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Hi Michael:
Before you jump into it, let me pour cold water first.
TRADING OPTIONS, WHETHER THEY ARE CALL, PUTS, OR LEAPS, IS VERY RISKY. YOU
MAY LOSE EVERY CENT YOU INVEST IN THEM.
Now that the warning is over, I'll outline what one should do to trade leaps.
First, you need some very rudimentary knowledge about trading options, esp
leaps. There are books you can buy for reference, through Trader Press or
some other companies suggested by various members.
There are also websites on leaps. Two of them are:
1. CBOE website: http://quote.cboe.com/QuoteTable.htm
2. Dreyfus options quote website:
http://www.tradepbs.com/cgi-bin/dbsclient?TYPE=F3&TAG=01QUOTEquote
Once you're fairly familiar with options and leaps in general, you need to
open an account with your broker. (For example, with my broker, TD
Waterhouse, if you don't open a US Margin account, I'm told you can't trade
US options.)
When you've established the account allowing you to trade US options, you
can start planning your own strategy. Note that you can't do margin
trading when you're strictly buying options. (Covered calls etc is another
matter and I don't know anything about those areas.) You have to decide
which particular leaps ptions series you're interested in trading.
This is my strategy. I'm sure you have better strategy than mine.
Nevertheless, here it is:
1. I need a friendly environment to trade calls. IT HAS TO BE A BULL MARKET.
2. I need to buy leaps of a very good, fundamentally-sound company, such
as: IBM, MSFT, INTC, MRK....
3. I need adequate marketing timing. (As noted in many posts of mine, I
don't have perfect timing.)
"Adequate" is enough for me. (See # 4.)
4. There's a winning strategy in ancient Chinese warfare (and I'm sure the
western one is very similar):
"Before one considers winning, one should allow for defeats." That's why
my strategy allows for
initial "bad" buy entries.
5. I therefore will not plunge every cent I have into the leaps. Let's say
I have $10,000 to invest in
MSFT leaps, I will divide it into 3 parts: about $3,500 each. (This is
how I define "money
management".)
6. On the first buy signal, based on adequate market timing (through
indicators such as moving average,
rsi, stochastic etc - however you define as "buy" conditions), I will buy
$3,500 worth of the leaps.
7. I will then average down - buy more as the stock, and therefore the
leaps, go lower. The drop in
price has to be fairly reasonable - a rough guideline will be a drop of
25% to 50% of the previous
purchase price of the leaps. Again, on the second purchase, I will buy
another $3,500 worth of
the leaps.
8. I will buy the 3rd and final time for further drop in leaps price, after
which I would have no money to
invest.
(9. In case, after my first purchase, the stock, and therefore the leaps,
go up, I will do nothing.
I will not pyramid up.)
10. After I've used up all my money, I'll sit back and relax, and wait for
the long-term outcome.
11. The long-term outcome is uncertain, but it would fall into one of these
categories:
- stock, therefore leaps, continue to go down: I lose every cent
- stock doesn't move much higher, and the leaps expire with decent loss
- stock goes up somewhat, and I break-even on the leaps
- stock goes quite high, and I will make at least double my money
- stock goes very high, and I make 3-5 times money
- stock goes EXTREMELY high, and I make more than 10 times money
(I may have omitted some categories...)
12. When do I get out when I've made money?
This is a very tough question, and I have no ABSOLUTE answer. In general,
I'm satisfied with at least
5 times the profit.
One other way is to do the reverse in averaging down buy. When the leaps
goes higher, I sell some.
And when it goes even higher, I sell some more...
13. One constant lesson I learn is I have been WAY TOO GREEDY. At times I
wasn't satisfied with 10 times
profit, and in the end I lost everything. This is where trading
discipline comes in. But even
after trading options for more than 6 years, my trading discipline is
still not very good. (Knowing
my mistake is one thing, but correcting the mistake is extremely
difficult. Human nature!)
I may have missed out some points, but that's the gist of what I've been
doing.
Good luck!
Wong
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At 01:52 PM 04/08/2000 -0500, Michael Ferguson wrote:
>Great idea. I have never purchased leaps. How is this done?
>
>
>Michael
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