You are here: Home

Introduction to Options Video Course

on 06/22/2011

At Options for Rookies Premium, I’m offering a video course for option rookies . Much of this course follows my book, The Rookie’s Guide to Options, and some is brand new material.

Currently, there is no extra charge for Gold Members. That means for the nominal fee of $37 per month you get all the features of Gold Membership, plus the course.

Note: I am still adding content, as it continues to expand. When the course is finished, it will be sold separately. Today, it’s available to Gold Members – at no extra cost. This is the type of course that sells for hundreds of dollars, and some charge thousands for far less quality content.

If you considered trying the Premium Membership, now is the time.

Here is the introduction to the course:

Introduction to Options. Part 00

Short Introduction to the series

993

Expiring Monthly. June 2011 issued published yesterday.



Table of Contents

Comments { 0 }

Answers to Options Quiz

on 06/21/2011

The quiz was posted yesterday

Apparently there was a miscommunication. For some of these questions, there were multiple correct answers.

1) True or False:

Trading iron condors is almost free money. Just set it and forget it

False. Set it and forget is likely to result in losses over time. The iron condor strategy can be profitable when positions are well managed because the key to success is being certain that large losses are prevented.

Glad to report that everyone answered correctly

2) You have $50,000 in your trading account. As a speculation, you bought 20 Jul 70 call options. The stock has not performed as you hoped, but it has been moving higher all week and today (expiration Friday) opened for trading @ $69.80. Which of the following are true:

a) You own these options and thus, cannot be assigned an exercise notice. Nothing bad can happen to you.

Not true. If these options finish in the money, your account will be assigned an exercise notice automatically. You will be forced to buy 2,000 shares, or $140,000 worth of stock. Your account is far too small, and a margin call will be issued. You will be forced to sell these shares at the opening Monday, regardless of price.

25% thought this to be true. Owning the options does limit risk, but when it comes to owning them at expiration – danger looms.

b) You must do your best to sell the calls before the market closes for the day – just in case the stock closes above $70 per share

True. If there is no bid and you cannot sell, and if the stock is priced barely above the strike price when the market closes, notify your broker immediately: DO NOT EXERCISE

.
25% chose this. I expected a higher total.

c) It’s a good idea to enter a limit order to sell the options now. Then forget all about them
Not true. See reply to a) above.

13% voted for this choice. It’s seldom a good idea to forget about positions. This automatic exercise rule can result in big problems, even for those who own options.

d) It’s a good idea to enter a limit order to sell the options now. Then lower the asking price later in the day – as often as necessary
True. This is sound policy.

35% recognized that this is a decent choice. It may not be best, but that depends on how much time you have to follow the position during the day.

e) It is a reasonable plan to go for a bonanza by not looking at the stock or option price all day – until well after the market closes. Maybe you’ll get lucky and the stock will close @$72 – or higher.

Not true. Sure, you can go for the bonanza, but you MUST be certain to sell the options before the market closes for trading. You cannot afford to exercise these calls.

I’m pleased to see only one vote for this.

3) Out of the money put options on equities (stocks and indexes) tend to trade with a significantly higher implied volatility than do the out of the money call options. Which of these statemens is true.

a) This has been true since put options were first listed for trading at the CBOE
False. This phenomenon first appeared after the market crash of October 1987.

One vote

b) This observation is known as volatility skew True
50% of the votes

c) This observation is known as option kurtosis Not true
One vote

d) This is unreasonable, and this perplexing pricing will end soon Not true
No votes

e) This is true because huge and sudden declines occur more often than huge and sudden rallies True
The other 50% of the votes

I believe everyone would have voted for both had it been possible.

4) You are very excited about the prospects for a specific stock. You expect it to rise by 40% (from $40 to above $55) within two months, three at the most. You have had this feeling about other stocks in the past, and your track record is so-so. Six times the stock moved lower, but 4 times the stock moved nicely higher (but not as high as you anticipated).

Which of the following represent sound trades? Which trade suits you best? Which is the worst, in your opinion?

a) Buy three-month calls. Strike price $55
Worst possible choice in my opinion. Stock unlikely to move far enough quickly enough

One vote

b) Buy three month calls, strike price $50
Unsound. Almost as bad as a) above.
One vote

c) Buy two-month calls. Strike price $40 Sound choice most of the time. Best for traders who have confidence in their opinions. Three month is a bit safer.
Two votes

c) Sell two month puts; strike price $40 Sound choice, but risky
Two votes

d) Sell three-month, 35/40 put spread Sound choice
34% of the votes

e) Buy front-month 40/45 call spread Not a good choice. Time frame is too short
10% of the votes

f) Buy three month, 40/45 call spread Sound choice
40% of the vote

Best trade had votes spread over the whole map, but d) and f) had the most votes.

Buying three-month 55 calls was voted the worst trade. If you must buy OTM calls, at least buy one that you believe will be in the money eventually.

Thanks for participating

992
Comments { 0 }

Options Mentors and their Promises

on 06/20/2011

Published in error and removed immediately.

I apologize for some of the content, and for now, it’s best to let it go at that.

Mark Wolfinger
June 20, 2011

Comments { 0 }

Mistake

on 06/20/2011

I apologize for the post that went out a few minutes ago.

I had intended it to go to trash, when it was published instead.

I removed the post from this site, but unfortunately it’s out there in RSS land

Comments { 4 }

Options quiz

on 06/20/2011

I haven’t run a quiz in a long time, so let’s try another.



For your convenience, the questions are repeated below.
However, you must click on the button to have your reply tallied

1) True or False:

    Trading iron condors is almost free money. Just set it and forget it

2) You have $50,000 in your trading account. As a speculation, you bought 20 Jul 70 call options. The stock has not performed as you hoped, but it has been moving higher all week and today (expiration Friday) opened for trading @ $69.80. Which of the following are true:

    a) You own these options and thus, cannot be assigned an exercise notice. Nothing bad can happen to you

    b) You must do your best to sell the calls before the market closes for the day – just in case the stock closes above $70 per share

    c) You should enter a limit order to sell the options now. Then forget all about them

    d) You should enter a limit order to sell the options now. Then lower the asking price later in the day – as often as necessary

    e) It is a reasonable plan to go for a bonanza by not looking at the stock or option price all day – until well after the market closes. Maybe you’ll get lucky and the stock will close @$72 – or higher.

3) Out of the money put options on equities (stocks and indexes) tend to trade with a significantly higher implied volatility than do the out of the money call options. Which of these statement is true.

    a) This has been true since put options were first listed for trading at the CBOE

    b) This observation is known as volatility skew

    c) This observation is known as option kurtosis

    d) This is unreasonable, and this perplexing pricing will end soon

    e) This is true because huge and sudden declines occur more often than huge and sudden rallies

4) You are very excited about the prospects for a specific stock. You expect it to rise by 40% (from $40 to above $55) within two months, three at the most. You have had this feeling about other stocks in the past, and your track record is so-so. Six times the stock moved lower, but 4 times the stock moved nicely higher (but not as high as you anticipated).

Which of the follow represent sound trades? Which trade suits you? Which is the worst, in your opinion?

    a) Buy three-month calls. Strike price $55

    b) Buy three month calls, strike price $50

    c) Buy two-month calls. Strike price $40

    c) Sell two month puts; strike price $40

    d) Sell three-month, 35/40 put spread

    e) Buy front-month 40/45 call spread

    f) Buy three month, 40/45 call spread

Answers tomorrow

991
Comments { 3 }

Position Adjustments are Essential

on 06/17/2011

Mark,

Let us take two traders (A and B) trading ~90 day index ICs (or credit spreads) with a preference to exit the market 20-30 days before expiration. These traders make exactly the same trades and have the same comfort level and same trading philosophy, except when it comes to making an adjustment:

Trader A always uses the same adjustment method: close all positions at the same time or close in stages.

Trader B sometimes closes his positions and sometimes he uses other adjustment methods depending on his analysis in each situation.

In the long run, and under all kinds of different market conditions, I think trader B will achieve better results (higher annualised returns). The question is how much better?

Obviously, I am not looking for precise figures here, just some kind of rough data/information/comments that could help me decide for myself, if it is worth it (for me) to spend the necessary time to “master” one or more of the available adjustment methods.

Thank you,
Dimitrios

Good question. However, the problem is not with ‘learning’ something new. Nor does it have anything to do with your ‘mastering’ anything special. We must look at ‘adjusting’ differently.

As to the final question, I believe that knowing how to ‘fix’ a good, but risky, position is a powerful earnings source. It remains important to exit trades that are not worth salvaging.

An Alternative Perspective

I often refer to ‘risk management’ as if it were separated from ‘regular’ trading. We enter into a trade as a first step, then when necessary, the original position is changed or adjusted.

Consider this perspective:

You own a blank portfolio – with no current positions. No risk. No possible reward.

Next, assume adjustment to that portfolio is made. Deciding that zero risk/zero reward is not what you want to own right now, you buy an iron condor. That trade adjusted (changed) the portfolio. You made a voluntary trade and added an acceptable level of both risk and reward potential.

    I’ve described adjustments as having one purpose: risk reduction. In this scenario, the risk of having no earnings potential was reduced.

Two weeks later, you make another portfolio adjustment by opening a new position. Perhaps it’s a butterfly spread this time. This is another voluntary portfolio adjustment.

Most traders think of an adjustment as involuntary. In other words, they prefer not to make that trade. That is not a good mindset, and only applies when the trader has waited far too long and now has no alternatives, other than exiting the trade. I suggest looking at an adjustment (as it is usually defined) as a voluntary trade. You want to make this trade because it reduces risk and transforms the current position into another that you want to own.

From this perspective, making a position adjustment is NO DIFFERENT from opening a new trade.

When the adjustment is complete, you own a position that you want to own. Isn’t that exactly how you feel when making a new trade?

Thus, you do not have to ‘master’ anything. You only have to know when an adjustment is needed and recognize when a new trade is going to give you an improved position. I believe those are reasonable goals for any trader. Think of ‘adjusting’ a position as working on a partially painted canvas, whereas adjusting a portfolio by adding a new trade is working on a blank canvas.

Just as you make an effort to learn more details about trading your chosen strategies, so too will you learn a few possibilities for ‘fixing’ a troubled trade. There’s no need to be any more of an expert in making these trades than there is in making the original iron condor trade. It may be more fun to open a clean trade, but you will discover that the money is made by improving your positions. I do not believe there is any special edge in initiating iron condors. The edge has to come from good decision-making, and trade execution skills.

As you understand more about options, you gain a better intuitive feeling (but do NOT ignore the risk graphs or the greeks) for which trade type provides needed (even if not the absolute best) risk-reducing, profit-enhancing protection. It is worth the effort.

If you believe than an adjustment is another profit-making opportunity and not a nuisance that locks in a loss, then the whole idea of adjusting becomes so much less frightening and burdensome. It’s just an ordinary trade using options = to do what options do best: reduce risk and (if you elect not to exit) increase the chances of owning a winning trade(defined as making money from the time the adjustment is made).

990
Comments { 9 }

Trader Mindset Series: IV. Adjust or Exit?

on 06/16/2011

Locking in a loss

We all know that taking losses is necessary and we all prefer not to do that. However, one of the most costly mistakes that traders make is refusing to take a loss when

  • They no longer like the position
  • The trade has become too risky to hold
  • The trader’s maximum loss for the trade has been reached

Consider these scenarios:

    Exit or Adjust

    Scenario a) A trader is managing a position that is moving against her. Let’s assume the position is a put credit spread and her underlying asset is moving lower. Not at the stage of capitulation, she makes a well-judged adjustment. Next, the underlying moves lower aggressively, and the risk is more than our trader is willing to accept. The adjustment has helped, but not enough. The position is closed. The loss is accepted as the cost of doing business and she is already looking for a good opportunity for her next trade.

    Scenario b) Some months later the same trader finds herself in a similar situation, but this time she is short a 10-point call spread (sold, collecting $200) that has become too risky to hold.

    She has two choices: The first is to pay $400, take the loss and eliminate all risk by closing the position.

    Alternatively, she sees a decent adjustment. More than that, it looks to be a good trade. It eliminates the possibility of a large loss, although money is still at risk. This adjustment requires an outlay of $300 to execute the trade. That’s uncomfortable because that’s more cash than she received when selling the call spread.

    Our trader thinks about this and decides that making the trade would be foolish because once the $300 is paid, she would own the position at a $100 debit, still have some risk, and would lose money (all options expire worthless) if the market moved lower. That could easily result in all options expiring worthless.

    The position is closed (by paying $400) and the adjustment idea is discarded.

True Story

This scenario occurs in the real trading world. I’ve received several comments/questions on this topic from both readers of this blog and Gold Members at Options for Rookies Premium.

It’s a realistic mindset because traders behave just as our trader did. Whenever an adjustment costs more than the original trade credit, it is abandoned. I hope to persuade you that this is a losing mindset by making some points that I have discussed previously in this blog.

But first a clarification: The discussion below assumes that the adjustment is good and needed. It assumes that the adjustment is not made with the sole purpose of avoiding an exit that locks in a loss. This is a very important point., Many traders adjust just to stay in the position. Do not depend on good luck to protect the assets in your trading account.

1) There is nothing wrong with exiting when you are uncomfortable with a trade. Thus, the decision to exit is always acceptable

2) When you have a choice between two reasonable alternatives, to find success over the long term, it’s important to make the trade that leaves you with the better position – but there are conditions

  • The final position must be one you want to own at the price paid
  • If the condition above is not satisfied, then choose the exit
  • The adjusted position must be within your comfort zone regarding risk and potential reward (from today into the future, not from the original trade price)

3) Why did our trader choose to buy back the original trade, paying $400 instead of making a good adjustment and paying $300? Answer: Because of a losing mindset. It is not uncommon for new traders to believe certain ‘rules’ with no idea how those rules originated.

There is nothing wrong with paying more for an adjustment than you collected for the original trade. Assuming a trade must be made for appropriate risk management, then the true decision is:

Would you prefer to buy the position sold originally at its current price? Or would you prefer to make the adjustment at its present cost? You cannot do both. It’s edit or adjust.

Repeating for emphasis: The original trade price must play no role in this decision. You have a position – at today’s price. Nothing can be done to change that. You must exit, adjust, or do the unthinkable, and take more risk than your account (and psyche) can handle.

Do not foolishly throw good money after bad trying to salvage junk. But do not be afraid to make a solid investment that improves your chances going forward.

989
Comments { 11 }

Learning to Trade Options when Employed Full Time

on 06/15/2011

Conversation with a Gold Member

Mark, If I may ask, how do you select your trades? The selection of the trade is so critical.

That statement is true. It is also a problem area for me as a teacher. I prefer not not use technical analysis. That means I seldom try to time a trade entry. I admit it – I do not know where the market is headed. Sure, I may lean a bit bullish or bearish on a trade, but I want to earn my profits by skillful management of an option position, rather than by correctly guessing in which direction a stock or the market will move.

If you believe you can predict direction well enough to prosper by doing that (I know you have been a long-term stockholder, and may have an excellent track record for stock picking. But timing is different), then continue. Use what you learn about options to trade positions that are better than owning stock: Better because they are more likely to produce profits, require less cash, allow you to limit losses, etc.

I don’t try to time the markets. I enter trades in a vacuum, trying to be market neutral. Right now, my general plan is to earn cash bu owning positions with positive time decay. That’s working very well now but will not always do so. There are no guaranteed profits. But the bottom line is that I leave the timing of trades to those who have expertise. However, what we can in the realm of timing is to adopt a strategy that feels right for today’s market. Covered calls are okay – but it is a quite bullish strategy (even though most people think it is a neutral strategy).

I am also trying to teach myself the basics of fundamental analysis and technical analysis. This can make you a much better trader. But do not believe it’s a quick study.

FA is generally used for longer term investing, and my stance is that you cannot expect to do better than the pros who do it for a living. And the evidence is there: these people cannot outperform the market averages. Thus, I believe it takes a special talent to earn money as a fundamentals trader. On the other hand, the Cramer idea (I am not a fan of his) of doing research every week on every stock you own cannot be a bad idea. I just don’t know how helpful it will be.

TA is better for the shorter-term trader (one week to couple of months), so it is likely to be of significant value in your options trading – if you have a talent for using it.
Some decades ago, there were the ‘nifty fifty stocks. Owning those worked until it didn’t. That idea crashed badly

I have been reading about this also. I bought 2 books for “dummies” on the subject, and will start these.

The one other site I am looking at is Investors Business Daily- they do fundamental analysis and technical analysis and keep track of the entire market with special attention to the top 50 stocks in the market. But they are not involved much with options (or that is my impression so far-but I do not subscribe to them)

General information is a good thing. Knowing about markets in general is helpful. If you have the time and patience, I love that you are learning as much as you can about all aspects of making this work for you. It’s a lot better than your old buy and hope strategy.

All of this would be easier if I had more time to spend but I have a busy job and a family, so my time is limited.
When we had the crash in 2008 we had our money in a Schwab “private client ” account where we were being advised. I don’t think the advice we were given was very good. Subsequently my husband and I took all our money out of that service, but managing it ourselves is a bit daunting-we are diversified in mutual funds, bonds, ETFs etc.

What I like about options, is that you can actually lower risk. Thanks again for your help!

.

Comments { 0 }
← Older posts
Newer posts →