 commissions.
>
> You just DEFINED the risk, the risk of losing $478 remained the same as if
> you had invested the entire $25,000 on that trade.
>
> This low-risk blah blah tends to create the psychology that "it is ok to
> lose $478", how many consecutive $478's will one's psychology take before
it
> realizes that low risk or not, the loss was the loss, and cumulated over
10
> trades, took away 20% of the account, etc...
>
> Those strategies that can be executed with lower capital outlays need to
> have a large element of directional accuracy and outsized directional
moves
> to be meaningfully profitable or they have a lower probability of
consistent
> profitability (or they don't make sense trading in a small sized $25,000
> retail brokerage account charging $75 round turn per trade).
>
> If one believes one has the ability to predict, with reasonable
consistency,
> the direction of the stock/index, but one doesn't have a lot of money to
> trade with, it is best to restrict one's learning & implementation to long
> calls, long puts, what volatility is and what it does to that call/put,
what
> bull spreads & bear spreads are and how they can be used in place of long
> calls/long puts.
>
> Trending or trading range, one has to be good at that basic craft that
tells
> one to change stripes.
>
> Options can become the proxy for being long short with defined loss
> protection.
>
> The weakness?
>
> One is sometimes better off just trading the underlying and forgetting
about
> the leverage AND the defined risk if one cannot understand how volatility
> made the call shrink in value EVEN THOUGH the direction was right and the
> stock went up weeks before its options expired.
>
> Hence it is necessary to understand the role of volatility in an options'
> pricing mechanism.
>
> The combined understanding of volatility + leverage is a process that
takes
> time & experience. Most of everything else follows rather rapidly.
>
> Over time, I came to a few conclusions:
>
> - I don't need indicators to trade options. I found increasingly that I
> could get by on price charts, a couple moving averages, maybe an ADX here
&
> there, and an understanding of how options impacted my P&L.
>
> What a relief, and what a blasphemous statement to make on this list....
all
> of the above functionality is possible in any homegrown spreadsheet ! But
I
> digress, and I have to admit, once an indicatoritis junkie, always a
junkie.
>
> - One can be directional & make money, or have non-directional positions &
> still make money. It is a question of how fast & how much, not a question
of
> whether or not. This makes it a game of managing expectations relative to
> one's account size and relative to a market's intention & ability to move
> within those expectations.
>
> - There is a time to be directional, and a time to be non-directional. IT
IS
> OKAY TO BE DIRECTIONAL even though it is sometimes less stressful being
> non-directional.
>
> - Not everything in the books gives an answer for current market
conditions,
> because the sequence the market followed to get here is not necessarily
the
> same sequence one gets in the book's chapters or layout. The trick is in
> figuring out what chapter to skip to in order to understand the current
> market, and then which chapter to skip back to in order to understand the
> pre-requisites of the strategy this chapter specifies.
>
> - There are. almost always, three, four or more ways to trade the same
> setup. Confusion over understanding which one choice to use sometimes
> results in a passed up trade. However, each trade has its own spicy
> implications concurrently and down the road so it is well worth one's
while
> just taking the one choice that one most understands, and paper-trading
the
> competing choices so that one learns.
>
> - Towards the lower account capitalization extremes, the choice of
> instrument doesn't matter (leveraged or not) - and has the same dramatic
> implications of being "blown out" as any other instrument or system. If
one
> is going to get blown out anyway, why not get blown slowly by trading the
> slower moving underlying stock. The longer the torture, the greater the
> pleasure of the self-examination, and the greater the probability of one's
> ability to regroup, research, and recover.
>
> In this feature, trading "is" a business, because the more
undercapitalized
> the business, the faster it folds - regardless of the quality of the
product
> (your indicator or your choice of options) or of the manager running it
(the
> person calling/clicking in the trade).
>
> Gitanshu
>
>