The description provided by ET says that journals are supposed to be for "personal thoughts and anything else related to your quest of becoming a better trader," so I guess that makes journals the best category for this thread. My quest to become a better Forex trader has, by and large, reached its final destination (or a new beginning). Having fully fleshed out my system, my plan is to begin trading it full-time this week, or the following week at the latest. But as I was reading someone else’s journal and realized they were referencing options, it occurred to me that now would be as good a time as any to look into this trading venue I have always avoided and know virtually nothing about. I’m under the impression that options can enable an investor to adapt or adjust his or her position according to any situation that arises, and to hedge the risk of other market transactions, so they are probably worth looking into, even if I end up never trading them. At least I will not be rejecting their use out of ignorance. It was suggested that I should work my way through Option Alpha and Tasty Trade to get started, but first I’m going to check out three booklets I downloaded online. The first book said that an option is defined as "the right, not the obligation, to buy (or sell) an asset at a fixed price before a predetermined date," which seems to be a bit inaccurate to me in the sense that I’ve always understood an option to be a contract. The second book appeared to be a bit more careful with its language, describing an option as a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. So the first thing I want to know is, how are the specific prices at which the underlying assets are sold determined? One book starts with a bunch of rigmarole about criteria for successful investing, pre-planning every trade, discipline, and risk profile charts—all of which I skipped. Another gets started right off the bat with how to draw profit and loss diagrams. Nonetheless, I plan to initially zero in on the nature of the contracts themselves, given that I probably know better than anyone how I learn best. In developing the Forex system I use, I was told that my ideas were wrong, nonsense, false, and mistaken. Upon mentioning that I was shooting for a success rate of from 80% to 90% or better, one contributor to this forum remarked, "Please not the dreaded 'success rate' again. I've achieved 90% success rate for a long period many, many years ago and lost money. Think on that." I was told that what I ought to do was read books by the likes of Chande, Van Tharp, and Ciana. But all of that notwithstanding, I went on to develop the system I had in mind just as I envisioned it. Upon its completion, I took a look at a couple of the publications written by the previously cited authors and concluded that, had I bothered reading them when they were recommended to me, it would have been an almost total waste of my time. Given these kinds of experiences, I tend to study the things that interest me in whatever manner strikes me as being best for me personally, and it will probably be the same when it comes to options. So again, the first thing I plan to do is conduct a search to find out how the specific prices at which the underlying assets are sold are determined. LESSON #1: An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a given date.
Some time ago I wrote on FB a mini guide to options that explains such basics, so let me quote the relevant part here: ========= 1. Unlike a limited number of shares that people trade, you simply create options by the act of selling them, or they get created when you buy them from someone else. Options are similar to signing a contract with someone else, so they don't exist before the act of creating/trading them. 2. Each option is a contract/right to buy or sell 100 shares of a stock, which means that if you'd buy a $3 option, you'd actually pay $300. 3. Every broker has legal requirement to ask you some questions about your trading experience, usually when signing up. Your answers will determine which option trading strategies will be available to you. People who specify (or even lie about) having the most experience and being most aggressive with trading, will usually end up with the highest level of option trading, meaning being able to utilize most option trading strategies. 4. In theory you could specify any price you want when buying or selling any option, but in practice option prices are calculated and set by computers using specific formulas. And those computers, owned by trading companies called market makers, will set bid & ask prices for options, just like for stocks. So they'll always buy any options that may be too cheap, or sell options when someone will pay enough for them. So if you don't find a buyer or seller in general markets, then you can still buy or sell an option if you keep adjusting the price a little. Generally the calculated prices are published within the stock trading platform, and on the internet, if you search for "option chain" or "FB option chain" for example. 5. Because of #4, it is usually best to trade options that are most liquid (have a lot of volume), so that you can easily find buyers and sellers. This usually means options on well-known stocks like FB, AMZN, MSFT, etc. Otherwise you will be trading with market makers who will profit by not giving you the best price. Sometimes you may lose simply by buying options that later no one else wants to buy from you. 6. Each option has specific paramaters: - stock or index that it is related to, like FB (called "underlying") - expiration date, similar to your insurance expiring - price/cost (#4) - strike price, which is the price of the stock/index/underlying that the option targets - type: call or put, which I'm explaining below 7. There is also an option parameter called "implied volatility" (IV), sometimes referred to simply as volatility or vol, which usually indicates how overpriced an option is. The IV, and therefore option prices for specific stock, may increase a lot before a company's earnings. I am explaining how this works below. ... ========= (this is followed by longer explanation with examples but I don’t want to spam your journal too much) Keep in mind that options may turn out to be a distraction. Once you get into them you may lose focus of your core strategy by focusing on options and discovering new “edges” that may turn out not be edges, so in the end you may come back to trading what you already started trading and regret spending time being distracted by something that doesn’t change anything for you. Options may turn to be useful for some, but if you already have something that works without options then finalize that path first before straying onto a different path. Also, Forex options seem much more difficult to trade (than equity options) for reasons difficult to explain, so you actually may be learning a wrong thing and not seeing the actual potential of options that everyone else is trading. They may be useful to you for hedging though, to limited extent.
Whew, I feel your pain. i suggest you are in for monstrous struggle, perhaps, not unfamiliar to you --as you stated that you took a similar approach to your mastery of the Forex markets. PLEASE, @expiated, do not read my comments with the idea that I am in anyway critical of your goals or methods to learn and explore trading systems and/or new markets; I fully respect your massive efforts in that regard. Again, Whew, effort and pedantic quest is no doubt why you chose the ET name @expiated as being appropriate and perhaps even part of your Families Code of Arms. Again, this is respectful comment -- meant as praise. Yes, books and study of trading systems, may be of some help, (I have been there too) there is in my opinion a much more efficient -- time and brain saving -- approach to trading. This is particularly true in both Options as well as Forex; both requiring acceptance of the Jargon used as well as all the contradictory groups of Gurus. I have traded Forex in the spot market as well as the futures and so I appreciate your efforts to profitably trade Forex. ( I no longer find the Forex a comparatively viable market for consistent profits. ) So, if I wish to trade currencies I trade in the futures markets where option contracts are available and full transparency of data is posted. With all that preamble -- to the point. You can learn to trade options (profitably) within just 10 hours of study. You, @expiated, are well equipped to learn quickly. Complexity is not necessarily a requirement. Option pricing is based on a "model" the most popularly known is the "Black Scholes" option pricing model. No need to learn the equation of the complex math that makes up the model. No need to learn all the different nuances of constructing various option trades and positions. Study what makes money and get an hour of understanding what is necessary and what is not. Learn importance of Volatility and trade based on Implied vs. Historic and you will know 90% of what is required to make money with options. @expiated it will improve your overall approach to any market. So, It Is Worth your 10 hours of necessary study. I looked at your Forex Journal briefly and saw the considerable time and study you put in to Forex -- much less is necessary with trading Options.
Equity options are what I had in mind. I didn't even know that Forex options existed. Thanks for the convenient summary!
Thanks for the input... I will begin my research with the terms you mentioned: Black Scholes, implied vs. historic volatility, full transparency of data, etc. In my case, I continue to find the Forex market to be an extremely viable market for consistent profits, so it will be interesting to see if my insights there will be of any help when it comes to this alternative market, thanks again! Pain? I feel no pain. This four-year journey (or eight years if starting from the beginning of the beginning, not counting the three years prior when I was trading stocks) has been a fun and fulfilling experience, but perhaps that's because the first four years (or seven including stocks) I was a break-even trader and was not hemorrhaging my discretionary/excess income, and the last four years have all been profitable, but primarily on a virtual basis, and all for the purpose of ridding myself of the sense I could make the system better, an itch that has now been scratched to my complete satisfaction—hence my going live in September, God willing. (My moniker [expiated] refers to my debt to the Creator, as a guilty sinner, having thankfully been paid by Yeshua HaMashiach.)
Thanks,@expiated for your informative response. We all qualify as "a guilty sinner". Staying with what you are profiting in (Forex) is certainly the correct path for you. Forex is primarily Currency Pairs trading on a broker's platform as opposed to the Central Bank's direct access. No matter -- whatever allows you to be consistently profitable. What you have done, in the way of learning is impressive -- certainly for effort expended and years of experimentation. You having reached break-even with a live trading account and then to further invest your time in a "virtual account" is outstanding -- way more than this "sinner" would be capable of. Regarding options on forex: https://www.investopedia.com/ask/answers/forex/foreign-currency-option-trading.asp I saw your charts, posted in your Journal for example: This took lots of time and study to create. By comparison here is all that is necessary to trade Options using only standard broker platform completely generated and updated for free. The trade is an example of trading a future (could be a currency future like the EUR vs.USD) but in this case it is Options traded on The SPX (ES mini contract). This can be fully learned and understood in less than 10 hours by most traders. Managing this trade is less than 15 minutes a day. The total needed in the account is about $9000 in this case and as you can see the trade has a profit of about $4500. So return on account size is favorable and true when trading forex you need less money in your account to trade even a full sized contract. Risks are minimal. Note the very wide price area for closing out the trade at a Breakeven Price. I am just showing a comparison -- not in anyway saying that the options on futures offers all the benefits of Forex like "no commissions" and massive liquidity.
That looks like a screenshot from a spaceship dashboard to me, so regarding what you you wrote (i.e., a $4500 profit from a $9000 account, risk being minimal, a very wide price area for closing out the trade at a break-even price, etc.) I'll just have to take your word for it for now, though at this point, it kind of sounds too good to be completely true compared to what I'm familiar with (i.e., stocks, futures, foreign currency pairs, commodities, and binary options). Even if I managed a 5% return on my initial OANDA Forex account balance every single day, it would take me at least 93 days to grow the account to $9000 assuming I never make a single withdrawal, so I have plenty of time to explore the feasibility of options—no rush. [Though the image you attached "is all Greek to me," I couldn't help but notice that above and below the $4500 P/L Open is ($7523.22) and ($1053.40) with parentheses that would indicate deficits on an Excel spreadsheet—a sight that causes me to suspect I should still remain somewhat wary and cautious regarding options.]