Tag Archives | options education

Advice for the new options trader

I ‘borrowed’ (and modified) the following question from the EliteTrader Forum.

I have been studying, paper trading, and real trading – using mixed options strategies with mixed results. I mainly sold call & put spreads and did ok – until I got hammered on one trade. I’ve tried weekly & monthly expiration because I was attracted to these trades and their high probability of profit.

I have a $5k account and pay $1.50/contract flat rate commissions. At the moment, I am being lured into iron condors.

I am not dependent on my account but I want to grow it. I prefer strategies that require low monitoring/maintenance, but I am open to suggestions. What strategies should I try to incorporate and why?

Good news for this trader

This rookie trader is seeking advice, has experimented with several trade ideas, has a good attitude (does not expect instant riches), and incurred a loss from which he has learned a lesson. He appears to be patient and is seeking new ideas to consider.

This person has a nice edge: He has a flat rate commission per contract. That allows him to trade small size (yes, even one-lots) without having to be concerned that the ‘per ticket’ charge will consume too much of any profit. This was an intelligent item to negotiate and I strongly recommend this idea for all traders who trade small size. The savings can be significant – if you can get them.

The not so good part of the story

He is being ‘lured’ into a new strategy, but he should only adopt this play if he feels comfortable using it. In truth, it’s merely a combination of the strategies he has already been using – and in my opinion, anyone who understands the risks associated with selling vertical spreads is ready to consider trading iron condors.

The other problem is the size of the trading account. I understand that brokers allow customers to trade with even less capital, but it is a difficult task. It is simply too easy to lose the entire account when it is small.

Advice

As a young person with a job, he is in position to make a deposit into this account every time he receives a paycheck. That’s an outstanding method for increasing wealth over time. However, with this advantage comes the responsibility of carefully managing risk.

Learning to do this well takes time. The best recommendation I have is to be very careful with trade size because that is the simplest and most efficient method for managing risk for any trader. Smaller is better. Less risk and less profit potential is better – especially when the trader is first getting started. There is plenty of time to increase size as experience and confidence grow.

Patience is necessary because some strategies (such as selling credit spreads) may take some time to perform as hoped. [It’s true that selling a put spread can become very profitable quickly when the stock rises, but in a neutral market, iron condors require patience and good risk management.] Experience does not come quickly.

I also offer this advice for our rookie trader:

  • Rapid time decay may look great on paper, but (as you already learned) it comes with explosive negative gamma, making these trades riskier than they appear
  • Longer-term options come with higher premium and more protection against unwanted market moves. They also lose time value more slowly
    • Trading involves trade-offs. Less risk requires accepting a smaller profit target.
    • Your problem is to find the trade-off that feels ‘just’ right.’ Not a simple task – but it gets easier with experience
  • Choosing a good strategy is important. You want to feel that you understand how to use it effectively
  • However, risk management is more important and will have the greatest effect on your overall performance
  • Which strategies?

    The list is long. Options are very versatile and provide many alternatives. If you are comfortable with credit spreads, they make an excellent choice because losses are limited, margin requirement is small – allowing you to diversify, and they are easy to understand.

    Then there is something you may not yet recognize: Selling the put spread is equivalent to the very conservative collar strategy. More than that, selling put spreads is the same as buying call spreads (same stock, strike, and expiration date), and selling call spreads is the same as buying put spreads (same stock, strike, and expiration date).

    That means you are already using a much wider variety of strategies than you realize.

    I believe you are on the right track. Don’t get greedy. Increase position size one contract at a time, and don’t do that too frequently. Keep asking questions and don’t accept all replies as ‘correct.’ Use your own judgment.

    Excellent reviews for first live discussion session at Options for Rookies Premium. Become a Gold Member and get invited to future sessions
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    Trading Options: An Investment Opportunity or a Career

    Trading is similar to any other job or hobby

    You cannot wake up one morning, decide to become a trader, open an account, and begin trading. That is you cannot expect to earn money by taking that route.
    Trading requires skills and knowledge. These are not learned overnight. And the truth is that some people can never develop the necessary skills. They may be successful investors, but trading is different.

    For clarification:

    By the definitions used in this post, an investor buys an asset and plans to hold for an unspecified time. The investor’s expectation is that the asset’s value will increase over time, allowing the investment to be sold at a profit.

    On the other hand, a trader buys (or sells short) an asset with no long-term plans.Traders tend to hold positions for as little as a few seconds to as long as a day, and seldom own positions overnight. The same expectation is in play: closing the position and collecting a profit.

    An option trader is a mixed breed. While we don’t own positions for several years (options don’t live that long), there is also less of an immediacy to exit. I have no statistics, but when I talk about an option trader, I am referring to someone who opens a position with the intention of earning a profit when the market moves (option owner), or time passes (option seller). Thus, the holding period is not known in advance (except for those who always hold until expiration arrives). To me an option trader has a position that takes several days to a few months to bear fruit. Someone who buys LEAPS* options and who plans to hold for a year or two is an investor, not an option trader.

    *Long term Equity AnticiPation Security. An option with a longer lifetime.

    To many people, the trader’s job sounds easy. In fact, not so many years ago (1990s), brokers were advertising how easy it was to open a trading account and become wealthy. Anyone remember those E*Trade ads? Even though most of those day trader wannabes faded into the sunset, people believe that being a winning trader is not too difficult. For that reason, new traders tend to be overconfident.

    With that overconfidence comes a sense of bravado, risk management is ignored, and traders blow up their accounts before they learn whether they have what it takes.

    Trading is difficult. It requires a certain skill-set, knowledge and the ability to avoid panic.

    Traders do not have to be the best, however they must be substantially better than average. Why? Because the average trader loses his/her stake and leaves the business.

    Trading is a serious business, and not a game.

    Options Education

    If you want to learn about options with the intention of using them to make money – or to reduce the risk of holding other investments – I can help with the education portion of becoming an option trader.

    I can help guide you toward understanding what is needed, such as patience, discipline, controlling your emotions – and especially fear and greed.

    Developing skills often requires a good trade coach or mentor

    Options are unlike anything you ever traded previously. They can be used to hedge (reduce the risk of owning) other assets. They can be bought or sold as a bet on market movement (or lack thereof). If you are unfamiliar with options, there are two major differences between options and other assets:

    • Options have a limited lifetime, and at some point they expire and cease to exist. Options are known as wasting assets.
    • Options are used to measure and manage risk. Too few people understand that aspect of options

    Regarding using options as a hedge: The truth is that options were designed as risk-reducing tools, and option buyers own insurance policies. Risk is transferred to the option sellers. Investors everywhere should (ok, that’s my opinion) be protecting their assets by using options. Too few do that, and suffer when the market undergoes one of its periodic tumbles.

    Character traits that make you a better option trader

    a) Be interested in paying attention to details

    b) Be willing to take time to understand options, allowing you to recognize how what is happening in the marketplace affects the value of the options you bought/sold (or plan to buy/sell)

    c) Be disciplined

    d) Control your emotions. This is very difficult for some personality types.

    e) Willingness to devote time to practice

    f) Having the patience to defer trading with real money until you are ready

    g) ***Understanding that paying attention to and managing risk is necessary for success. It is not just something that helps a little. You cannot succeed (for long) without recognizing the importance of risk management. Do not allow losses to grow to an unacceptable level.; Be willing to accept a loss. Recognize that every trade cannot be a winning trade. Be realistic. Your ego is not involved with the trade, but your financial future is.

    Bottom line: You can succeed, but there are no guarantees. Trading is not for everyone. Do what’s necessary and the chances are excellent that you can make money as a trader. How much money? That depends on the size on your bankroll and your trading skills

    One of my favorite quotes by Dr. Brett Steenbarger (trader, trading coach, psychologist, former blogger) was in response to my question:

    “Brett, do you think it’s important that beginners learn to manage risk right away, or is that something they can postpone until they have some experience and a better understanding of how options work in the real world?”

    He replied: “They had better learn to manage risk right away, or else they are likely to have a very short trading career.”

     

     

    Good decisions

    Trading is all about making good decisions. We look at potential risk (maximum loss), potential profits, probabilities of success and make our trade decisions.  Sometimes the markets behave (move as you hope) and at other time they don't.  Just how badly they misbehave determines your financial results. 

    Winning traders do not idly stand by and watch their money disappear when things don't go their way. Traders are active in the trading arena.  They frequently exit losing trades, waiting for a better set of circumstances.  They also protect their assets by hedging, adjusting, and reducing position size.  In short. they learn to take defensive actions to minimize risk – when necessary.

    Please (I mean it: please) do not adjust positions every time the market moves one percent. Sure those appear to be good-sized moves and they will affect the probability that your current portfolio is or isn't going to be profitable.  But, there are times to adjust. Just as waiting too long is not a good way to manage risk, so too, adjusting too quickly in ineffective .

    That's one reason for making a trading plan.  You will know, in advance when the position reaches, or approaches, the danger zone for you and your risk tolerance.  At or near that zone is the time to make an adjustment.

    Over-adjusting is not going to work.  It's expensive, it's overkill.  If you cannot tolerate any risk – then option trading is not for you.  If your risk tolerance is very low, that's okay.  Find a strategy that offers that very low risk (and the low-profit potential) that goes with it.  But if you adjust (out of fear) every time the market makes a small move, you will have a lot of trouble.

    Advice:  Open that paper-trading account, open some positions, believe it's real money and see just how frightened you get.  Adjust when you believe it's necessary.  Keep careful records and determine whether you can be consistently profitable.  This takes time.  Be patient.

     

    Bottom Line

    When you understand the principles behind trading, you have the ability to think clearly and make good trade decisions.  In turn, that increases your chances of having a long and successful trading career.  There are people whoI can help you make better trade decisions.

    Many serious-minded traders in training learn to do whatever is necessary to succeed.  A larger number are anxious to begin, skip both the education and practice sessions, and expect to make money.   It's not going to happen.

    I can teach you many things.  However, you must know who you are.  Can you control your emotions, or do you panic easily? Can you make difficult decisions in stressful situations?. 

    Do you refuse to take a loss and plan to hold all trades until they turn profitable?  If that is your mindset, trading is going to be a very difficult undertaking.

    If you get greedy or become easily frightened, you must learn to overcome those habits to become a successful trader.

    939
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    Options Education

    As launch time (April 1, 2011) approaches for my new education site: Options for Rookies Premium, I want to use today’s blog post to tell you why readers of this blog would consider joining:

    What’s in it for you

    Those of you who know me from this blog recognize that I bring passion to the options education business. I care about you and your options-related problems.

    For me, this new venture is not only about earning an income for my efforts.

    This gig is about providing an outstanding product at an extremely attractive price. A full year Gold Membership costs less than most mentors charge for a single one or two hour session.

    For me, Options for Rookies Premium represents an opportunity to become personally acquainted with a wider audience of traders who want to learn to use options. There are solid reasons why understanding how to use options is important for anyone’s financial future.

    But right now, I’m telling you why Options for Rookies Premium represents an excellent value for you

    • This is an interactive education, with live meetings (on video if you cannot attend) at which you control the agenda
    • I want my eagerness to teach to rub off, and make you eager to learn
    • Do you want answers to specific questions? Just ask
    • Would you like to have a group discussion on a given topic? We do that also
    • Have a topic to suggest for a spontaneous seminar? If the other members in attendance like the idea, you get your seminar
    • I’m making myself available to you, as part of a group. You gain access to an experienced options trader and teacher. I am someone who wants you to understand how options work. Those members who get involved in the discussions stand to gin the most
    • To begin, there will be four one-hour sessions per month
    • We’ll also follow a trade together. Via blog posts, video, or live meetings, I’ll explain my thoughts at each stage of the trade – from entry to exit. You get to see how decisions are made – and that’s a learning experience difficult to find (without paying big bucks). I’ll consider alternatives for each trade. Deciding when to exit is also part of the experience.

      Please keep in mind that conservative and aggressive traders have different points of view, and I’ll fit that into the discussion whenever possible. Some decisions will be too conservative for you, while others are too aggressive. When you recognize that, you’ve come along way towards defining your own comfort zone.

    • Members are invited to suggest a trade to follow and/or to contribute to all discussions.
    • There’s a Gold Member’s blog
    • I’m preparing video courses (extra cost) that work for those who prefer the more traditional learning experience.

    The cost?

    Gold Membership is $37/month. With a 30-day money back guarantee.
    This is an incredible value.

    Join as a Gold Member and become part of the group.

    ***

    March 2011 issue of Expiring Monthly will be published later today. If you are not already a subscriber, now is a great time to begin a subscription.

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    ITM Calls as a Stock Substitute

    I found this series of questions to be quite valuable. Here we have a relatively new options trader who finds an excellent method for reducing risk, but who gets caught up in a mistake that makes him question his methods.

    Mark,

    I’ve been using DITM options for swing trades, while utilizing the leverage to potentially increase the return of buying stock outright.

    Plus much less downside risk, unless you decide to buy extra options with the cash not used to buy stock. To be clear, I’m hoping that you do not decide to buy 10 calls, paying $8 each, Instead of $100 shares at $80/share. That’s a very bad idea. You must determine your correct position size by the number of shares you would have bought, and buy only one call for each of those 100 shares. Careful position sizing is essential to risk management.

    I usually pick the first strike showing a 1.00 delta. My question is whether this is actually a good risk to return strategy based on the changing delta.

    You adopted an excellent strategy, but your focus seems to be misguided.

    100 delta options are too far in the money – unless it’s expiration week. The major benefit of using this trading method (buying calls instead of stocks) is to gain a large amount of downside protection. As you know, a market tumble can be quite costly for stockholders.

    If you chose ‘high delta’ options instead of 100 delta options, you would gain that protection at a very modest cost. I urge you to consider the idea of paying a few dimes over parity for a call option that has a 75-85 delta instead of paying closer to parity for that 100 delta option. This is a personal decision and if you refuse to pay that time premium for protection, so be it.

    Example

    With the stock trading at $76, don’t buy the 65 calls (price = $11.20). Instead, buy the 70 calls (price $6.50). That extra $30 reduces the potential loss. Consider it to be an insurance policy.

    Next, I understand neither your reference to changing delta nor “risk to return strategy”.

    1) The risk to return is outstanding. You cut the dollars at risk from a gigantic number (when owning stock) to a much smaller number (by owning a call option). Surely you understand that.

    2) Changing delta? If you are unfortunate enough to see the stock decline by enough for the option delta to become < 100, that's GOOD for you. You seem to believe it's costing money. All it means is that you would lose LESS money per point of decline that you would lose if owning stock. I have one question for you: If you are a swing trader, why would be holding a long position in this stock when it declines by so much? That is not how swing traders operate. They are quick to cut losses. Remember, until the stock falls enough to cut delta, you lose $100 per point. 'Changing delta' doesn't mean much in your scenario because 100 delta options don't change delta very quickly.

    Say I pay $10 for a call with a 1.00 delta, and based on this, expect about a 10% move in option price for a $1 stock move (give or take some). The stocks drops. At this point the option price and delta will also drop,
    which could very easily cause the percentage option loss per dollar to go up based on higher volatility.
    .

    You are off on several wrong paths here, and that’s the reason for posting this discussion. This is a good learning opportunity for rookie option traders:

    a) You should expect the ‘give or take’ to be essentially zero for a 100 delta option

    b) You are thinking in percentages, and that is confusing you. As a swing trader, concentrate on what you are doing. You are buying (or selling short) stocks, looking to make a few dollars per share. Using call options changes nothing in your basic plan – except that it reduces risk. Concentrate on dollars and forget those percentages.

    c) You do NOT KNOW that the option delta will be less than 100 when the stock declines by one point. You did say these are deep in the money options.

    d) If there is a change in implied volatility, you WILL NEVER lose ore than $1 per point in the price of an option when the stock declines. Why? You own the option. You own the vega. You BENEFIT when the implied volatility increases. Thus, any losses would be reduce by that change in volatility. Couple that with your anticipation that the delta becomes less than 100 and you benefit again by losing less than $100 per point decline (in the sock price).

    Here’s where you miss the big picture: If the volatility increase is large enough – due to a general market scare – you can MAKE money on the decline when oping calls! Did you know that? Get out your option calculator and see what happens to the value of a call with a 70 strike price when implied volatility goes from 30 to 60 and the stock declines from 75 to 70. Assume options have 30 days before they expire. [Your calls would lose less than $1 in value. If they were longer-term options, they would increase in value]

    Should the stock move higher, the volatility may decrease and the delta is maxed out at 1.00. Thus, my option price increases, thereby lowering my percentage gain.

    No. Delta may be maxed at 100, but so is the delta of the stock. The long call and the long stock move in tandem. The percentage return is totally unimportant – and in fact, it does snot change. You paid $10, so every one point gain is another 10% return on your investment. Plus, your return is far better than that of the stockholder. I’ll say it again. Forget those percentages.

    So I’m wondering if this approach actually causes a disadvantage as the reward potential for say a $2 increase may be lower than the risk potential of a $2 drop because the percentage gain decreases for every dollar going up while increasing for every dollar going down. So I may make 18% on a $2 upside but in exchange for a 30% drop for a $2 drop … again give or take.

    No. You illustrated why your idea is good. The bad things you found in the strategy are imaginary. They are contrary to fact. You earn as much on the upside (you may earn a little less if you take my advice to buy options with a small amount of time premium). To compensate, you have an excellent chance to lose less than $1 per one point drop in the stock price.

    Sit down. Think about this carefully.

    One additional point: These DITM calls don’t do the job for stocks that pay decent dividends because you may have to exercsie for the dividend to prevent losing money.

    925
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    My Philosophy on Options Education

    Education: An activity that imparts knowledge or skill.

    When I work with individual investors or write blog posts and books, my objective is for the reader to learn something he/she does not already know.  That includes providing enough details that the clouds disappear and the reader gains a better understanding of the topic under discussion.  

    Careful and detailed explanations take time to explain.  If you require instant gratification and the ability to attend one webinar or lesson and then immediately begin trading, I cannot help you.

    Details?  What does that mean? I stress the details that help you reach a better understanding of the lesson material.   Unless the topic is risk management (and that's a big topic) there is no reason to bother with details of events that are extremely unlikely to occur.  My job is for you to come away from a lesson with something of value for your trading career.  And that's true for the trader who devotes only two hours per month to his/her investments as well as the full time trader.

    There are trading tidbits that you will accumulate and points of view that you, the trader, will develop over the years.  Rather than wait for traders to slowly gather insights on certain more advanced topics, I prefer to see that you get an inkling of the importance of certain features of options – even when it may be soon soon for some students. 

    One example is the idea that two very different-looking positions can be equivalent, i.e., they produce identical profits and losses under all market scenarios. Most beginners don't get introduced to that concept until they are well into their trading.  I believe this idea is so important to an understanding of how options work that I introduce it early.  If anyone does not see the importance, or does not yet understand how equivalency works, no harm done.  The idea has been mentioned and soon enough, as specific trade ideas are introduced, the 'eureka' moment arrives and the concept becomes clear.  Accelerating the date of that moment makes better traders of those in the class.

    We all wish we had understood something more clearly, or recognized the true risk of an innocent-looking position earlier in our trading careers.  For example, I believe the successful trader must concentrate on risk as his/her primary focus.  Many others prefer to concentrate on profit and loss, and do anything in an attempt to achieve that profit.  That is dangerous for reasons that may not be obvious.

    When you grasp the 'little extra stuff' early in your career, it often makes a big difference in whether you succeed or ultimately give up the game.  The very first rule to understand is: Don't go broke.  It seems obvious, but it's something ignored by too many traders – until it's too late. I help traders learn how to minimize the chances of going broke.  It's not as simple as: "Don't take a lot f risk in one trade."  Some traders lose their accounts slowly and end up just as broke as the person who blew up over a single trade.

    When I clarify some previous misconception held by a student, that is truly hitting the jackpot (for me).  Trading is a business that punishes mistakes.  Everyone tells us that we learn from our mistakes.  That's true ONLY when the mistake is recognized. If a trader repeatedly acts on a misconception, those mistakes are difficult to discover – and hence, are going to be repeated.

    I love the breakthrough when something under discussion results in an 'aha moment' for the student.  As a writer, I never know when that happens, unless you let me know.

    So what do I mean by that introductory statement – to teach something you don't already know?  Here are some examples that appear frequently in my writings:

    • Explaining something from a different perspective
    • Including extra details, just in case they can provide a better understanding
    • Including information to answer questions before they are asked
    • Explaining the rationale behind my opinions. 'Why I believe it's true'
    • Outlining a philosophy based on common sense, and not on traditional rules
    • Being willing to take a minority stance – but always telling readers when most others have a different point of view
    • Encouraging readers to think for themselves before making decisions
    • Continuously stressing the importance of risk management
    • Explaining that choosing a good trading strategy is just the beginning
    • Why trading near-term (front-month) options is more risky that it appears
    • Why it's easier to make money by selling, and not buying, option premium
    • Why selling naked short options is too risky for most traders (unless you sell puts with the intention of owning stock)
    • Sharing the opinions of other option writers and bloggers


    One on one

    When working with a trader one on one, my philosophy is to help with specific topics of interest to that student.

    I don't have 'lessons' prepared in advance. I don't have any specific number of lessons planned.  These sessions are designed to answer your specific needs.

    Risk Management

    Concerned with capital preservation?  At Options for Rookies we live and breathe risk management.  I stress the importance of controlling risk from the very beginning of your trading education.  This is not a topic suitable for experienced traders only. Why?

    If you trade without measuring and controlling risk, the risk of ruin is too high. Don't count on a lengthy trading career when being aware of, and respecting, risk is not at the top of your priority list.

    When dealing with the stock market in any capacity, you are dealing with statistics.  You must be alert for unlikely events.  By being aware of the probabilities of winning and losing, you can trade only when the reward justifies the risk. 

    You will have many winning trades by doing just that.  However, long shots have their day and black swan (unexpected) events do occur.  Your task as a trader (and mine as a teacher) is to see that you are prepared for the unlikely event. 

    As a premium seller, gigantic market moves represent the enemy.  Portfolios can be protected against disaster, if you are willing to pay the price of insurance.  One alternative is to be very careful when sizing trades.  Be aware of the worst case and you can limit losses to an acceptable amount.

    It's all part of risk management.

     

    886

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    Implied Volatility: Why does it change?

    I recently received the following e-mail question It's fairly simple, but on further analysis I find it most disturbing:

    Is it possible to find out who changed IV and why and for how long?

    Here's the background: Last week I posted a discussion based on a readers question about an iron condor position that immediately lost money (it's worth reading as background for today's post).  Because he expected to collect theta every day – especially when the underlying asset did not undergo a large move.  Basically, he didn't understand how this loss could have happened. The question above is the result of my telling him that the implied volatility of the options had increased.

    In other words, he was trading iron condors as if they were money in the bank. An increase in IV took him by surprise, prompting today's questions:  Who is responsible for the higher IV?  Why was it changed?  How long will it last?

    Every question deserves an answer, especially when an explanation may turn into an 'aha moment' for the questioner.  What truly disturbs me about this innocent-looking question is that it demonstrates a complete lack of understanding of how the markets work.

    When playing a game or when practicing some trade ideas with play money, there is no question that's out of line.  There are two types of trader who use paper-money accounts:

    • The beginner who is trying to gain an understanding of how to trade and what has to be learned
    • The expert who is fine-tuning strategies, looking for any additional small edge

    The beginner is expected to be learning as he/she goes.  Reading, taking classes, attending webinars – and asking questions.  I'oveheard very unsophisticated questions – and that's to be expected.  But the questioners learn from the answers and move beyond the basics.

    Today's question comes from someone who is using real money (although I don't know the size of his positions).  This single set of question tells me that he is not yet ready to trade.  The whole concept of options trading, options markets, how prices are determined and what options are worth has not yet been grasped.  There's nothing wrong with that when using play money.

    It's fun to win and there's no harm done whe losing money.  Asthe trader plays, he/she gains playing experience, and insight into some subtle strategies tha had not yet considered, etc.  That's how one becomes a better player at chess, monopoly, backgammon, or any other game.  As long as you are not playing for money and the game is taken seriously by the participants, it's a good learning experience for everyone.

    However, when trading with real moneyy, some elements of the game change.  There is the possibility of earning some serious cash, and that's fantastic.  There is also the chance of losing far more than the player realizes is at stake, and that can be devastating.  Trading is not a game and one must have some basic understanding of the rules of engagement – and in this case, it's a basic idea of how the markets work.

    In the previous post, I explained that his trade is losing money because his negative vega position is being hurt by a rise in the implied volatility of the options in his position.

     

    Who changed IV?  Why?

    No one individual changed the implied volatility of AAPL options.  Many thousands of contracts trade every day, and if anyone tried to bid prices higher or offer them at steadily lower prices, that person would be stampeded by everyone else in the marketplace who thought he was wrong-headed in his efforts.

    It takes much more than a single 'who' to 'change IV. Changes occur for basic reasons, and subtle factors make a difference. 

    • Supply and demand is often 'blamed' for IV changes.  Look at it this way.  If option buyers – and that means calls and/or puts – far outnumber sellers, then sellers must demand a higher price – even when the stock has not moved.  If buying continues, prices move higher again.  This is normal market behavior, no matter what product is being traded
    • Market maker positions:  When they sell options to the buyers, their primary job is to reduce risk.  They must buy other options, preferably on the same underlying

    It's true that most of today's traders use computers to generate orders to buy/sell options in different underlying assets.  However, after selling to public or institutional buyers, the market makers preferable next move is to buy, rather than sell more options. So they raise their bids and offers.  To do that, they raise the estimated future volatility estimate built into their trading algorithm. This is not a conspiracy.  Each trader independently raises or lowers bid according to his/her need to own/sell vega, gamma, theta delta, etc.

    Those algorithms tell their quote-generating computers to raise or lower the trader's bid/ask quote

    It's true that different market makers make different quotes, but when there is more demand for the  options, then prices move higher

    • Fear/complacency.  When 'people' [individual investors, market makers, speculators, hedge funds etc.] are afraid that the market may do something drastic, or when they fear that their portfolios are not well-hedged against potential losses, they buy options as insurance.  It doesn't matter whether they buy puts or calls [Remember that puts are calls and calls are puts], the purchase of any option can drive prices higher – when there are enough buyers.

    We have all seen SPX volatility (as measured by VIX) decline from over 80 to 15 over the past two years.  And even traders who have not been in the market that long have seen IV decline over recent times.  They've seen it, but do they understand why this has happened?  Today's questioner apparently has not given it a moment's thought.  It happened because the markets have been dead.  Extreme low volatility begets option sellers.  But, at some point, sellers become buyers.

    I don't know if the decline in IV is ended, or if the current increase is just a bump in the road.  I do know that someone traded an iron condor without any understanding of what could happen to his position – other he would collect time decay.

     

    For How long?

    Another impossible question.  Until there are enough option sellers to satisfy the buyers without prices moving higher.

    I  truly hope this gives you a more clear understanding of the markets.  They are very complex and not easily understood.  I guarantee this: Neither you nor I will ever understand them well enough to be able to just print money.  Trading is difficult work and it takes training and education and skill to succeed.  The sad fact is that some people have no chance.

    If you take the time to understand how each trade makes or loses money, what must occur for that profit or loss to be realized, and if you can discover how to estimate the probability that such events will occur,  then you are ready to trade options.

    If you open positions based on theta alone, you will not be one of the success stories.  You have work to do.  Good luck and good trading.

    871

    TylersTrading

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    Options for Rookies Premium. Planned Content

    Premium Content

    This page is where the premium content begins. Below is a description of current plans: 

    The idea behind the premium site is that it allows members to have greater access to an experienced trader and teacher who can offer answers to your questions and provide more personalized service.  Please understand that this does not include telephone calls or hours of e-mail questions.

    I'll be available for live sessions, answer questions, follow trades in detail, offer courses and write blog posts.  The blogging emphasis is on 'follow that trade' posts.

    Blog Posts

    1) The primary posts will involve 'Follow That Trade' in which I initiate a trade (Members: please suggest trades at the appropriate time).  Then we follow the position – as often as necessary – with detailed analysis.  If I consider and reject an adjustment; when I make an adjustment; when I exit or plan an exit – each of those items gets described in a post. 

    A trade plan with updates as needed – for each new trade.

    In short, my decision-making process.  Questions and comments from members are encouraged.  Criticize, offer alternatives etc.

    These trades are intended to be a learning experience, and are not trades specifically made to earn a profit.  I must repeat that the trades may not be as carefully chosen as one would when planning to earn money from the trade.  Some trades will be from my own portfolio (which will be disclosed when that happens), some will be in a paper-trading account, and some will be real trades from Members.

    The plan is to follow 2-3 trades simultaneously, posting as needed.  If feasible, I'll follow a 4th trade.  But it's very important not to be swamped with too much diversification. If the market gets volatile, it's impossible to manage several trades (and write about each in detail) simultaneously.

    2) Other posts on a variety of topics, just as I do here, at Options for Rookies.  But those posts will not be made available outside the Premium site.

    Live Sessions

    1) Question and answer sessions.  To begin, it's twice per month, one hour each. I'll offer more sessions if there is sufficient demand.

    Sessions recorded for members who cannot attend.

    Objective: For members to have access to ask questions, get immediate replies and have an opportunity to ask follow-up questions.  We will have to find the right format to allow the questioner to get a good reply plus allow time for as many people to speak as possible.

    If questions cover too wide of a knowledge range, then I will offer beginner sessions and 'beyond beginner' sessions.  The idea is to find the right arrangement so that members get to ask their questions. 

    I will always reply to written questions.  Members will be pleased with written replies, but the immediacy of live answers is lost.

     

    2) Seminars.  These are very similar to the Q and A sessions.  The difference is that this time, I'll take a question or topic from someone in the 'room' and try to talk about that for about 30 minutes.  Audience participation and questions always welcome.

    Sessions recorded for members.

     

    3) Webinars.  No specific schedule.  I do not expect these to occur frequently.  These are prepared in advance and require a lot of time.  I'd prefer to devote that time to live sessions with members.

     

    Discounts

    Everything from Expiring Monthly, to my e-books and private consultation is offered at a discount. 

    Non-members pay 50% higher tuition for courses.

     

    Courses: Additional fee required

    Some courses may be offered live, but most will be pre-recorded.

    I hope to have one or two courses ready by the planned launch of March 1.

    Shortest course will be a single 2-hour class.

    Longest course: I'd guess it to be 10 to 12 sessions of about one hour each.

    The only significant difference between a live and prerecorded class is the ability to receive immediate replies to questions and the possibility of adding a follow-up question

    Each course has it's own question/comments page and I'll answer such questions as quickly as possible

    You may take the lessons at your own convenience. If you prefer, you may repeat any class before moving on.  

    As long as you remain a member, you may re-take each class as often as you want to do so.

    If your membership lapses, so does your access to the recorded classes.

     

    This site is intended to be for rookies, but that covers a wide territory.  Newbies to options are welcome, as is anyone who has been trading for a few years.  If enough more experience traders ask to join, I'll plan content for them as quickly as possible after launch.

    I suspect more material will be added per member request, but this is an outline of what I will offer at the beginning. 

    This is a different approach.  Most experienced traders who offer access, do so with individual mentoring (and of course that must be more costly).

    There will also be a pre-launch special price for the month of March.  It's too soon to talk about those details at this point.

    I'm currently working on building the web site/blog.

     

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    Options for Rookies Premium

    Options for Rookie's is a place to learn about options, ask questions, suggest topics for discussion, and most of all, a blog where we can exchange ideas and dialog about options.   The best part for me comes from intracting with readers who take the time to post comments or questions.

    The focus is, and will remain: options education for individual investors. This blog will continue to be published in its current format.

    Announcing:I plan to launch a new website: Options for Rookies Premium.  Launch date (tentative): March 1, 2011.

     

    Options for Rookies Premium: Brief Description (more details at a later date)

    Options for Rookies Premium is a membership site that serves a different audience.  It offers more traditional options education in a classroom setting.

    Free sample I intend to offer free membership to everyone for two weeks. I hope that will be in mid to late February.  Once that two-week period ends, the site will be launched officially, and available only to paid members. 

    What do you get for becoming a member?

    * Live Question & Answer Session: One hour, 3 times per month. In a virtual meeting, members ask questions and receive immediate replies.

    * Live seminars: Once again, a virtual meeting at which I'll choose one topic for a lengthy discussion.  Estimate: 30+ minutes.  These are spontaneous discussions, with no advanced preparation.  I'll take a topic from suggestions of those who attend. These sessions will be recorded. 3 times per month.

    * Follow a live trade via blog posts.  We'll follow a trade from entry to exit, including all risk management decisions.  I'll be counting on members to suggest trades (no trade ideas now, please).  These are learning experiences and not intended to be money-making trade recommendations.

    * Video posts when appropriate

    * Discounts on almost everything: yearly membership, e-books, private consultation, courses.

    * Webinar: An occasional pre-recorded webinar on a relevant topic.  Topic requests accepted. Frequency unknown.

    * Written Questions and answers: I'll answer questions as I do on this blog.  The difference is that those questions should focus on topics covered on the Premium site.

    I hope to offer more as time passes.

    Guarantee: Unconditional, no questions asked refund of the month's fee – before paying for the next month.  If you pay for the next month, it's reasonable to assume you were satisfied with the current month's content. Limit: Once per person.

    Membership cost: Undecided, but it will be reasonable.

      ***

    Courses: Extra cost

    I'll be teaching courses for option rookies.  There will be basic beginner classes, as well as classes for traders with some experience.  I will leave more advanced education to other instructors and mentors.  As regular readers of Options for Rookies already know, the importance of risk management will be a major component of any trade discussions.

    Non-members may take courses at the full rate.  Members pay 1/3 less.  Unconditional money-back guarantee: If you are not satisfied after the first session, just let me know and the refund is yours.

    Your input

    That's the plan and it's subject to improvement. The main purpose of today's post is to seek your input.  Please let me know your thoughts. Suggestions and comments requested.

    855

     

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