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Hi Gitanshu,
Thanks for this really great post.
And remember gang:
"Good judgement comes from experience and experience comes from bad judgement"
Rgds.
Frans
At 14:15 23-10-00 -0400, you wrote:
>>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
>
>
>
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