I saw that news this morning... I was paper trading this as a Covered Call with a ITM LEAP. Was about to pull the trigger next week on the real thing. Standing back and looking for another stock candidate now.
Eliot, thanks. Yes, except for a $250 just for fun bet on two OTM long calls I was out. What happened yesterday, was exactly what some of you were warning could happen. John
Actually as far as KCI goes I've looked at some horizontal spreads and they don't look too bad right now. I haven't traded any though.
Here is an Amazon.com reader's review about a book: Q There are four basic mistakes all beginning option traders make, these are: 1) Relying solely on market timing; 2) Buying only out-of-the-money options; 3) Using strategies that are too complex; and 4) Casting too wide a net on option choices Relying solely on market timing. It causes failure because it ignores implied volatility. It can lead to paying far too much to purchase an option. It would be like buying a stock without knowing its P/E, or buying a car without knowing its blue book value. The way to avoid this mistake is by carefully analyzing which options are best suited to achieve your objective. Also, measure what is the current implied volatility of these options and compare it vs. the historical volatility of this option. This will give you an idea of the current valuation of this option, and whether it appears overpriced or underpriced. Buying only out-of-the-money options. By doing so, you ignore the probability that the option will eventually be in-the-money. It leads to buying options with little likelihood of profiting. You can get lucky once. But, such a blind strategy is a sure way to get wiped out in option trading. Instead, you should know exactly what is the probability of you making money on each option trades. This entails knowing the "Delta" of a specific option. If an option has a Delta of 20. It has a 20% chance of being in-the-money. Using strategies that are too complex. This leads to unfavorable risk\reward situations. First, you should determine your objective and make certain the trade you are going to make can achieve those objectives without more risk than you can handle. Casting too wide a net. You will spend too much time wasted looking for opportunities among illiquid options. By doing so, you will waste a lot of your potential returns on the wider bid and ask spreads of these less than liquid options. Instead, focus on securities that have actively traded options. UQ How true are they?
A quiz while I am metaphorically in the first week (poetic license) of Options 101! OK, I'll take a crack at it. #1. If one is relying solely on market timing, then I would think one is better off trading the underlying only. With options one needs to understand the principles implied volatility, the greeks and the model that they are derived from. But IV is the biggest key. Two things about understanding IV and the the greeks, especially gamma. (a) In order two understand you need to do your homework. You need to read a lot, read this board who people who are successful traders will take the time to answer questions from someone like me. But, even if you have a perfect theoretical understanding, until you put this into practice these principles with money on the table, you are not going to learn. Once more you are not going to know if you are the type of person for this type of game, simply put do you have the aptitude for it, the mental toughness for it and the discipline for it. Do, I? The jury is out. I haven't come to that determination yet. I am doing this because it interests me. Money is secondary. Honestly that is no bullshit. (b) I read somewhere I think in options you have to make a decision about what volatility go up and/or down or you have to make a directional call. I am finding that I am leaning toward the directional calls. But, I have to understand the other principles of volatility. So timing should and can be part of the equation. But, with all the other variables it shouldn't have the largest coefficient. So making a trade with timing in mind, but relying most heavily on the implications of implied volatility is a good approach in my opinion. #2. The odds are against you in buying only OTM options. Statistically anyway. You may get lucky now and then. But, buying stand alone (outside a combination) OTM options as a long term strategy, I don't think is a good idea. Does that mean, I will not buy one now and then? Not at all. In fact I bought 2 OTM opinions for KCI last week. I only bought two for $250. I thought they would win their case. But, having sat on a few juries, I knew no one can ever predict what a jury will do. But, I made a small bet just for fun. And lost. But, it was fun. And I will do it again sometimes. But, only for small amounts. #3. I agree with the point of consistently using strategies that are too risky all the time. For example if one makes a career out of selling naked calls, the career will most likely be short. But, there be occasions when selling a naked call(s), may be a good thing. I said in my early posts that I never do anything naked. Never say never. There are some people I understand that have made a career selling naked options. My hat goes off to them, I am not going to pursue that career. I will trade into a risky trade now and then. If I wasn't prepared to take some risk, I would put my money in short term government bonds. And actually that is where most of my investments are! I have just set aside about 10 percent of my net worth for investing in options and stocks. Also, I am in a unique position (at least these days), because I am 52 I was able to keep my defined benefit plan pension (I qualified for the grandfathering in), so I my wife and I will get a pretty good annuity every month for as long as we are breathing once I retire. So if you were to impute a cash value of this annuity (I get the annuity not the cash though), this would really increase my net worth. It is just me and my wife and if I die today she gets an annuity for life, plus a about $2.0 million in insurance (even though when I retire I am going to pull way back on that insurance because of premiums after 55 years old); but she is set one way or the other. I am worth more dead than alive. Point being what risk one takes needs to be in the context, of what risk one can be able to afford to take. So when people talk about risk, they've got to look at the big picture. #3. I guess this one I disagree with. None of the strategies in the books I have read seem all that complex to me. Often a complex strategy is the best in a given circumstance. What is complex, is truly understanding the model, implied volatility, gamma, the other greeks and so forth. I have bought a book on statistics recently, which I'll get to . . maybe. I took Statistics I and II in college, but that was about 30 years ago. I want to reacquaint myself with the principles of probability. So, if I had to guess, the person who wrote this review, probably was into something like covered calls. Honestly, I don't like to start trades as covered calls. One thing I do feel strongly about, regardless of any strategy, if you have picked a strategy that doesn't allow you to make adjustments or "manage the trade" then you you probably picked the wrong strategy. Before making a trade, I am always looking at if this happens, then what do I do. I try to have a plan in place. I learned something in the last month. I was probably the luckiest SOB on this board. I made a fair degree of money on a risky trade. The following month, if I had made the same type of trade, I would have lost about $50,000. Its the KCI trade we talk about above. Now does this mean, will I never sell a strangle or straddle again? No. But, will I ever put myself in a position again like that again? Hopefully not. So, I won, when I could have lost big. I learned while I won, because I saw what could happen if I had lost just three weeks later. Most people don't have that kind of luck to win and learn a big lesson. I don't expect, I will have that kind of luck again. I am going to take the lesson and move forward. #4. I always try to trade options that are very liquid. I have found the illiquid options have pretty wide differences between bid and ask price, making adjustment more difficult. Well, I completed the quiz. How did I do?
Actually I'm not quite sure yet if I can find/ develop a suitable style for trading options, besides hedging. Perhaps more comments would be learned from others. Thanks for your input anyway.
The points are absolutely true and right on. Those are the mistakes beginning options traders make. You can make money trading options by NOT making those mistakes. The biggest mistake not mentioned is people start learning and using too large a number of contracts 10 or 20 lots "cause it seems so cheap". Keep it to one or two contracts and consider the commission cost your cost of tuition, until you are comfortable with the strategy and know what your doing.