New Option Trader

DOG for a falling DJIA

If you think there's more pain ahead for the Dow, then buying DOG which is an inverse ETF for DJIA might be a good idea.

This morning I bought a DOG NOV 72 call with an 82 delta.  I'm doing a stock replacement strategy and plan on rolling down when the delta goes above 85.   This strategy of ITM calls with 80-85 deltas and rolling to keep that delta has worked well for me before.. We'll see how it works out.

On another note, DEFINITELY moving this blog this weekend!  If anyone has experience moving from Typepad to Wordpress please pass along any gotchas I should know of now..

Update...

Apologies for disappearing for the last several months.  Some pretty significant things have been happening since my last post and I'm not even talking about the credit crunch, debt collapse, and general market craziness.

1. Got laid off in February (along with 1,000 other people at large internet search company..)
2. Took a 2 month consulting job that turned into a 4 month consulting job
3. Joined  a forex coaching group -- LOVE forex trading and looking forward to trading options on forex.

What's Next?

I'm looking for opportunities to trade puts.  Think there's still more pain to come so want to be on the right side of that.  Will post more often as I work with long puts and put spreads

Our Dollar is Dying

Have you guys heard about this? The dollar is so weak that some stores in New York are accepting Euros!  The video below also talks about how some parts of India will not accept dollars!  Whoa...

Where are the Bull Markets?

Yes, I know, I've been absent.. Sorry about that.  Had a few things going on such as getting laid off (Yes, it's a good thing, wanted to leave anyway), and the Options University Live Mastery classes started (very consuming, very intense).

So, anyway, this market has really been a shift for me because as long as I've been interested in the markets things have for the most part been pretty strong.  But, from everything I'm hearing we are in a bear market.  There may be rallies here and there but between the credit crisis, housing disaster, and falling dollar -- it's a bear market.  Let's just face it. 

However, there are bull markets in mining, agriculture, oil, and just about every currency except the dollar. Talking about the dollar gets into forex pairs, so I won't go there... but the point is that the dollar is very weak.

Gold:
I think mining in general is pretty strong, but gold is seriously going through the roof!

Agriculture:
Can anyone say Potash?  It's at an all time high and this thing doesn't look like it's going to stop.

Oil:
And then we have oil which has broken through $100 a barrel -- yikes!

Nightly Stock Market Report

Here's another video for you guys, hope it lightens your mood on the market we're having these days...

Options University Webinar Recording Now Available

If you missed the Options University webinar the other night, they've just made the recording available.  Over 1000 people showed up so the audio quality in the first half hour sucked but halfway through it got better. The audio should not be an issue in the recording though.

View the recording here

The purpose of this webinar was to introduce a 12-week series of classes that is starting this Sunday night, 3 times a week and 2-3 hrs each.  So, it does have excellent info but keep in mind they are promoting a class.  Nevertheless, LOTS of good information and I highly recommend watching the replay.  I also HIGHLY recommend taking the class.  It goes through everything and the teaching is superb.  Really, Ron and his team really work hard to make sure the students get the concepts down and will stay online until every last question in answered.  I signed up so if you do get into the class, let me know.  Will be nice to have someone on the chat line...

It's Going To Get Ugly Tomorrow...

I get the Shadow Trader video every week.  Given what's now become a global bear market, we got an extra report written report which I want to share with you guys.

Shadow Trader Bonus Report

What I know right now is that futures lead the Dow and Futures are trading down -- way down.  Tomorrow will likely be a huge sell off driven by panic and mayhem.  Scary stuff.

Free Webinar for Upcoming Options University Class

Options University is getting ready to begin a new "semester" for their Live Mastery classes and to give us a preview of what's included and what the classes will be like, they're holding a free webinar tomorrow night.

I've been to several of their classes and strongly recommend that you attend whether or not you plan on signing up for the Live Classes because even this free webinar will give out a lot of great free information.  I will definitely be there, so say hi in the chat area if you decide to attend.

Details for the Live Mastery Series Free Webinar:

Date:  Jan 22, 2008
Signup here for the Live Mastery Classes free webinar

I'm really excited about this class.  I've been waiting for it ever since I met a bunch of people at the workshop in October who raved about it. This is a 12-week series of classes held twice a week and 2-3 hours each time!  It's completely comprehensive and goes through all the basics and then goes on to option greeks, implied/historical volatility, all the option strategies, and just about anything else you can think of.   So, if you still have gaps in your understanding of options, this class will probably clear the cobwebs.

Denied by Fidelity!

My company has an ESPP plan which (in case you're not familiar with this term) is a way for employees to buy company stock at a discount -- it stands for Employee Stock Purchase Plan.  It's a great thing because they purchase it at a 15% discount to it's average price over the time the money has been collected for this purpose.  They purchase the stock twice a year, so in a way it's also a forced savings account -- also a good thing.  So even if all you do is flip the stock, you're likely to make at least the 15%.  If the stock has risen significantly, then you make more. If it's dropped significantly then better to hold it for a while.

Fidelity manages this program for my company.  And, being an educated option trader I thought I would sell covered calls or buy protective puts on this stock for a while. You have to apply for option trading at Fidelity but that's not the problem since I think that's pretty standard.  They want to make sure you understand the risks and give you the appropriate trading level -- I get that.  Selling covered calls is at the lowest level because the calls are covered by the stock you own, hence the term, "covered"  meaning if the stock does hit that price and you ARE forced to sell, you already own the stock so no real risk.

So anyway, I "applied" for option trading using a form which asked about my experience with and understanding of options -- which, let's be honest -- even at a beginner level is way beyond what the average person trading options knows.  Most people just wing it by buying calls and puts and don't ever bother learning about implied volatility, option greeks, or option strategies such as butterflies and iron condors.   Today, I got a letter from Fidelity telling me that I've been denied for option trading privileges.  No explanation or details on why or what I need to do to get approved. Seriously?

If I really cared, I'd call them up and try and get it worked out. But, the truth is I only wanted it to sell covered calls on my ESPP stock. I do all my real option trading at Think or Swim.

I'm filing this under "Lessons Learned" because it's proof that the bigger brokers are completely inept when it comes to options trading and should not be used.  For options trading you need a broker that understands options and has policies and staff in place as well as a superior platform and execution time. Any broker who matches this description would never pull crap like this.  Think or Swim is my first choice but if for whatever reason you're looking for alternatives, there's also Tradeking and  OptionsXpress

I'm stepping off my soapbox now...

Bill Johnson's Options 101 -- Free Chapter

Just found this and want to pass it along to you guys. Its a free chapter from Bill Johnson's new book, "Options Trading 101"

Bill has a knack for zeroing in on the stuff that's hard to understand when you're first learning about options and explains things in a way that so very crystal clear.  If you like this chapter, then definitely get the whole book. It covers mostly the basics but puts those basics in a way that you may not have understood until now.  I know I've learned alot from this book and that's after taking several classes.

Right click this link and choose "Save As"
to download the free chapter -->  Free Chapter 

Free Technical Analysis Webinar Wed night

Just found out that Options University is holding a free webinar on Technical Analysis tomorrow night.  Options University is the best place I've found to learn about options trading and technical analysis is key for trading options.  These webinars fill up pretty fast so not sure if there's still room but definitely worth a shot.

Sign up for the Technical Analysis webinar here.  Again, it's this Wed and starts at 6 pm PST

Money Management Reality Check

Anyone who trades actively had to learn at some point that losing is just part of the game.  It doesn't mean you're a bad trader, it's just the way probability works.  You can't control the market but you can control how much you lose on any single trade.  There's absolutely no reason anyone should ever lose their entire account just because of a "bad month" if they're sticking to their money management rules.

Now, as we get more experienced we're able to spot the higher probability trades and (ideally) go with those.  But, there is no sure thing in trading and a bad week or two that comes out of nowhere will turn any trade no matter how good the setup into a losing trade.   That's why money management is so important  -- it stops losing trades from going too far in the losing direction and lets the good trades run.  You really only need to be right about 35% of the time to be a successful option trader with sound money management rules in place.  That may not sound like a lot but remember -- options are leveraged instruments.  A little goes a long way...

Think about money management as risk management because that's what that it really is -- managing your risk with every trade by limiting how much you put into each trade. Most people dive right into learning option strategies right away and only come back to money management after a few bad trades This really should be the other way around.  Good money management habits should be at the beginning of the learning process and every single trade so you don't get wiped out with one bad trade which can happen no matter how good you think it will be -- otherwise you're just gambling.  Smart traders trade with a plan and that plan includes rules about money management.

So, what are some good money management rules?

1. Don't lose more than 2% of your total account capital on any single trade.  2% is the generally recommended percentage. Think about it.  If you never lose more that 2% on a trade, that's pretty safe, right?  Let's put this into perspective.  Say, you have $25,000 in a trading account.  This means you will not lose more than $500 on any single trade.
2. Now that you know the most you want to lose on this trade, figure out where to put your stop loss so that you're out the minute you're at a $500 loss.  There are various formulas for figuring this out.  Below are two other sites that do a spectacular job of describe positioning sizing formulas, so I won't go repeat them here.

Money Management and Position Sizing

• Position Size
• Money Management 101
  
  

Money Management Key Points

• Comes down to planning your trade and having the discipline to follow that plan
• Determine amount you are prepared to lose before placing the trade -- that is the amount you will risk
• Figure out your position size based on the amount you're prepared to risk
• Stick to the plan no matter what

Money Management Rules to Live By

It can be tempting in a bull market to let it all ride on a single trade.  This may work out once of twice but eventually you will end up giving it all back.  Especially with the volatility swings we've been seeing lately, what looks like a no-brainer high probability trade can very easily turn against you in the last two weeks before expiration leaving few options but to take a loss.

More than anything else smart money management is what determines trading success.  Remember, it's not about making the big wins on every single trade but minimizing the losses and living to trade another day.  Look at it this way, if you have a spectacular month and make 300% on every trade -- and each time you're putting 80% or more into each trade -- all it takes is one bad trade to take away all your gains and maybe even your whole account!

The goal here is not only to preserve what you have but grow that capital at a steady pace.  There will be losses along the way.  But, if you're only risking a small percentage of your account then that's the most you can lose on any one trade.

I was going to post money management rules in this post but then realized this is actually a bigger topic that deserves more than, "dont' risk more than 2% on any trade.."

So, consider this an introduction to money management and stay tuned.  I'll be back in the next post with a more information on what money management rules to consider when placing a single trade and for your overall trading strategy -- yes, it is that deep.

Option Term of the Day: Parity

Parity:
Parity is the term that refers to an option whose price consists strictly of intrinsic value. In essence, parity is the amount by which an option is in-the-money.

Free Option Trading Videos

Taking classes on options trading and reading books on option trading are both definitely the best way to learn at an in depth level.  But, that can get expensive and it does take a while to really feel comfortable with what you're learning.  So, I recommend supplementing these paid educational classes with the multitude of free training that's available on the web.  Personally, I don't believe the following resources are enough on their own but they are a great supplement.

I have alot of resources to post so won't do it all in one post. So, here are three places where you can go to view free trading videos:

Free Trading Videos
Informed Trades
You Tube