I received another offer for an options trading advisory service or signal service.
This guarantee is deceiving. All of the others that I have looked at have had unconditional guarantees, satisfaction of money back in x days. This one states guaranteed 37 winning trades in six months or money back. Well, that sounds OK, 6 trades a month winners?
Reading farther, I find that I have to read the whole thing to get the proper perspective on this, there is no mention of the win vs lose rate, just a 37 winning trade threshold. Later it does state 8 - 10 trades per week.
WHOOA! That's a minimum of 192 trades and up to 240 trades...and he is only going guarantee 37 are winners? What constitutes a winner? 5% return? 50% return...probably anything that is not zero or less by definition.
That is fewer than 1 in 5 winning trades and worse, no guaranteed return rate.
The trades appear to be OTM options so the entire trade is risk. Assume straight odds to keep my math to a minimum, and of every 5 trades 1 wins (losing runs at this rate could easily be much longer than 4 losers in a row) then the minimum return needs to be substantial
Discounting commissions each winning trade would have to net 400% for every single winning trade just to break even. With single contracts the return needs to be higher yet as the commissions have to be covered for the losing trades as well which translates into over 520% rate of return minimum to actually break even.
OUCH!
Other services have quoted that they will return double there cost in a certain period as well as the unconditional guarantee in the first place.
It certainly pays to read and understand what is really being said in any offer.
Jeff.
Questrade, My direct access discount broker.
Sunday, September 6, 2009
Friday, September 4, 2009
Trade Signal Services... a bit of debunking.
I've been testing some trade signal services in the background, I may have alluded to that in the past but I thought that I would put it out there now as I am doing a fair amount of that now. I figure that I may as well see if there is any truth in the hubbub.
My plan has been to sign up, pay the cost, do some back testing on previous trades that they have logged then do some testing with current trades. If the current trades, during the trial period, cover the entire cost of the membership then I may continue using them. So far I have ended up cancelling every one except two, those two are still in testing as their trial periods have not expired.
Some of these have been $2500 up front which includes an annual membership, others as little as $500 for the same time period. This is certainly not a case of you get what you pay for.
I have found that most are upfront with any guarantees and have been quick with processing any refunds. Usually the trial period is not quite long enough to provide a thorough test, at least not in all cases. I am in one now that has a 90 day trial... so far that is the best guarantee I have run across. Others are usually 30 days only.
Some have given far too many signals as they try to accommodate ANY stock I may select and provide signals on those. Others have provided picks with entry prices but the picks seem to be all over the place as far as numbers are concerned...and too many of them. Others have just plain been losers over the last six months, even though one case the trade that I tried worked out well enough... too few trades setup so I couldn't really do much testing live.
One of the current services, options only, has provided a few trades to get into, none have panned out yet but they are longer term trades, weeks instead of day... good thing it is a 90 day trial. Of four trades I have entered, two were ones that I was already tracking, one I had already entered a few days prior to their signal and I exited a few days prior to their exit signal ... profitable trade but can I give them credit for it? Perhaps. I was in a stock position rather than an option position and they had an interesting twist to trading that one with options. I must give them credit in that they did some research as they timed the entry well and the exit slightly better than I did based on more than just chart reading.
Actually, so far I find their information more thorough than other services I have seen. They are using information and data that I cannot easily get access to with paying a lot for it. They are also processing this data over many different stocks and making recommendations based on their prior trading knowledge...this is not a "system" so much as an advisory service... so far I like it and think that I may keep it running for a while. At least I will compare returns on their system with returns on mine... even though I am still tweaking I am at a point of looking for some profits to start showing up. My trades I have open I let go through the pullback this week past as I figure that the pullback is not going to be as long lived as thought.
What all these services have shown me, that I already knew to be honest, is that they don't really work out as well as advertised. The ads are either misleading, erroneous or just plain subversive. I have stayed away from the ones that talk about making millions, fast or only a few minutes a day and concentrate more on selling a lifestyle than talking about trading. With two unfinished trials as exceptions so far.
For the record, any trades that I have talked about here have all been my picks and trades with no overlapping into any service provided trades.
If anyone reading this wants to ask about a service that they might be considering or one that they tried and liked, drop me an email. If I have looked at that one I can give you my honest opinion. If I haven't seen It I may just give it a try myself.
Jeff.
My plan has been to sign up, pay the cost, do some back testing on previous trades that they have logged then do some testing with current trades. If the current trades, during the trial period, cover the entire cost of the membership then I may continue using them. So far I have ended up cancelling every one except two, those two are still in testing as their trial periods have not expired.
Some of these have been $2500 up front which includes an annual membership, others as little as $500 for the same time period. This is certainly not a case of you get what you pay for.
I have found that most are upfront with any guarantees and have been quick with processing any refunds. Usually the trial period is not quite long enough to provide a thorough test, at least not in all cases. I am in one now that has a 90 day trial... so far that is the best guarantee I have run across. Others are usually 30 days only.
Some have given far too many signals as they try to accommodate ANY stock I may select and provide signals on those. Others have provided picks with entry prices but the picks seem to be all over the place as far as numbers are concerned...and too many of them. Others have just plain been losers over the last six months, even though one case the trade that I tried worked out well enough... too few trades setup so I couldn't really do much testing live.
One of the current services, options only, has provided a few trades to get into, none have panned out yet but they are longer term trades, weeks instead of day... good thing it is a 90 day trial. Of four trades I have entered, two were ones that I was already tracking, one I had already entered a few days prior to their signal and I exited a few days prior to their exit signal ... profitable trade but can I give them credit for it? Perhaps. I was in a stock position rather than an option position and they had an interesting twist to trading that one with options. I must give them credit in that they did some research as they timed the entry well and the exit slightly better than I did based on more than just chart reading.
Actually, so far I find their information more thorough than other services I have seen. They are using information and data that I cannot easily get access to with paying a lot for it. They are also processing this data over many different stocks and making recommendations based on their prior trading knowledge...this is not a "system" so much as an advisory service... so far I like it and think that I may keep it running for a while. At least I will compare returns on their system with returns on mine... even though I am still tweaking I am at a point of looking for some profits to start showing up. My trades I have open I let go through the pullback this week past as I figure that the pullback is not going to be as long lived as thought.
What all these services have shown me, that I already knew to be honest, is that they don't really work out as well as advertised. The ads are either misleading, erroneous or just plain subversive. I have stayed away from the ones that talk about making millions, fast or only a few minutes a day and concentrate more on selling a lifestyle than talking about trading. With two unfinished trials as exceptions so far.
For the record, any trades that I have talked about here have all been my picks and trades with no overlapping into any service provided trades.
If anyone reading this wants to ask about a service that they might be considering or one that they tried and liked, drop me an email. If I have looked at that one I can give you my honest opinion. If I haven't seen It I may just give it a try myself.
Jeff.
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.
CVA and CMC revisited with options
I keep looking at the options that I am trading now and consider that what I am doing is the best method for the style of trading that I am pursuing... but those cheap ATM or OTM options look awfully tempting.
I bought two new option contracts this morning, CVA and CMC...both of which I have trade stocks in my new plan recently and both are using the Point and Figure entry method.
In CVA my entry trigger for the stock was between $17.25 and $17.50, and I even entered a stock order at that limit initially as I wanted into the market at that price. This gave me time to investigate the options. The price hovered around $17.30 for a while, I entered the option data into my spreadsheet, decided upon the option, cancelled the stock order and placed an option order. Strike was $15, expiry Jan '10. In at $2.90 after playing with $2.80 and $2.85 for a while.
Option cost $2.90, $2.25 ITM so 65 cents Extrinsic Value, 22.4% of the price was EV.
CMC was, more or less the same deal. $16.75 to $17. Option was the $12.50 strike, Jan '10 expiry.
Option cost $5.10, $4.25 ITM so 85 cents Extrinsic Value, 16.7% of the price was EV.
Looking at my sheet comparing the various strike prices with their EV based on paying the asking price (which I didn't) makes these look like the best deal as the Deltas are high and the EV was relatively low.
Then I consider the element of risk. Options reduce risk in the sense that they are somewhat unaffected by some attributes of the stock activity...CAH example as I would have lost over 50% of the value of my stock only position where I did better holding my own in the options.
Let's just see where these trades take me going forward.
Jeff.
I bought two new option contracts this morning, CVA and CMC...both of which I have trade stocks in my new plan recently and both are using the Point and Figure entry method.
In CVA my entry trigger for the stock was between $17.25 and $17.50, and I even entered a stock order at that limit initially as I wanted into the market at that price. This gave me time to investigate the options. The price hovered around $17.30 for a while, I entered the option data into my spreadsheet, decided upon the option, cancelled the stock order and placed an option order. Strike was $15, expiry Jan '10. In at $2.90 after playing with $2.80 and $2.85 for a while.
Option cost $2.90, $2.25 ITM so 65 cents Extrinsic Value, 22.4% of the price was EV.
CMC was, more or less the same deal. $16.75 to $17. Option was the $12.50 strike, Jan '10 expiry.
Option cost $5.10, $4.25 ITM so 85 cents Extrinsic Value, 16.7% of the price was EV.
Looking at my sheet comparing the various strike prices with their EV based on paying the asking price (which I didn't) makes these look like the best deal as the Deltas are high and the EV was relatively low.
Then I consider the element of risk. Options reduce risk in the sense that they are somewhat unaffected by some attributes of the stock activity...CAH example as I would have lost over 50% of the value of my stock only position where I did better holding my own in the options.
Let's just see where these trades take me going forward.
Jeff.
Wednesday, September 2, 2009
Long Straddle, Spinoffs and symbol changes
Well, I didn't expect anything major to be happening with CAH. It has been spun into KCF now. Seeing as I don't pay any attention to news or much about the stocks that I play with, whether options or stocks, I guess I can get blindsided the odd time.
My straddle was based on chart activity and it looked ready to head for a drop, as I said before I would have just played it short as a stock trade or just bought a put...but I wanted to play.
Yesterday they switched symbols on the NYSE while spinning off to KCF (Care Freedom I think). I would have received, had I shares in CAH, a 50% transfer, I would only get 1 share of KCF for every 2 shares of CAH. That would have sucked as they closed last night at around $35 and opened under $25 today.
That was the ride though, all I saw was the share price drop from $35 to $25... I waited for the options to be priced and was expecting my put to balloon by $10 per share and my call to lose $2 per share. I was surprised to see that the option chain symbols had changed. This means that I could not sell my options until they are transferred to the new symbols, which happened today.
Interestingly the options, as they only give me control of 100 shares, are not affected by the share exchange rate. Seeing as I was on both sides of the trade and the relationship between option price and stock price is not linear, I really was not concerned about this, once I realized what was going on.
There is an advantage to playing both sides simultaneously.
While the option pair was not the greatest I learned a few things and had some others reinforced, like that options can provide protection from unforeseen events. Just thought I would share.
The new options cost was changed though.
The call was at $2.85 it is now $2.4873 and the put was $2.50 and is now $2.8743
The old difference was 35 cents and the new difference is 38.7 cents
Another change was the delta, seeing as the strike price of the options is still $35 and the new stock price is $25, the price difference remained similar but the Delta is now 0.365 and 1.00 for the call and put respectively compared to the original 0.527 and 0.46. This makes the option pair skewed in my favour if the price of the stock continues to drop.
I have a feeling that the price is not going to do a whole lot for a while and I might lean toward it going up instead of down...which might not work in my favour unless it REALLY goes up a lot, like $10 or more. I will hold this to see what happens though.
My straddle was based on chart activity and it looked ready to head for a drop, as I said before I would have just played it short as a stock trade or just bought a put...but I wanted to play.
Yesterday they switched symbols on the NYSE while spinning off to KCF (Care Freedom I think). I would have received, had I shares in CAH, a 50% transfer, I would only get 1 share of KCF for every 2 shares of CAH. That would have sucked as they closed last night at around $35 and opened under $25 today.
That was the ride though, all I saw was the share price drop from $35 to $25... I waited for the options to be priced and was expecting my put to balloon by $10 per share and my call to lose $2 per share. I was surprised to see that the option chain symbols had changed. This means that I could not sell my options until they are transferred to the new symbols, which happened today.
Interestingly the options, as they only give me control of 100 shares, are not affected by the share exchange rate. Seeing as I was on both sides of the trade and the relationship between option price and stock price is not linear, I really was not concerned about this, once I realized what was going on.
There is an advantage to playing both sides simultaneously.
While the option pair was not the greatest I learned a few things and had some others reinforced, like that options can provide protection from unforeseen events. Just thought I would share.
The new options cost was changed though.
The call was at $2.85 it is now $2.4873 and the put was $2.50 and is now $2.8743
The old difference was 35 cents and the new difference is 38.7 cents
Another change was the delta, seeing as the strike price of the options is still $35 and the new stock price is $25, the price difference remained similar but the Delta is now 0.365 and 1.00 for the call and put respectively compared to the original 0.527 and 0.46. This makes the option pair skewed in my favour if the price of the stock continues to drop.
I have a feeling that the price is not going to do a whole lot for a while and I might lean toward it going up instead of down...which might not work in my favour unless it REALLY goes up a lot, like $10 or more. I will hold this to see what happens though.
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