This was a poor day, $7 in profits... better than a loss at least and all trades were closed, no hold overs.
I have been doing all the math showing some really nice numbers based on $10,000 trade sizes and what not. Today we had a talk, well, John did all the talking, in the direction of trade sizing. Apparently we are to keep out trades to a maximum of 5 contracts. I have no trouble with that initially as I am aiming for $1000 trades which makes most of the $2-$4 trades in the under 5 contract range. In a few weeks that will change. I had planned on at least hitting 10 contracts on larger options and up to 20 on smaller options.
The idea of limiting to this size is troublesome. I figure that I can trade the stocks and make use of larger trading capital by entering the stock at the same point as the options and exiting using trailing stops. The entries would be fine as the contract price entries are at or near low points, buy on weakness, and sold at high points, sell on strength. The thing about getting out of an option trade is that just placing a market order screws up the bid / ask for anyone else trying to get out at the same point. Market order exits in a liquid stock are just a matter of course and hardly have any real bearing on the price.
The trouble is I am using a TFSA and margin is not available and I cannot even just plunk a hoard of cash in there instead due to the $5,000 annual contribution limit.
So, back to options in the TFSA and stocks in the margin once I get things rolling along. I will aim for at least 100 share orders and will need to keep the price range under the $200 price range.
I worked out the trades for today based on time of entry in the options orders and the profits would have been in the $670 range if I had my $25,000 in the margin account. In the long run I will still be making the larger trades and may only use the options when they are being sold to open for some premium capture. I want to get my TFSA built up to be able to do the larger trades without going into margin use for these.
I am looking forward to a good day tomorrow and tuning my order entry to be sure to get into these options before the prices run up as they are lately... more people in the group will affect entries. 150 - 200 were about right. 300 is getting pretty full and we will have to be more selective on the stocks we are using. 500, the ultimate group size target seems like it may be too cumbersome, we will see.
Jeff.
Questrade, My direct access discount broker.
Showing posts with label options. Show all posts
Showing posts with label options. Show all posts
Wednesday, April 7, 2010
Friday, March 19, 2010
Options trading...longer term, or not.
I just closed my first longer term momentum option trade... after a whopping 3 days into the service.
Daily average return is $51.02 which, considering the $1600 total account size, is not bad for a start...2.91%.
So I can add that to my current $255 daily average, sort of. I will probably end up tracking these together in a total investment stat number somehow later.
Obviously I cannot use this one trade to judge anything or do any additional forecasting yet...but it pushed my gross profit for the day up to $1965.00. Nice.
Jeff.
Daily average return is $51.02 which, considering the $1600 total account size, is not bad for a start...2.91%.
So I can add that to my current $255 daily average, sort of. I will probably end up tracking these together in a total investment stat number somehow later.
Obviously I cannot use this one trade to judge anything or do any additional forecasting yet...but it pushed my gross profit for the day up to $1965.00. Nice.
Jeff.
Thursday, March 18, 2010
Edge of my seat? Not Really.
The market (S&P 500) opens flat, the same open as the close yesterday. To me that means that it will start out without too much movement, at least early on. That has, so far, proven to be the case as it waffles around the 1166 area. Of course I have spreads at 1160 and 1165. I expect to take a loss on the 1160's.
Today is options expiry. Normally I don't take much stock in that but having trades that are very close makes one take notice of what is happening. This is one of the reasons why paper trading is not much use... no money on the line then the line is not observed and the nuances of market movement are not noted for later recall.
Options technically expire today BUT that is not the end of it. The final settlement numbers are tallied at the open on Friday so an overnight move can, and will, affect the size of a loss, in my case, or even whether an option may be exercised due to moving into the money overnight.
Normally I would expect spreads and iron condors to be far enough away at expiry that the final numbers are next to meaningless, seeing that as long as the final levels are inside the range full profits are retained.
In my idealized world I would like to see the market drop away and settle tomorrow a hair under 1160, that would be really nice. Anywhere in the 1160 to 1165 range would be OK. Then the market is free to rally on up. This would keep my spreads in good shape and push all my long positions into the green zone tomorrow and over the weekend. Seeing as I have 21 on the go now and half are options... but all April or June expirys.
I'll update my stats over the weekend. I'll end up with four sets, one each for the Optioneer stuff, daytrading, stock swing trades and the options momentum trades.
Jeff.
Today is options expiry. Normally I don't take much stock in that but having trades that are very close makes one take notice of what is happening. This is one of the reasons why paper trading is not much use... no money on the line then the line is not observed and the nuances of market movement are not noted for later recall.
Options technically expire today BUT that is not the end of it. The final settlement numbers are tallied at the open on Friday so an overnight move can, and will, affect the size of a loss, in my case, or even whether an option may be exercised due to moving into the money overnight.
Normally I would expect spreads and iron condors to be far enough away at expiry that the final numbers are next to meaningless, seeing that as long as the final levels are inside the range full profits are retained.
In my idealized world I would like to see the market drop away and settle tomorrow a hair under 1160, that would be really nice. Anywhere in the 1160 to 1165 range would be OK. Then the market is free to rally on up. This would keep my spreads in good shape and push all my long positions into the green zone tomorrow and over the weekend. Seeing as I have 21 on the go now and half are options... but all April or June expirys.
I'll update my stats over the weekend. I'll end up with four sets, one each for the Optioneer stuff, daytrading, stock swing trades and the options momentum trades.
Jeff.
Wednesday, December 9, 2009
Option Spread Optimization and the $10 day
I slightly reworked a spreadsheet to provide a comparison between varied strike spreads at various strike levels and incorporated position sizing, Return On Risk, daily returns and the average ROR for the entire spread strike listing that is usable (ie all $1, $2, $3 and $4 spreads from 115 to 121 strike).
The result, the best bang for the buck is for the $2 spreads by a 0.5% margin.
With my Optioneer/Strikepoint trades I look for $10 per trade as a minimum target and that is based on a $5000 (less premium sold) risk profile. With my spreads I might feel comfortable with a 117 or 118 strike spread...go with 118 so safety.
A 118 strike with a $2 spread yields 3.27% based on $1200 gross risk.
This nets about $1.09 per day of the trade (January expiry) if I trade 6 contracts, $1200 total risk. Comparing against the same risk profile as Optioneer I would put $5,000 at risk and yield 3.95% and $5,50 per day.
117 strike the yield jumps to 6.72% and $9 per day
116 strike the yield jumps to 9.65% and $12.50 per day
Considering this is with the price of SPY at the low end of the trading channel now these numbers would look much better with a higher SPY price as the strikes would be that much closer...although the volatility would be lower and would depress the option prices a bit.
Thus the issue becomes how much to risk and how far out to place the strikes to lower the chance of taking a larger hit and meeting a $10 per trade per day target or the equivalent.
$10 per day at $5000 risk
$5 per day at $2500 risk
$2.40 per day at $1200 risk
Today that target could be met with a trade at 116 strike yielding 8.9% and a $2.80 per day profit.
Considering that there is no margin available for these trades and my account is just over $5,000 I would feel better placing more smaller trades so I will have to aim for the "equivalent to $5000" trades. I think that I can find combos to provide this particular cashflow without undue stress.
I also am aiming to be able to do any number crunching after market hours in order to place my trades before the market opens the next morning and not have to worry about intraday chart watching...I either get my target price or I don't. This certainly gives me a feel for what the Optioneer/Strikepoint guys do. I knew it would be fun.
Jeff.
The result, the best bang for the buck is for the $2 spreads by a 0.5% margin.
With my Optioneer/Strikepoint trades I look for $10 per trade as a minimum target and that is based on a $5000 (less premium sold) risk profile. With my spreads I might feel comfortable with a 117 or 118 strike spread...go with 118 so safety.
A 118 strike with a $2 spread yields 3.27% based on $1200 gross risk.
This nets about $1.09 per day of the trade (January expiry) if I trade 6 contracts, $1200 total risk. Comparing against the same risk profile as Optioneer I would put $5,000 at risk and yield 3.95% and $5,50 per day.
117 strike the yield jumps to 6.72% and $9 per day
116 strike the yield jumps to 9.65% and $12.50 per day
Considering this is with the price of SPY at the low end of the trading channel now these numbers would look much better with a higher SPY price as the strikes would be that much closer...although the volatility would be lower and would depress the option prices a bit.
Thus the issue becomes how much to risk and how far out to place the strikes to lower the chance of taking a larger hit and meeting a $10 per trade per day target or the equivalent.
$10 per day at $5000 risk
$5 per day at $2500 risk
$2.40 per day at $1200 risk
Today that target could be met with a trade at 116 strike yielding 8.9% and a $2.80 per day profit.
Considering that there is no margin available for these trades and my account is just over $5,000 I would feel better placing more smaller trades so I will have to aim for the "equivalent to $5000" trades. I think that I can find combos to provide this particular cashflow without undue stress.
I also am aiming to be able to do any number crunching after market hours in order to place my trades before the market opens the next morning and not have to worry about intraday chart watching...I either get my target price or I don't. This certainly gives me a feel for what the Optioneer/Strikepoint guys do. I knew it would be fun.
Jeff.
Friday, October 30, 2009
Update, the good and the bad...or the bad and the good....
It's been a few days since I've blogged anything as I have been busy. Between a conference last week, ULC inspections this week and other personal stuff going on in the middle I just have not had time.
AS far as my trading is concerned there is no real movement to talk about. With the pullback in the market I expect to realize a few losses soon as one position expires in November and it likely will not move fast enough to recoup me much. A bunch of others are way down but have longer to go so there may be some promise there. I have a few that are in the green after spending some time in the red and one or two that the stock gapped down dragging the option price with it.
Having said that, if I had been in these stock positions instead of options I would be losing my shirt in most cases. The downside to the options is the expiry though. At least with the stocks I could choose to hold them if they looked like they were going to come back, some are not going to fast enough for me though.
Even though many are down it is a comforting feeling to know that, in the few cases that the option has hit zero...it cannot go any lower.
I should mention my overall strategy mistake.
I had decided that $120 is my loss allowance and that dictates the position size of the trade. I will take positions of a single contract that are higher than $1.20, as high as $2 but I will not take multiple contract positions that are any higher than the $1.20 or maybe $1.30. The issue is not that decision, the issue is that I still had a few positions that were far larger than this and I have let them go rather than placing a stop loss. So I have some $400 plus trades that I should have pared down at least or just stopped at worst.
Also, a few of these are from service advisories that I no longer subscribe to, even though I can chart and track them easy enough to determine where they are going (the cancelled services really only used some basic technical studies and a bunch of guesswork afterall) I had gotten lazy about them.
Perhaps I should have just cleaned house and brought everything in line. Hindsight is wonderful. At least I had a decent profit to also work with on this.
So my strategy is to hold out for the expected rally, if it does not materialize I will close some losing positions, let a few expire to save the commissions as they are not worth trading now, regroup and keep on slugging.
On the Optioneer/Strikepoint side I placed a trade yesterday that did not get filled...due to market conditions. It was nice to choose the setup and just send the request to my broker and get the email at the end of the day telling me what had happened with the trade...no watching the screen and making trades to setup the strangle...nice.
Today the numbers are not so good so I will wait until Monday to place another for a better profit target. Yesterday's was about $420 profit to expire on November 30th, today the trade was only worth $309, same expiry. I am going to aim for $400 targets or higher mainly as this gets my return per trade up near 10% and my annualized return close to 100%.
The goals are going to start at making the first $4000 to cover all my fees for the year, then the next $5000 is going to cover adding another trade to the concurrent trade number OR start doubling one trade in the mix. Based on some backtesting goal one is possible in the first 3 or 4 months unless I maximize my trade quantity. My testing was using up to five concurrent trades and I could place up to seven.
The idea is to be able to diversify the trades so that I spread my risk of a major market move over many trades. A strangle takes advantage of selling options for profit and buying options for protection so the net profit results from the sales being worth more than the protection. Seeing as these are based on the S&P500 the call spread is set much higher than the current level and the puts are much lower. As long as the S&P remains within those boundaries there is profit to be had. Placing trades as the market moves every 20 to 30 points allows the strangles to stagger and "bracket" the market at varying levels, this amounts to diversification. As the market goes up the next trade will bracket higher and as it moves down it will bracket lower. This has my trades moving with the market and a sharp up move may only affect a trade that was placed at, a much lower level but not the three or four others at a higher level. Most trades are, at most 45 days in duration.
I'll set up a chart to show this another time.
Jeff.
AS far as my trading is concerned there is no real movement to talk about. With the pullback in the market I expect to realize a few losses soon as one position expires in November and it likely will not move fast enough to recoup me much. A bunch of others are way down but have longer to go so there may be some promise there. I have a few that are in the green after spending some time in the red and one or two that the stock gapped down dragging the option price with it.
Having said that, if I had been in these stock positions instead of options I would be losing my shirt in most cases. The downside to the options is the expiry though. At least with the stocks I could choose to hold them if they looked like they were going to come back, some are not going to fast enough for me though.
Even though many are down it is a comforting feeling to know that, in the few cases that the option has hit zero...it cannot go any lower.
I should mention my overall strategy mistake.
I had decided that $120 is my loss allowance and that dictates the position size of the trade. I will take positions of a single contract that are higher than $1.20, as high as $2 but I will not take multiple contract positions that are any higher than the $1.20 or maybe $1.30. The issue is not that decision, the issue is that I still had a few positions that were far larger than this and I have let them go rather than placing a stop loss. So I have some $400 plus trades that I should have pared down at least or just stopped at worst.
Also, a few of these are from service advisories that I no longer subscribe to, even though I can chart and track them easy enough to determine where they are going (the cancelled services really only used some basic technical studies and a bunch of guesswork afterall) I had gotten lazy about them.
Perhaps I should have just cleaned house and brought everything in line. Hindsight is wonderful. At least I had a decent profit to also work with on this.
So my strategy is to hold out for the expected rally, if it does not materialize I will close some losing positions, let a few expire to save the commissions as they are not worth trading now, regroup and keep on slugging.
On the Optioneer/Strikepoint side I placed a trade yesterday that did not get filled...due to market conditions. It was nice to choose the setup and just send the request to my broker and get the email at the end of the day telling me what had happened with the trade...no watching the screen and making trades to setup the strangle...nice.
Today the numbers are not so good so I will wait until Monday to place another for a better profit target. Yesterday's was about $420 profit to expire on November 30th, today the trade was only worth $309, same expiry. I am going to aim for $400 targets or higher mainly as this gets my return per trade up near 10% and my annualized return close to 100%.
The goals are going to start at making the first $4000 to cover all my fees for the year, then the next $5000 is going to cover adding another trade to the concurrent trade number OR start doubling one trade in the mix. Based on some backtesting goal one is possible in the first 3 or 4 months unless I maximize my trade quantity. My testing was using up to five concurrent trades and I could place up to seven.
The idea is to be able to diversify the trades so that I spread my risk of a major market move over many trades. A strangle takes advantage of selling options for profit and buying options for protection so the net profit results from the sales being worth more than the protection. Seeing as these are based on the S&P500 the call spread is set much higher than the current level and the puts are much lower. As long as the S&P remains within those boundaries there is profit to be had. Placing trades as the market moves every 20 to 30 points allows the strangles to stagger and "bracket" the market at varying levels, this amounts to diversification. As the market goes up the next trade will bracket higher and as it moves down it will bracket lower. This has my trades moving with the market and a sharp up move may only affect a trade that was placed at, a much lower level but not the three or four others at a higher level. Most trades are, at most 45 days in duration.
I'll set up a chart to show this another time.
Jeff.
Friday, September 25, 2009
AAARRRGGGHHH! One last trial.
I had decided that signing up with the Optioneer program was to be my last service to put to the test (although there is more commitment there than others from my side AND their side to make it work).
Today I received a notice about another program that I had considered before and looked into. It is new but I have tried other products from the same group. While I did not keep them active and exercised my risk free guarantee I was impressed with their dealings and straight up business attitude.
I put the cost onto my card, as all online services do, and immediately went crazy reading and going through the material.
This one is a "course" in options that includes a DVD set of lessons and some online assistance and webtools for working with options.
I must admit that they did a bangup job of it and it comes across as professional and is informative. I blew through all the quizzes after reading through the slide presentations so I have a handle on the entire content of the course now. The last part I skipped had to do with some of the more complicated strategies, condors, butterflies, strangles... all of which I am already looking at implementing anyway but will approach on an individual basis as I have done with every other aspect of trading.
In order to receive the credit upon cancellation within the 30 days I have to return the material...I think that I may cancel before then as all of the option course so far, 70% of it, has not had anything new. A few twists on theories that I passed over before and a slightly different takes on a few ideas but certainly nothing earthshattering...and certainly not worth $2500, the "introductory" price let alone the suggest retail price of $5,000.
While I should have known, I was curious enough to try it. The thing about these is there is no real material to get to understand ahead of ordering these so I have to bite the bullet to satisfy my curiosity. I am glad that the guarantees so far have lived up to their word.
I suppose, in defense of the program, anyone brand new to options would have a time with this course as it does cover a lot of material, just not much new for someone who, like myself, loves to learn voraciously and seeks out every scrap of material available while leaving my BS filter on high gain.
One last comment, and this has to do with the reason that I left options as long as I have. No matter how much one knows about options, one still has to be able to gauge a stock and price expectations in order to trade options. There are a few ways to trade them that can turn losers into winners and some that can turn a profit without knowing anything more than the volatility and average true range but that does not preclude getting to know the stocks first anyway.
Another service bites the dust.
Jeff.
Today I received a notice about another program that I had considered before and looked into. It is new but I have tried other products from the same group. While I did not keep them active and exercised my risk free guarantee I was impressed with their dealings and straight up business attitude.
I put the cost onto my card, as all online services do, and immediately went crazy reading and going through the material.
This one is a "course" in options that includes a DVD set of lessons and some online assistance and webtools for working with options.
I must admit that they did a bangup job of it and it comes across as professional and is informative. I blew through all the quizzes after reading through the slide presentations so I have a handle on the entire content of the course now. The last part I skipped had to do with some of the more complicated strategies, condors, butterflies, strangles... all of which I am already looking at implementing anyway but will approach on an individual basis as I have done with every other aspect of trading.
In order to receive the credit upon cancellation within the 30 days I have to return the material...I think that I may cancel before then as all of the option course so far, 70% of it, has not had anything new. A few twists on theories that I passed over before and a slightly different takes on a few ideas but certainly nothing earthshattering...and certainly not worth $2500, the "introductory" price let alone the suggest retail price of $5,000.
While I should have known, I was curious enough to try it. The thing about these is there is no real material to get to understand ahead of ordering these so I have to bite the bullet to satisfy my curiosity. I am glad that the guarantees so far have lived up to their word.
I suppose, in defense of the program, anyone brand new to options would have a time with this course as it does cover a lot of material, just not much new for someone who, like myself, loves to learn voraciously and seeks out every scrap of material available while leaving my BS filter on high gain.
One last comment, and this has to do with the reason that I left options as long as I have. No matter how much one knows about options, one still has to be able to gauge a stock and price expectations in order to trade options. There are a few ways to trade them that can turn losers into winners and some that can turn a profit without knowing anything more than the volatility and average true range but that does not preclude getting to know the stocks first anyway.
Another service bites the dust.
Jeff.
Wednesday, September 23, 2009
Plans, plans, plans...
Plans always change...
I had decided to put my P&F chart trading on hold for a while and test only the trading service trades. Now that I have migrated most (all but 4 of 14) trades over to my TFSA I have a ton of cash sitting in my RRSP not being put to work. All my trades right now would easily fit into less than a $5,ooo account.
This afternoon I am attending, if you can call it that, a webinar put on as a training guide for the next service I am likely to try out...the expensive one. Should this look extremely good I may be moving most of my RRSP over as a longer term plan. It really looks promising now that I have had more time to tweak the trades and do a little varied back testing. I have some current live fake trades that are turning into profit mode so it is nice to see an active progression.
In the meantime, my plan is to re-introduce the P&F chart trading into my RRSP account but I will be concentrating on covered calls to generate a slightly different line of income. I may be able to use some of the advisory trades to do this but substitute stocks for the calls then sell the calls based on the stock holding rather than perform a true option spread. I have updated my option level to level 2 in that account now, minimum balance to do this is $2500 so I updated my TFSA as well.
Should the service trades look promising I will use mainly those but I will pick up to 10 stocks from my final list of 50 or so P&F charts that are the most promising patterns and use those as the basis of my own covered call trades. These are going to have to be under the $20 mark though as I need to be able to trade in 100 share increments in order to sell a call against them. That alone will whittle the selection down considerably. Even so, checking the option chains for activity that corresponds to my charts will be interesting. I don't have any fancy software to do that for me so I cannot get too many going for this as I will be using my broker platform for this...which is really restrictive when it comes to studies.
Should the RRSP not get transferred I will consider liquidating some of it and transferring into the margin account to top it off to $5,000, plus a bit, to allow me to perform spreads... $5K is the minimum required account value to do this. I think that I would not likely use naked option writing so I won't worry too much about getting the account up to $25K. Once I have that in place then I will investigate getting into strangles as that is where I can produce some nice long term low risk regular gains. That will just be a rather complicated dance and I am afraid that the commissions are going to be prohibitive or perhaps just restrict me to one style of strangle or perhaps just one side, a spread, for now.
Back to the downside of any trading in the margin account...taxation.
Plans, plans, plans.
Jeff.
I had decided to put my P&F chart trading on hold for a while and test only the trading service trades. Now that I have migrated most (all but 4 of 14) trades over to my TFSA I have a ton of cash sitting in my RRSP not being put to work. All my trades right now would easily fit into less than a $5,ooo account.
This afternoon I am attending, if you can call it that, a webinar put on as a training guide for the next service I am likely to try out...the expensive one. Should this look extremely good I may be moving most of my RRSP over as a longer term plan. It really looks promising now that I have had more time to tweak the trades and do a little varied back testing. I have some current live fake trades that are turning into profit mode so it is nice to see an active progression.
In the meantime, my plan is to re-introduce the P&F chart trading into my RRSP account but I will be concentrating on covered calls to generate a slightly different line of income. I may be able to use some of the advisory trades to do this but substitute stocks for the calls then sell the calls based on the stock holding rather than perform a true option spread. I have updated my option level to level 2 in that account now, minimum balance to do this is $2500 so I updated my TFSA as well.
Should the service trades look promising I will use mainly those but I will pick up to 10 stocks from my final list of 50 or so P&F charts that are the most promising patterns and use those as the basis of my own covered call trades. These are going to have to be under the $20 mark though as I need to be able to trade in 100 share increments in order to sell a call against them. That alone will whittle the selection down considerably. Even so, checking the option chains for activity that corresponds to my charts will be interesting. I don't have any fancy software to do that for me so I cannot get too many going for this as I will be using my broker platform for this...which is really restrictive when it comes to studies.
Should the RRSP not get transferred I will consider liquidating some of it and transferring into the margin account to top it off to $5,000, plus a bit, to allow me to perform spreads... $5K is the minimum required account value to do this. I think that I would not likely use naked option writing so I won't worry too much about getting the account up to $25K. Once I have that in place then I will investigate getting into strangles as that is where I can produce some nice long term low risk regular gains. That will just be a rather complicated dance and I am afraid that the commissions are going to be prohibitive or perhaps just restrict me to one style of strangle or perhaps just one side, a spread, for now.
Back to the downside of any trading in the margin account...taxation.
Plans, plans, plans.
Jeff.
Monday, September 21, 2009
Stop Orders and Options
I have placed a few stop orders in the past for some of my option positions but I have just placed limit orders more often in order to catch a particular profit level. As a result I was never totally sure of how the stop orders were executed.
I watched an order that I placed today on a position that I was looking to get out of. Maximizing profits was not my goal so I set a stop order. The spread was 30 cents and the bids ranged from $4.50 to $4.70 near the start of the day.
I noticed that, unlike a stop on a stock position, the stop was not triggered when the bid price hit the stop price. Stock stop orders get executed as market orders as soon as the bid hits the stop.
My stop was set for $4.50 and I moved it up to $4.60 as the bid moved up. I was trying to get hit but wanted to see how the execution occurred as the price moved so I kept my stop at the bid.
I eventually got hit and the position closed at $4.30. Seeing as the spread was 30 cents and upon checking the bid at the time of the order execution, it was $4.30.
So, as I suspected, the stop orders get executed when the ask hits the stop, not when the bid hits.
This certainly makes difference in how I will choose to place stops in the future as losing the spread all the time is not really what I have in mind.
For the record, VTSOs do not work, which makes sense as the trailing stop is set by the last trade price and options may not trade all day while the prices fluctuate wildly. I think that the VTSO could be easily tied to the bid or ask but that would take the broker changing their platform to accommodate this. I suspect that the market (NYSE, AMEX etc) will not support a VTSO directly and Questrade does not handle orders as they are strictly a direct access discount broker. The most they do is to hold GTC orders over.
Jeff.
I watched an order that I placed today on a position that I was looking to get out of. Maximizing profits was not my goal so I set a stop order. The spread was 30 cents and the bids ranged from $4.50 to $4.70 near the start of the day.
I noticed that, unlike a stop on a stock position, the stop was not triggered when the bid price hit the stop price. Stock stop orders get executed as market orders as soon as the bid hits the stop.
My stop was set for $4.50 and I moved it up to $4.60 as the bid moved up. I was trying to get hit but wanted to see how the execution occurred as the price moved so I kept my stop at the bid.
I eventually got hit and the position closed at $4.30. Seeing as the spread was 30 cents and upon checking the bid at the time of the order execution, it was $4.30.
So, as I suspected, the stop orders get executed when the ask hits the stop, not when the bid hits.
This certainly makes difference in how I will choose to place stops in the future as losing the spread all the time is not really what I have in mind.
For the record, VTSOs do not work, which makes sense as the trailing stop is set by the last trade price and options may not trade all day while the prices fluctuate wildly. I think that the VTSO could be easily tied to the bid or ask but that would take the broker changing their platform to accommodate this. I suspect that the market (NYSE, AMEX etc) will not support a VTSO directly and Questrade does not handle orders as they are strictly a direct access discount broker. The most they do is to hold GTC orders over.
Jeff.
Wednesday, September 16, 2009
A more advanced option trading service
Of course more advanced means more expensive. More than $4K CDN start up plus some access and commission fees as this is a broker/trader platform that only works with one broker...and it is a US company. Now, they have a track record in the sense that they have been around since 2000 or so and I can back test to 2004.
The core assumption that the system is based on is that close to 75% of all options sold expire un-exercised...this is a loss to the buyer and a gain to the seller. That alone is quite an edge over just buying options. I sort of knew that I was going to need to get into selling options in order to secure a smoother cash flow and I also knew that a lot of options expire worthless...but I didn't know the numbers.
The second assumption is that big winning home runs are not looked for. They promote the idea of very tight risk management that will, by it's nature, provide a good return compared to any other investment vehicle. In this, compounding, even though they don't mention it, will turn a small account into a decent size rather quickly.
The strategy is sound and my back testing has yielded an over all win rate higher than anything I have back tested yet... in fact in 2009 I have yet to produce a single losing trade. Looking at their strategy, this is plain to see why. The only "worst case" scenario involves a huge run up or sell off in the market and I think that they tweak things to accommodate this on the fly, somewhat.
I was able to create some large losses in September last year as there was a bad run down in the market which fell outside of the current strategy parameters...it may not have been near as bad as I tested as I was just going with current settings and strict exit criteria. Pulling out of the hole that I virtually dug in September and October took me until May or so. I must admit that a hole in a mutual find account would still be there. Plodding along doing the exact same thing for each trade using the same strategy and same index (I won't get into what they trade but suffice it to say these are not stock options) worked. I expect that I could have mitigated the loss by not trading when risk factors were high in that month and boosted the returns by selecting trades that had higher risk/reward numbers initially and shorter time lines.
They have a 30 day money back exit guarantee and a 10 trade guarantee to have the initial fee reimbursed while still staying with the program. Now they specify which trade strategy that this guarantee applies to and I can see that they are next to guaranteed that they will never have to pay me back should I sign up. But, in that case I will have paid for it through trading anyway... win, win.
There are downsides to even trying this as it is a US company and I am not sure how the taxation applies to me yet. They do let me paper trade the service for free first, which is nice, but setting up an account through them could be onerous and I may have to do some sort of online US banking.
They use a proprietary formula to determine trade entries, exits and monitoring. The trades are complicated enough that I would not really want to have to try to set them up myself, at this point. Commissions alone in my current account for a single trade would amount to $152 USD. The paper trade setup accounts for commissions through their system so my testing is not "frictionless".
The trading appears to be easy enough. They make about 10 recommendations each day. I select the style of trade from three styles, select the size of base trade and pick which ever one has the shortest duration, select how many units and hit "Trade"... more or less. Then check the position each day to determine if is remains a keeper or to close it due to high risk factor. They look after making the corresponding trades (up to six trades for a single position) and send a notification as to whether the trade was filled or not. Oh, there is an allowance for how far outside the trade prices that I am willing to go to get the trade filled.
I think that there is also an automatic exit setup that will close a trade at a certain point that I determine ahead of time as well, sort of a stop loss even though that is easily looked after by checking myself.
They make their money from the commissions, data fees (loosely speaking there are data fees monthly) and I don't doubt that they take some from the spreads during the trades as well.
All in all this looks like a decent system and I am seriously considering trying it. There would be a significant cash outlay to test this though. The 10 trade guarantee uses minimum trades that are in the $16,000 range...US. I cannot do this through an RRSP so there would be tax implications in the spring. My 10 trades would take about 10 months to complete if I were not able to do multiple trades, which I won't. Putting up $20K seems like a lot...but how much have I dumped into mutual funds hoping for the best? My wife has just given me the OK to transfer her RRSP account to trade but I really hesitate to do that just yet. My RRSP is play money, hers is not.
My other option would be to dump $10,000 USD into this and go with the smaller trades, about $1000 per trade and run them like a laddered GIC plan, one trade per week and roll them over as they expire or close. I would consider the $4K cost as a trade deficit to start so I would not be tempted to pull cash out for anything and I could continue with my RRSP and TFSA trading in my CDN account.
I am torn as I see the huge long term potential here.
I have been in one of their webinars, done some serious playing in a test account and have booked another webinar next week. Overall I have about 6 hours into this so far. I think that this company is willing to spend the time to get anyone up to speed and help facilitate the account setup and funding...after all, it is their business.
Jeff.
The core assumption that the system is based on is that close to 75% of all options sold expire un-exercised...this is a loss to the buyer and a gain to the seller. That alone is quite an edge over just buying options. I sort of knew that I was going to need to get into selling options in order to secure a smoother cash flow and I also knew that a lot of options expire worthless...but I didn't know the numbers.
The second assumption is that big winning home runs are not looked for. They promote the idea of very tight risk management that will, by it's nature, provide a good return compared to any other investment vehicle. In this, compounding, even though they don't mention it, will turn a small account into a decent size rather quickly.
The strategy is sound and my back testing has yielded an over all win rate higher than anything I have back tested yet... in fact in 2009 I have yet to produce a single losing trade. Looking at their strategy, this is plain to see why. The only "worst case" scenario involves a huge run up or sell off in the market and I think that they tweak things to accommodate this on the fly, somewhat.
I was able to create some large losses in September last year as there was a bad run down in the market which fell outside of the current strategy parameters...it may not have been near as bad as I tested as I was just going with current settings and strict exit criteria. Pulling out of the hole that I virtually dug in September and October took me until May or so. I must admit that a hole in a mutual find account would still be there. Plodding along doing the exact same thing for each trade using the same strategy and same index (I won't get into what they trade but suffice it to say these are not stock options) worked. I expect that I could have mitigated the loss by not trading when risk factors were high in that month and boosted the returns by selecting trades that had higher risk/reward numbers initially and shorter time lines.
They have a 30 day money back exit guarantee and a 10 trade guarantee to have the initial fee reimbursed while still staying with the program. Now they specify which trade strategy that this guarantee applies to and I can see that they are next to guaranteed that they will never have to pay me back should I sign up. But, in that case I will have paid for it through trading anyway... win, win.
There are downsides to even trying this as it is a US company and I am not sure how the taxation applies to me yet. They do let me paper trade the service for free first, which is nice, but setting up an account through them could be onerous and I may have to do some sort of online US banking.
They use a proprietary formula to determine trade entries, exits and monitoring. The trades are complicated enough that I would not really want to have to try to set them up myself, at this point. Commissions alone in my current account for a single trade would amount to $152 USD. The paper trade setup accounts for commissions through their system so my testing is not "frictionless".
The trading appears to be easy enough. They make about 10 recommendations each day. I select the style of trade from three styles, select the size of base trade and pick which ever one has the shortest duration, select how many units and hit "Trade"... more or less. Then check the position each day to determine if is remains a keeper or to close it due to high risk factor. They look after making the corresponding trades (up to six trades for a single position) and send a notification as to whether the trade was filled or not. Oh, there is an allowance for how far outside the trade prices that I am willing to go to get the trade filled.
I think that there is also an automatic exit setup that will close a trade at a certain point that I determine ahead of time as well, sort of a stop loss even though that is easily looked after by checking myself.
They make their money from the commissions, data fees (loosely speaking there are data fees monthly) and I don't doubt that they take some from the spreads during the trades as well.
All in all this looks like a decent system and I am seriously considering trying it. There would be a significant cash outlay to test this though. The 10 trade guarantee uses minimum trades that are in the $16,000 range...US. I cannot do this through an RRSP so there would be tax implications in the spring. My 10 trades would take about 10 months to complete if I were not able to do multiple trades, which I won't. Putting up $20K seems like a lot...but how much have I dumped into mutual funds hoping for the best? My wife has just given me the OK to transfer her RRSP account to trade but I really hesitate to do that just yet. My RRSP is play money, hers is not.
My other option would be to dump $10,000 USD into this and go with the smaller trades, about $1000 per trade and run them like a laddered GIC plan, one trade per week and roll them over as they expire or close. I would consider the $4K cost as a trade deficit to start so I would not be tempted to pull cash out for anything and I could continue with my RRSP and TFSA trading in my CDN account.
I am torn as I see the huge long term potential here.
I have been in one of their webinars, done some serious playing in a test account and have booked another webinar next week. Overall I have about 6 hours into this so far. I think that this company is willing to spend the time to get anyone up to speed and help facilitate the account setup and funding...after all, it is their business.
Jeff.
Thursday, September 10, 2009
On trading advisory services
Well,
I still have two trial subscriptions for option trading services. I find that they are more information scanners for me as I may or may not make the trade that they suggest. One has a 90 day trial which is actually pretty good as that gives me time to really run it through it's paces. They also include a blurb that guarantees 9 money doubling trades in that period but I can still cancel even if those are met, no strings. This one does some decent checking on the stock as well as the typical data scan and they do not pull in much "technical" chart analysis that is easy for anyone to do.
The other only has a 30 day guarantee and uses more chart analysis... although it is a cheaper service.
Having said that both have access to information that I do not, or will not, choose to pay for as it would be more expensive than paying them. I have open trades from each of the services now.
Both have almost covered the initial cost with the trades that I have taken. The more expensive as given more trades and profitable positions so far (none sold yet) and the cheaper only one active trade, as I have had it for less time mainly but it does provide fewer trades overall.
I may keep one or both if they prove fruitful while still running my own trading alongside...seeing as options are cheaper I can do that easily enough.
I have not quoted any figures or trades from these yet but I have 60%, 44%, 55% with one that is -20% and some others just in the green.
These numbers are a little deceptive, or can be. My trades have been deeper ITM so the percentage will be lower even though the actual dollar return may be higher. Some of the service trades were smaller ATM or OTM trades so 60% is not as impressive...until I count that I took a 4 contract position in that case due to the low cost. That is not too high as the trade was for $1 options and I would have bought 300 shares of the underlying stock had I bought the stock and both cash returns would be in the same ballpark.
I need to rethink my loss allowance on these smaller trades and make use of some of the leverage available at some of these $1 or less options. I could have made the one trade with 6 contracts and been at my loss allowance as I would stop them at 50% loss or $300. These have opened my eyes to the ATM trades as being not as scary as some may have led me to believe.
Like anything else in the trading game, risk and loss management are the key to profits, or at least the key to still being around to play the game.
I hope not to gain a reliance on advisory services so I am learning what they use and finding other ways to gain the same sort of information. These two seem to be on the ball where all of the others I have seen and tried (some were very expensive) have missed the mark altogether.
Jeff.
I still have two trial subscriptions for option trading services. I find that they are more information scanners for me as I may or may not make the trade that they suggest. One has a 90 day trial which is actually pretty good as that gives me time to really run it through it's paces. They also include a blurb that guarantees 9 money doubling trades in that period but I can still cancel even if those are met, no strings. This one does some decent checking on the stock as well as the typical data scan and they do not pull in much "technical" chart analysis that is easy for anyone to do.
The other only has a 30 day guarantee and uses more chart analysis... although it is a cheaper service.
Having said that both have access to information that I do not, or will not, choose to pay for as it would be more expensive than paying them. I have open trades from each of the services now.
Both have almost covered the initial cost with the trades that I have taken. The more expensive as given more trades and profitable positions so far (none sold yet) and the cheaper only one active trade, as I have had it for less time mainly but it does provide fewer trades overall.
I may keep one or both if they prove fruitful while still running my own trading alongside...seeing as options are cheaper I can do that easily enough.
I have not quoted any figures or trades from these yet but I have 60%, 44%, 55% with one that is -20% and some others just in the green.
These numbers are a little deceptive, or can be. My trades have been deeper ITM so the percentage will be lower even though the actual dollar return may be higher. Some of the service trades were smaller ATM or OTM trades so 60% is not as impressive...until I count that I took a 4 contract position in that case due to the low cost. That is not too high as the trade was for $1 options and I would have bought 300 shares of the underlying stock had I bought the stock and both cash returns would be in the same ballpark.
I need to rethink my loss allowance on these smaller trades and make use of some of the leverage available at some of these $1 or less options. I could have made the one trade with 6 contracts and been at my loss allowance as I would stop them at 50% loss or $300. These have opened my eyes to the ATM trades as being not as scary as some may have led me to believe.
Like anything else in the trading game, risk and loss management are the key to profits, or at least the key to still being around to play the game.
I hope not to gain a reliance on advisory services so I am learning what they use and finding other ways to gain the same sort of information. These two seem to be on the ball where all of the others I have seen and tried (some were very expensive) have missed the mark altogether.
Jeff.
Friday, September 4, 2009
Options vs Stocks at the open
I have been playing with stocks for such a long time it is hard to break out of that mindset.
Having said that, there is one important difference between stock and options trading that I am finding very valuable to me.
The bid / ask spread at the open.
Options are priced based on the underlying stock price, implied volatility, strike price and a few other factors that I have not looked at yet. Stocks are priced based on what someone is willing to buy or sell them at at that particular moment. The moment that causes me the most problem is the first moment as the market opens and particularly on stocks that do not trade pre-market.
The reason this is such a hassle is due to my stop loss orders. A stop loss on a stock will be triggered when the bid hits the stop price, then the order is placed as a market order and the position is sold at whatever price it will get. I tend to check the pre-market spread and very often see that the spread is large enough that the bid is under my stop even though the ask is way over my stop.
One day I called my broker and asked them what happens in the case of such a wide spread at the open. "The stop would be triggered and executed".
I have been massaging my stop orders pre-market as a result, move the stop down to accommodate the low bid and move it up after the open to where it was or cancelling VTSOs and hoping to be able to re-establish them afterwards. This is just s nuisance. VTSOs are not so easy to re-establish as a 75 cent VTSO that is up to, say $10, needs the stock to be up to $10.75 in order to re-establish at $10. The stock may only make it up to $10.50 so I have to watch my stop at $10 until the price hits $10.75 to re-order the VTSO.
Stocks that trade pre-market have already gone through this initial spread issue and are trading with a normal spread by 0930h so the issue is not an issue. If the price opens below my stop then it is not artificially there and I will let the order go.
The whole point is that the options do not get re-priced until AFTER the market is open as they need to see the price established by trading FIRST.
There are two ways to look at the option angle.
1) buying options that do NOT require a stop (ITM or OTM)
2) using stops as profit protection and not being concerned about the open spread on the stock
In either case the option still does not go through the volatility at the bell that a stock does by it's very nature.
Chalk one more up for options over stocks...one day I will make a list of these reasons.
Jeff.
Having said that, there is one important difference between stock and options trading that I am finding very valuable to me.
The bid / ask spread at the open.
Options are priced based on the underlying stock price, implied volatility, strike price and a few other factors that I have not looked at yet. Stocks are priced based on what someone is willing to buy or sell them at at that particular moment. The moment that causes me the most problem is the first moment as the market opens and particularly on stocks that do not trade pre-market.
The reason this is such a hassle is due to my stop loss orders. A stop loss on a stock will be triggered when the bid hits the stop price, then the order is placed as a market order and the position is sold at whatever price it will get. I tend to check the pre-market spread and very often see that the spread is large enough that the bid is under my stop even though the ask is way over my stop.
One day I called my broker and asked them what happens in the case of such a wide spread at the open. "The stop would be triggered and executed".
I have been massaging my stop orders pre-market as a result, move the stop down to accommodate the low bid and move it up after the open to where it was or cancelling VTSOs and hoping to be able to re-establish them afterwards. This is just s nuisance. VTSOs are not so easy to re-establish as a 75 cent VTSO that is up to, say $10, needs the stock to be up to $10.75 in order to re-establish at $10. The stock may only make it up to $10.50 so I have to watch my stop at $10 until the price hits $10.75 to re-order the VTSO.
Stocks that trade pre-market have already gone through this initial spread issue and are trading with a normal spread by 0930h so the issue is not an issue. If the price opens below my stop then it is not artificially there and I will let the order go.
The whole point is that the options do not get re-priced until AFTER the market is open as they need to see the price established by trading FIRST.
There are two ways to look at the option angle.
1) buying options that do NOT require a stop (ITM or OTM)
2) using stops as profit protection and not being concerned about the open spread on the stock
In either case the option still does not go through the volatility at the bell that a stock does by it's very nature.
Chalk one more up for options over stocks...one day I will make a list of these reasons.
Jeff.
Thursday, September 3, 2009
The allure of cheap ATM options
Risk.
An option risks only the price paid for the option...no more.
Comparing the two options from today's purchases:
CMC risks $510 and CVA risks $290. Take it one strike closer to the money and the overall cash risked is less. Buying the CVA ATM option right now puts $140 at risk and CMC ATM at $200 (and it is 50 cents OTM).
That makes these ATM options look enticing, but is it just because they are cheap?
Let's think about this for a moment.
Considering that they have no intrinsic value unless the stock price climbs AND the Extrinsic Value will most likely decline as the stock price comes up (Delta is usually around 0.50 for these so the IV goes up by $1 and the EV goes down by 50 cents).
Given this and assuming that I am willing to risk $300 per trade I have three choices:
1) buy stocks (100 shares) and set the stop $3 down
2) buy ITM options (1 contract) and set the stop roughly where the $3 stock price drop would be
3) buy ATM options (2 contracts) and set no stop
WAIT A MINUTE....SET NO STOP?
OK...Let's take CVA as an example, mainly because the closing price today was at the strike price of $17.50...or very close.
I bought one contract for $290 with an IV of $2.35. If the stock moves aginst me by $2.35 I lose all of the IV and some of the EV...total loss of perhaps $255 and I had to have had a stop in place to catch this. If it moves in my favour by $3 I gain $3 of IV and the EV may not change much as it is low already. So slightly less than a $300 gain for the position. Figuring out where to place the stop is tough as it is a moving target for a variety of reasons.
The current asking price for the ATM option for CVA is $1.40. I could buy 2 contracts for $280, slightly less than my loss allowance and slightly less than my actual ITM purchase. With the near 0.5 delta 2 contracts can produce the same option price move relative to the stock price move as 1 contract deeper ITM with a delta of 0.8 or greater.
If the stock price moves against me I lose no IV as there is none, only EV. As an example the next strike for CVA is $20...or $2.50 away but the option is only down by about $1. So the same $2.35 move against me would lose less than $1 overall per contract. About $200 for the entire 2 contract trade...less than the single ITM contract loss. Worst case is still $280.
Here is the catch. If the price moves in my favour by the $3, and I have the two contracts, the total IV for the position is now $600. The EV will likely drop but it cannot drop any more than the $280 it had in the first place, likely somewhat less...but let's take worst case. Lose all EV and the IV alone is still $600, I paid $280 so the gain is $320. Seeing as the $2.35 ITM option still has an EV of 55 cents it would stand to reason that the new option price would have close to that under similar circumstances...so the real number will be $110 more...that's $420 gain.
When we enter any position we do so with the expectation that the price will move in the direction that we anticipate, otherwise why make the trade. This means that having built in Intrinsic Value, by itself, is not as important as it may seem. Once the price moves in our favour the IV will move along with the price.
So taking a trade with no more risk and slightly better upside and not having to worry about anything other than a profit protection stop loss looks like a better all around trade to make.
The trick is finding those stocks that are ATM or slightly OTM that are poised for the next move and have the options priced accordingly. In hindsight I would have made those two trades today using this option thinking instead of what I did... so back to the charts to see what I can scare up for tomorrow... or with the long weekend this weekend, I may just wait until Tuesday.
Jeff.
An option risks only the price paid for the option...no more.
Comparing the two options from today's purchases:
CMC risks $510 and CVA risks $290. Take it one strike closer to the money and the overall cash risked is less. Buying the CVA ATM option right now puts $140 at risk and CMC ATM at $200 (and it is 50 cents OTM).
That makes these ATM options look enticing, but is it just because they are cheap?
Let's think about this for a moment.
Considering that they have no intrinsic value unless the stock price climbs AND the Extrinsic Value will most likely decline as the stock price comes up (Delta is usually around 0.50 for these so the IV goes up by $1 and the EV goes down by 50 cents).
Given this and assuming that I am willing to risk $300 per trade I have three choices:
1) buy stocks (100 shares) and set the stop $3 down
2) buy ITM options (1 contract) and set the stop roughly where the $3 stock price drop would be
3) buy ATM options (2 contracts) and set no stop
WAIT A MINUTE....SET NO STOP?
OK...Let's take CVA as an example, mainly because the closing price today was at the strike price of $17.50...or very close.
I bought one contract for $290 with an IV of $2.35. If the stock moves aginst me by $2.35 I lose all of the IV and some of the EV...total loss of perhaps $255 and I had to have had a stop in place to catch this. If it moves in my favour by $3 I gain $3 of IV and the EV may not change much as it is low already. So slightly less than a $300 gain for the position. Figuring out where to place the stop is tough as it is a moving target for a variety of reasons.
The current asking price for the ATM option for CVA is $1.40. I could buy 2 contracts for $280, slightly less than my loss allowance and slightly less than my actual ITM purchase. With the near 0.5 delta 2 contracts can produce the same option price move relative to the stock price move as 1 contract deeper ITM with a delta of 0.8 or greater.
If the stock price moves against me I lose no IV as there is none, only EV. As an example the next strike for CVA is $20...or $2.50 away but the option is only down by about $1. So the same $2.35 move against me would lose less than $1 overall per contract. About $200 for the entire 2 contract trade...less than the single ITM contract loss. Worst case is still $280.
Here is the catch. If the price moves in my favour by the $3, and I have the two contracts, the total IV for the position is now $600. The EV will likely drop but it cannot drop any more than the $280 it had in the first place, likely somewhat less...but let's take worst case. Lose all EV and the IV alone is still $600, I paid $280 so the gain is $320. Seeing as the $2.35 ITM option still has an EV of 55 cents it would stand to reason that the new option price would have close to that under similar circumstances...so the real number will be $110 more...that's $420 gain.
When we enter any position we do so with the expectation that the price will move in the direction that we anticipate, otherwise why make the trade. This means that having built in Intrinsic Value, by itself, is not as important as it may seem. Once the price moves in our favour the IV will move along with the price.
So taking a trade with no more risk and slightly better upside and not having to worry about anything other than a profit protection stop loss looks like a better all around trade to make.
The trick is finding those stocks that are ATM or slightly OTM that are poised for the next move and have the options priced accordingly. In hindsight I would have made those two trades today using this option thinking instead of what I did... so back to the charts to see what I can scare up for tomorrow... or with the long weekend this weekend, I may just wait until Tuesday.
Jeff.
Friday, August 28, 2009
IPI options execution update
The importance of buying options with a small percentage of Extrinsic Value and considering that EV amount to be slush.
Back on the 19th of August I placed a trade for IPI stock and the Jan 20 call option. Here was the table as the trade stood at the end of that day. Note the EV of $2. Even on this short timeframe the EV lost far more than I might have expected.
Now, keep in mind this is a little experiment to compare the two trading vehicles and I am not expecting any real profits other than gaining some more knowledge in the realm of option trading. My expectations going in were curious in nature.
Here is the table for today:
The major thing to note on this one so far is that the stock is up 20 cps and the option is down 50 cps. Basically the intrinsic value is up by the 20cps of the stock but the extrinsic value dropped by 70 cps.. even though the Delta would suggest that a 20cps gain SHOULD result in a 16cps gain in the option value. The greeks are definitely not infallible.
Here is the daily six month chart for IPI :
The indicators that I have on the bottom are the Relative Strength Index and the Average True Range. The price is obviously in a bit of a limbo right now as it waffles around the long Volume by Price bar between $25 and $26. This bar looks to be more related to indecision than any support or resistance levels.
The ATR is just the average daily range over the last 5 day period and reflects a lower volatility. I could use other volatility indicators but this one also gives me a guideline for setting stop orders or VTSOs should I decide to employ them.
Seeing as the ATR is getting lower it would imply that the EV of the option should also drop in sync with this indicator. I was not tracking it but I expect that even the put EV is dropping as either option gets some of it's EV from this volatility. I knew this already but seeing it act on my money is a very interesting experiment.
This will affect how I place my stops for options trades. I should be wary of placing stops based on the option price as compared with the stock price at the time of the trade. This is why it is important to look for options that have a smaller percentage of EV as this value is not strictly a time value as option "guru's" would have us believe. Sadly, in this case, the option purchased was not the best deal as the EV was over 30% of the option price...that's a lot of slush.
Basically, the stop is more dependent upon the price of the stock than the price of the option. This is more important as the EV% gets higher. Perhaps a good way to set an option stop, rather than trying to accommodate the Delta and EV would be to completely ignore the EV and base the ultimate option stop upon the IV only. So if the stop on the stock, had a regular stock been purchased, was $3 lower than the price, the option stop should be the option purchase price minus the EV minus the $3. This writes of the EV as a variable that may cause the option price to be higher initially, a sudden drop in volatility with the associated EV drop could hit a well placed option stop inadvertently.
Write off the EV, use the stock stop difference and set this as the absolute worst case stop loss order for the option. Once it is in the money and there are profits to protect, the stop can be moved up or the option sold to crystallize these paper profits.
Options trades I look for now generally have an EV of less than 20% with the exception of trades that I may take that are out of the money...in which case I consider the entire premium as a potential loss, even though I know that there will usually be SOME value left in the option if I get rid of it before the last three months to expiration. I have one down around 7%.
Options are somewhat more complicated as this brings up another consideration.
Is it fair to use the same loss allowance for options as for stock trades?
Jeff.
Back on the 19th of August I placed a trade for IPI stock and the Jan 20 call option. Here was the table as the trade stood at the end of that day. Note the EV of $2. Even on this short timeframe the EV lost far more than I might have expected.
Now, keep in mind this is a little experiment to compare the two trading vehicles and I am not expecting any real profits other than gaining some more knowledge in the realm of option trading. My expectations going in were curious in nature.Here is the table for today:
The major thing to note on this one so far is that the stock is up 20 cps and the option is down 50 cps. Basically the intrinsic value is up by the 20cps of the stock but the extrinsic value dropped by 70 cps.. even though the Delta would suggest that a 20cps gain SHOULD result in a 16cps gain in the option value. The greeks are definitely not infallible.
Here is the daily six month chart for IPI :
The indicators that I have on the bottom are the Relative Strength Index and the Average True Range. The price is obviously in a bit of a limbo right now as it waffles around the long Volume by Price bar between $25 and $26. This bar looks to be more related to indecision than any support or resistance levels.
The ATR is just the average daily range over the last 5 day period and reflects a lower volatility. I could use other volatility indicators but this one also gives me a guideline for setting stop orders or VTSOs should I decide to employ them.
Seeing as the ATR is getting lower it would imply that the EV of the option should also drop in sync with this indicator. I was not tracking it but I expect that even the put EV is dropping as either option gets some of it's EV from this volatility. I knew this already but seeing it act on my money is a very interesting experiment.
This will affect how I place my stops for options trades. I should be wary of placing stops based on the option price as compared with the stock price at the time of the trade. This is why it is important to look for options that have a smaller percentage of EV as this value is not strictly a time value as option "guru's" would have us believe. Sadly, in this case, the option purchased was not the best deal as the EV was over 30% of the option price...that's a lot of slush.
Basically, the stop is more dependent upon the price of the stock than the price of the option. This is more important as the EV% gets higher. Perhaps a good way to set an option stop, rather than trying to accommodate the Delta and EV would be to completely ignore the EV and base the ultimate option stop upon the IV only. So if the stop on the stock, had a regular stock been purchased, was $3 lower than the price, the option stop should be the option purchase price minus the EV minus the $3. This writes of the EV as a variable that may cause the option price to be higher initially, a sudden drop in volatility with the associated EV drop could hit a well placed option stop inadvertently.
Write off the EV, use the stock stop difference and set this as the absolute worst case stop loss order for the option. Once it is in the money and there are profits to protect, the stop can be moved up or the option sold to crystallize these paper profits.
Options trades I look for now generally have an EV of less than 20% with the exception of trades that I may take that are out of the money...in which case I consider the entire premium as a potential loss, even though I know that there will usually be SOME value left in the option if I get rid of it before the last three months to expiration. I have one down around 7%.
Options are somewhat more complicated as this brings up another consideration.
Is it fair to use the same loss allowance for options as for stock trades?
Jeff.
Friday, August 21, 2009
Long straddle and more options
There are two versions of the straddle, which I found while looking up the real definition of the long straddle. The Strap and the Strip. They are a bullish and bearish twist to the same strategy and I considered one for my CAH straddle trade.
The strap is just weighting the trade toward the bullish side by buying more calls than puts, any ratio will do depending upon how sure I might be of a certain move, this still limits the downside loss should the trade go south but increases the profits if the stock price heads up. Even at this it is still not as profitable as just being right and buying the call or put.
The strip is just the reverse.
Actually, I see there is also a short straddle. This one expects the price to NOT move as I would sell short the calls and puts. Unlike the long straddle the loss is not limited. Should the price move either direction and the option expires ITM then the option will get exercised at my expense. I could always just buy back the options to cut losses though. I have not really investigated this one much at all as I cannot write options right now and I am so stuck on looking for stocks that move that I would be at a loss to try to find stocks that will not move.
Jeff.
The strap is just weighting the trade toward the bullish side by buying more calls than puts, any ratio will do depending upon how sure I might be of a certain move, this still limits the downside loss should the trade go south but increases the profits if the stock price heads up. Even at this it is still not as profitable as just being right and buying the call or put.
The strip is just the reverse.
Actually, I see there is also a short straddle. This one expects the price to NOT move as I would sell short the calls and puts. Unlike the long straddle the loss is not limited. Should the price move either direction and the option expires ITM then the option will get exercised at my expense. I could always just buy back the options to cut losses though. I have not really investigated this one much at all as I cannot write options right now and I am so stuck on looking for stocks that move that I would be at a loss to try to find stocks that will not move.
Jeff.
CAH and the Long Straddle
Well, I couldn't help myself...I had to get one of these in play.
Now CAH may not have been my first choice had I enough time to really do some research but it fits the criteria close enough that I shouldn't lose my shirt on the endeavour.
Here is the chart for CAH, I tacked on the indicators that may be of value in checking these out.
RSI, on top. Any value over 70 is sort of an over bought indicator...just by it's nature as relative strength for this stock has not been above 70 in six months...let alone spent any time above 70.
ATR, bottom is the Average True range over the last five days. It is over 1. This only indicates that the stock's price may move, on average, over $1 per day in the last five days. Unlike the RSI indicator this one does spend some appreciable amount of time over $1 leading me consider that a few $1 plus days COULD be in any direction.
Now CAH may not have been my first choice had I enough time to really do some research but it fits the criteria close enough that I shouldn't lose my shirt on the endeavour.
Here is the chart for CAH, I tacked on the indicators that may be of value in checking these out.
RSI, on top. Any value over 70 is sort of an over bought indicator...just by it's nature as relative strength for this stock has not been above 70 in six months...let alone spent any time above 70.
ATR, bottom is the Average True range over the last five days. It is over 1. This only indicates that the stock's price may move, on average, over $1 per day in the last five days. Unlike the RSI indicator this one does spend some appreciable amount of time over $1 leading me consider that a few $1 plus days COULD be in any direction.
According to my P&F charting this stock would be shortable (buy puts) at anything over $35... so I use $35.50 as the trigger. I figured, rather than just buying a put I would try the straddle and see how it works out...see if my theory matches reality.
I bought the Jan 35 call and Jan 35 put at the same time. Unfortunately both are sitting 10 cents down as I did not get great prices with my limit orders. Ideally, once I decided on a straddle I should set limit orders in the AM and adjust them over the course of the day to get a lower put and option price as the stock price does it's normal gyrations. The 20 cent spread may become negligible over the long run anyway.
Total capital invested $535. I would have preferred to also have the stock price closer to the strike price of both options, CAH was 60 cents ITM for the call which makes it 60 cents OTM for the put. I will place a stop order at half of the value now for each option. This will get me out of the trade for a $250 or so loss, worst case should the price do nothing but hover, which I doubt, or it gets me out of the losing option while the winner runs increasing my profits on that side of the trade.
While I took the time to write this my call is now even (10 cent gain from open) and the put is still at -10 cents. The stock price has only gone up 9 cents or so. This shows the appreciation of the call as the price may be expected to rise, implied volatility at work here increasing the value of the extrinsic portion of the option...one more factor in creating the price movement non-linearity.
Lets see where this takes me.
Jeff.
Thursday, August 20, 2009
ATM options
My first thought after labelling this post was that I might be talking about options trading at your bank machine....right.
I was doing some thinking about my ITM long term expiry option trades last night and decided to look at ATM or At The Money options.
In the money options have a high delta which means the value of the option moves close to the value of the stock, partly due to the intrinsic value appreciating at the same rate as the stock price. So the long term ITM options seem to be a good buy as they will, most likely, always be worth something and the delta increases as they get farther into the money, increasing the symmetry of price movement.
ATM option prices move down around the 0.5 delta range so they move about half...give or take as I have not looked at too many yet as this is just a new idea forming. The advantage is that the option is cheaper as there is no intrinsic value so I would not be paying for any ITM value and could buy more contracts. This is also the downside as the extrinsic value will decay and shift due to time, volatility and price movement against the trade. Ultimately I think that buying enough contracts to offset the variance in delta would probably produce a similar risk so it only allows me to effectively trade options cheaper rather than with more leverage.
Any trade is made with the idea that the stock price will move into a profit position, otherwise why trade at all? Keeping this one tenet firmly in mind there would be no reason to have to pick ITM options over ATM options. I do a fair amount of testing with no expectation of profit, so those trades do not follow this idea, but that is just me.
Using IPI as an example I noted the options data for the Jan calls ranging from strike of $20 up to $30. The stock closed yesterday at $25.40 (a nice even $1 per share for me in one day BTW) which puts the price in the middle of the strike range.
From strike of $20 to strike of $30 the IV drops from $5.40 to zero while the EV starts at $1.30, raises to $3.40 (ATM) and back down to $1.90. The ITM option that I bought was strike $20 so I bought about $4.40 of IV.
The risk with options is restricted to the entire purchase price of the options contracts. With ITM options the risk is larger in this respect due to the IV. ATM options, being that they are pure EV premium means that the risk can be lower as long as the expiry is long term, six months or better. In the last three months to expiry the EV gets eaten up quickly and will reduce to zero as the option expires with no IV. The plan is not to hold them into this last phase anyway.
One of the other "Greeks" used in options is Theta. This represents the erosion of EV based on time decay alone. In the IPI example the Theta ranges from 0.011 to 0.014. My understanding of this number is that it represents the expected loss of EV per day of the option...so the options ranging from $20-$30 strike have very little difference between them. That being the case there is little sense in considering time decay between strike prices a problem this far from expiry.
So, if EV erosion is the same or similar for the range 5 strikes either side of neutral and an ATM option is purchased and the price moves in my favour then the IV increases penny for penny, the EV goes down to result in a net of about a 50 cent option move for every dollar of stock move (real rough).
Other things happen here as well...the EV erosion lessens the farther ITM the option goes increasing the correlation of option price to stock price moves. The farther Out of The Money the option goes the lower the delta and therefore the non-linear relationship effectively slows down the loss rate. This works the same for ITM options so no surprise, it's just that the mechanism is slightly different. Should the implied volatility jump so will the EV. This I have not studied too slosely yet though so I am not sure the relationship.
I was doing some thinking about my ITM long term expiry option trades last night and decided to look at ATM or At The Money options.
In the money options have a high delta which means the value of the option moves close to the value of the stock, partly due to the intrinsic value appreciating at the same rate as the stock price. So the long term ITM options seem to be a good buy as they will, most likely, always be worth something and the delta increases as they get farther into the money, increasing the symmetry of price movement.
ATM option prices move down around the 0.5 delta range so they move about half...give or take as I have not looked at too many yet as this is just a new idea forming. The advantage is that the option is cheaper as there is no intrinsic value so I would not be paying for any ITM value and could buy more contracts. This is also the downside as the extrinsic value will decay and shift due to time, volatility and price movement against the trade. Ultimately I think that buying enough contracts to offset the variance in delta would probably produce a similar risk so it only allows me to effectively trade options cheaper rather than with more leverage.
Any trade is made with the idea that the stock price will move into a profit position, otherwise why trade at all? Keeping this one tenet firmly in mind there would be no reason to have to pick ITM options over ATM options. I do a fair amount of testing with no expectation of profit, so those trades do not follow this idea, but that is just me.
Using IPI as an example I noted the options data for the Jan calls ranging from strike of $20 up to $30. The stock closed yesterday at $25.40 (a nice even $1 per share for me in one day BTW) which puts the price in the middle of the strike range.
From strike of $20 to strike of $30 the IV drops from $5.40 to zero while the EV starts at $1.30, raises to $3.40 (ATM) and back down to $1.90. The ITM option that I bought was strike $20 so I bought about $4.40 of IV.
The risk with options is restricted to the entire purchase price of the options contracts. With ITM options the risk is larger in this respect due to the IV. ATM options, being that they are pure EV premium means that the risk can be lower as long as the expiry is long term, six months or better. In the last three months to expiry the EV gets eaten up quickly and will reduce to zero as the option expires with no IV. The plan is not to hold them into this last phase anyway.
One of the other "Greeks" used in options is Theta. This represents the erosion of EV based on time decay alone. In the IPI example the Theta ranges from 0.011 to 0.014. My understanding of this number is that it represents the expected loss of EV per day of the option...so the options ranging from $20-$30 strike have very little difference between them. That being the case there is little sense in considering time decay between strike prices a problem this far from expiry.
So, if EV erosion is the same or similar for the range 5 strikes either side of neutral and an ATM option is purchased and the price moves in my favour then the IV increases penny for penny, the EV goes down to result in a net of about a 50 cent option move for every dollar of stock move (real rough).
Other things happen here as well...the EV erosion lessens the farther ITM the option goes increasing the correlation of option price to stock price moves. The farther Out of The Money the option goes the lower the delta and therefore the non-linear relationship effectively slows down the loss rate. This works the same for ITM options so no surprise, it's just that the mechanism is slightly different. Should the implied volatility jump so will the EV. This I have not studied too slosely yet though so I am not sure the relationship.
Wednesday, August 19, 2009
IPI and the comparative test
I have a number of option and stock positions in play right now. Overall I am in the green...considering that these are mostly positions taken this week that is not too bad for a three day run in a questionable market.
One test I ran was to enter limit orders this morning for a stock and an option at the same time. I calculated what the option entry price should be based on my trigger price from the stock chart using the various variables for the option and my spreadsheet formulae.
The test subject is Intrepid Potash Inc. (IPI).
The limit orders placed were for $25.50 in the stock and $6.40 for the Jan 20 call option (IFJAT).
Both orders filled quickly off the bell and I might have been able to get slightly better prices for the stock by another 15 cents and 10 cents for the option...but I would probably have sacrificed getting one or the other altogether as the price bottom was hit 3 minutes in. I am satisfied with both entries and happy to see that my estimate of the option price that I calculated from yesterday's EOD numbers was still accurate... and that is the only point for the trade in the first place, profit a close second.
Here is a little chart reflecting some of the numbers for each position.
One test I ran was to enter limit orders this morning for a stock and an option at the same time. I calculated what the option entry price should be based on my trigger price from the stock chart using the various variables for the option and my spreadsheet formulae.
The test subject is Intrepid Potash Inc. (IPI).
The limit orders placed were for $25.50 in the stock and $6.40 for the Jan 20 call option (IFJAT).
Both orders filled quickly off the bell and I might have been able to get slightly better prices for the stock by another 15 cents and 10 cents for the option...but I would probably have sacrificed getting one or the other altogether as the price bottom was hit 3 minutes in. I am satisfied with both entries and happy to see that my estimate of the option price that I calculated from yesterday's EOD numbers was still accurate... and that is the only point for the trade in the first place, profit a close second.
Here is a little chart reflecting some of the numbers for each position.
It is well worth noting that the Extrinsic Value (EV) decreased between 9 and 39 cents (depending on if you use the bid or ask numbers...I would tend toward the bid as that would be the price to sell given a market order...a whole other topic). This drop counterbalances the Intrinsic Value (IV) gain of 69 cents (the increase in stock price) and results in the EOD Delta being lower.
Delta is the expected ratio of stock price movement vs option price movement... initially the 0.823 would mean that if the stock moves $1 then the option price would move 82.3 cents. The IV will always change by the price of the stock, the variable becomes the EX as it is not only a time premium (as it is often referred to) but a volatility expectation premium as well. Higher volatility expectations can yield higher EV values. This is why a flat trading stock that is not expected to move quickly has a very low option EV premium and why some options are very cheap and other can be very expensive even given zero or negative IV.
That's about it for tonight.
Jeff.
Tuesday, August 18, 2009
Options
Well, I think I may be coverting my stock positions to option positions. For now I will run both as I see how the options trades work out. Using options forces me to take a closer look at the pricing and nature of the option, decide on a strike price, expiry date and determine if the option is viable to trade based on the charting that I have been doing. It seems to get me more in tune with the underlying stock as I have to do a LITTLE bit more homework before placing the trade.
All of this slows down my trading, which is a good thing. I am forced to take more time in setting up and reviewing all of the factors that go into deciding to trade or not. This extra time has me looking closer at sector rotation again. While I think that the nature of my stock selection sort of handles this automatically for me I would like to use the rotation strategy more aggressively to make it work as one more factor in pushing the odds into my favour.
The pricing of the options is a factor, obviously. I would trade 100 share lots all the time but find that my capital dissappears quickly, trades entered and not filled still count as buying power used up. Options will run between $5 and $15 for stocks between $15 and $50. Rather than filling up my account with orders this lets me sit in a bit more cash while already having my orders in place. The only possible downside is the inability to buy 1/2 contract sizes, minor problem.
I currently have three option positions, 6 stock positions and a few of each order in place. I think I will let this settle for a bit and see where it all goes now.
Jeff.
All of this slows down my trading, which is a good thing. I am forced to take more time in setting up and reviewing all of the factors that go into deciding to trade or not. This extra time has me looking closer at sector rotation again. While I think that the nature of my stock selection sort of handles this automatically for me I would like to use the rotation strategy more aggressively to make it work as one more factor in pushing the odds into my favour.
The pricing of the options is a factor, obviously. I would trade 100 share lots all the time but find that my capital dissappears quickly, trades entered and not filled still count as buying power used up. Options will run between $5 and $15 for stocks between $15 and $50. Rather than filling up my account with orders this lets me sit in a bit more cash while already having my orders in place. The only possible downside is the inability to buy 1/2 contract sizes, minor problem.
I currently have three option positions, 6 stock positions and a few of each order in place. I think I will let this settle for a bit and see where it all goes now.
Jeff.
Monday, August 17, 2009
Holiday is over, new scaling and options.
Back from my two weeks off. As much as holidays are a nice get away it is nice to be home again. I had lots of time to ponder a great variety of topics and aspects of life....but I will only write about the trading related stuff here.
I gave some more though to my entry strategy, the 25, 25, 25 share scaling and decided it was not the best approach. I ended up sticking on a two trade entry which can be left as a single trade depending on capital and price moves. As a typical trigger may fall on $30 (using 25's I would enter at $30, $29 and $28 with the stop at $27 with an ACB of $29 at 75 shares) I changed my entry sizing to 50 shares and lowered my entry after the trigger.
New entry is 50 shares at $29.50...which is the same as 25 at $30 and 25 at $29 with slightly lower trade costs (minor) while arriving at the same ACB.
The next trade would be another 50 shares at $28.50 which ends up with the same ACB as a full load of 25's, except now it is 100 shares instead of 75. The slight increase in risk is still within my tolerance.
The 25's entry worked well enough while I was away as I placed VTSOs on all of my positions and netted a small profit as they all closed out in the first week. The disappointment was TCO as I only ended up with 25 shares with a $4 and some per share profit... but a profit is not a loss.
Seeing as I am happy with a 50 share trade by itself this makes me feel better about getting only the first trade in. This still let's me trade the slightly higher priced stocks and maybe fill up more often on the lower priced stocks...which leads me back to the topic of options.
There is much not being said about options and exactly how the "greeks" are calculated and what they mean. While there is lots of free information available on stocks there is less on options so I am working on my own knowledge base for these. I have sent off the necessary paperwork to my broker to allow me to trade options in all of my accounts rather than just the one.
Any stock on my hit list over $25 in price has now become an option trade. I have setup a spreadsheet to automatically calculate the option price that corresponds to my P&F trigger price on the stock...this takes into account the various factors relating to how the price can change given the delta, Intrinsic and Extrinsic values. I realize that my estimate will only be close until the stock price actually approaches the initial trigger but close seems to count for more in options than in stocks due to the method used to set quotes (5 and 10 cent graduations).
The reason I decided to go with $25 as the break point for options rather than stocks is not only due to capitalization. Stocks under $25 I have room for quite a few trades and stocks are easier to trade for me right now, quicker trigger calculations, quicker order entry and a comfort level. Previously I had decided to qualify my trade priority based on lower priced stocks first, this allows me to continue trading while studying the option/stock relationship with the larger prices.
I currently have an order in for IPI at $24.50 as well as the Jan 2010 call at strike $20 for $6.40. I am curious to see how the option execution compares to the stock execution.
Upon rethinking the justification for using options for only the higher price stocks I may consider just going to options for all trades. This means I may have to select a few other stocks to base these on as the options chain should have enough liquidity to get in and out smoothly. The advantage to using options for even the lower priced stocks is in the leverage. If a $15 stock have an option that I would trade at, say, $5 then the leverage is an advantage. In addition to leverage this would allow me to enter more trades to keep my diversity up and not have to commit 100% of my cash to active trades...always leaving a bit in reserve for another nice trade setup.
Currently I have one option and four stock positions, one additional option order and three stock orders. I also have a penny stock position and a penny stock order in place. Pennies are something I decided to stay away from in the past but, upon a suggestion I have two trade "dabblings". One thing about pennies, the profit and loss is fun to watch as a 500 share position creates a quick P/L move. 1 cent = a $5 move. I won't mention anything other than my trades here so anyone else's suggestions will remain un-named.
Jeff.
I gave some more though to my entry strategy, the 25, 25, 25 share scaling and decided it was not the best approach. I ended up sticking on a two trade entry which can be left as a single trade depending on capital and price moves. As a typical trigger may fall on $30 (using 25's I would enter at $30, $29 and $28 with the stop at $27 with an ACB of $29 at 75 shares) I changed my entry sizing to 50 shares and lowered my entry after the trigger.
New entry is 50 shares at $29.50...which is the same as 25 at $30 and 25 at $29 with slightly lower trade costs (minor) while arriving at the same ACB.
The next trade would be another 50 shares at $28.50 which ends up with the same ACB as a full load of 25's, except now it is 100 shares instead of 75. The slight increase in risk is still within my tolerance.
The 25's entry worked well enough while I was away as I placed VTSOs on all of my positions and netted a small profit as they all closed out in the first week. The disappointment was TCO as I only ended up with 25 shares with a $4 and some per share profit... but a profit is not a loss.
Seeing as I am happy with a 50 share trade by itself this makes me feel better about getting only the first trade in. This still let's me trade the slightly higher priced stocks and maybe fill up more often on the lower priced stocks...which leads me back to the topic of options.
There is much not being said about options and exactly how the "greeks" are calculated and what they mean. While there is lots of free information available on stocks there is less on options so I am working on my own knowledge base for these. I have sent off the necessary paperwork to my broker to allow me to trade options in all of my accounts rather than just the one.
Any stock on my hit list over $25 in price has now become an option trade. I have setup a spreadsheet to automatically calculate the option price that corresponds to my P&F trigger price on the stock...this takes into account the various factors relating to how the price can change given the delta, Intrinsic and Extrinsic values. I realize that my estimate will only be close until the stock price actually approaches the initial trigger but close seems to count for more in options than in stocks due to the method used to set quotes (5 and 10 cent graduations).
The reason I decided to go with $25 as the break point for options rather than stocks is not only due to capitalization. Stocks under $25 I have room for quite a few trades and stocks are easier to trade for me right now, quicker trigger calculations, quicker order entry and a comfort level. Previously I had decided to qualify my trade priority based on lower priced stocks first, this allows me to continue trading while studying the option/stock relationship with the larger prices.
I currently have an order in for IPI at $24.50 as well as the Jan 2010 call at strike $20 for $6.40. I am curious to see how the option execution compares to the stock execution.
Upon rethinking the justification for using options for only the higher price stocks I may consider just going to options for all trades. This means I may have to select a few other stocks to base these on as the options chain should have enough liquidity to get in and out smoothly. The advantage to using options for even the lower priced stocks is in the leverage. If a $15 stock have an option that I would trade at, say, $5 then the leverage is an advantage. In addition to leverage this would allow me to enter more trades to keep my diversity up and not have to commit 100% of my cash to active trades...always leaving a bit in reserve for another nice trade setup.
Currently I have one option and four stock positions, one additional option order and three stock orders. I also have a penny stock position and a penny stock order in place. Pennies are something I decided to stay away from in the past but, upon a suggestion I have two trade "dabblings". One thing about pennies, the profit and loss is fun to watch as a 500 share position creates a quick P/L move. 1 cent = a $5 move. I won't mention anything other than my trades here so anyone else's suggestions will remain un-named.
Jeff.
Monday, August 3, 2009
Holidays
As I prepare for leaving on a bit of a vacation I thought I would drop into my trading account and set up some VTSOs and close any active buy orders. I am reasonably pleased with my portfolio thus far as there is lots of green even in the stop ranges, profit is stopped out is a good thing.
I have long positions in MS, ABX, IPI, TCO, CVA and AEO. My shorts are MWW and GNK...although GNK is likely stopped out already at a loss. I'll start tracking my performance on the home page of my blog once I get more positions that are based on my final plan and stock selections closed.
I started looking at the "greeks" of options last night while working on something else. The new one is the THETA which indicates how many cents per day the extrinsic value decays based on the current numbers. I also noted that the extrinsic value, which is commonly called the time value, is in now way tied only to the time decay. It has as much to do with volatility as some of the options that I have been looking at have had the extrinsic value change in the opposite direction than I would expect after a few days passed. higher volatility has a higher expectation of price moves which can make the option more valuable to traders which basically raises the premium they are willing to pay for them. Interesting stuff and one more reason to watch for options with a small extrinsic value.
I tried placing an option order after setting my accounts up for options trading and the order was rejected...I guess I need to fill out some more paperwork to activate options in the registered accounts. I'll mail this today so that I can activate my options level first of next week and be able to trade options upon my return in mid August.
This summer is disappearing rather quickly considering that we, here in the Ottawa area, have not really had many days that we could call "summer".
Jeff.
I have long positions in MS, ABX, IPI, TCO, CVA and AEO. My shorts are MWW and GNK...although GNK is likely stopped out already at a loss. I'll start tracking my performance on the home page of my blog once I get more positions that are based on my final plan and stock selections closed.
I started looking at the "greeks" of options last night while working on something else. The new one is the THETA which indicates how many cents per day the extrinsic value decays based on the current numbers. I also noted that the extrinsic value, which is commonly called the time value, is in now way tied only to the time decay. It has as much to do with volatility as some of the options that I have been looking at have had the extrinsic value change in the opposite direction than I would expect after a few days passed. higher volatility has a higher expectation of price moves which can make the option more valuable to traders which basically raises the premium they are willing to pay for them. Interesting stuff and one more reason to watch for options with a small extrinsic value.
I tried placing an option order after setting my accounts up for options trading and the order was rejected...I guess I need to fill out some more paperwork to activate options in the registered accounts. I'll mail this today so that I can activate my options level first of next week and be able to trade options upon my return in mid August.
This summer is disappearing rather quickly considering that we, here in the Ottawa area, have not really had many days that we could call "summer".
Jeff.
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