Journal of Poor Recent College Grad

Discussion in 'Journals' started by knocks420, Nov 1, 2005.

  1. Well it struck:

    Sold 17 MYOG Dec. 22.5 C
    Sold 16 MYOG DEC. 17.5 P

    MYOG gapped open today to ~$27 on some drug data. Loss on position was $4,977.59. The loss in the call was partially offset by the gain in the put.

    I've sold another strangle:

    Sold 11 MYOG JAN 30 C
    Sold 10 MYOG JAN 25 P

    Thats a credit of around $1650. It will take a few writes to offset the loss. Good learning experience though. Perhaps I'll look closer at the Condors, where I would sell a strangle and purchase far OTM options.
     
    #41     Dec 12, 2005
  2. You have not learned shit since you just wrote another strangle (5-points) on a stock that has had two gaps in the past months.

     
    #42     Dec 12, 2005
  3. nkhoi

    nkhoi

    coach, slow down , could you explain it in layman term.
     
    #43     Dec 12, 2005
  4. Seriously coach, chill...

    I realize that it has gapped in the past. I entered this position based on a low ratio of historic versus implicit volitality, as were the other two: RMBS & PFE.

    Lesson learned here was to check for fundamental catalysts to signal a large price change. This being a pharma company, something like a Phase III trial could do the trick.

    As for the new strangle, implied volatility is still high and I don't think there will be another huge price catalyst for at least a few months. I could easily be wrong but its only a paper account and used for experimenting.
     
    #44     Dec 12, 2005
  5. This is the primary problem I have with paper trading....does it encourage us to attempt poor trades thus reinforcing bad habits?
    Where actual money is on the line...you think long and hard and want to make the best possible trade. I would think the best way to paper trade is alongside your real trade ex. you want to do an IC which you normally would leg in put side then call side...papertrade buy otm strangle then sell inside strangle. Use the paper or virtual trade to try a different approach alongside the actual trade.


     
    #45     Dec 12, 2005
  6. This is definetely a good point. One is much less carefull with a paper account then a real account. In my real account I only have three simple long positions. Which I spend a long time tracking. Had I really been in MYOG I would have probably had more of an inkling of upcoming news. Something I found out only after the fact.
     
    #46     Dec 12, 2005
  7. Wulfrede

    Wulfrede

    Knocks,

    First of all, congrats with sticking to your trading.

    Second, let me take a moment to dispell a myth that seems to be prevalent in this thread:

    Naked option writing is a good strategy provided you properly manage your risk. In fact, I think option writing is a superior strategy to "long premium" or delta-neutral "vol play" approaches. This is based on my two years of fulltime options trading averaging 40-80 positions per expiration cycle.

    From this it follows that I strongly believe in diversification when it comes to naked options writing (I see some posters preaching hte opposite). Specifically, you want to have lots of premium short on many issues so that the few inevitable outliers don't kill all of your profit.

    Example: I was short CMTL Dec 40 puts with the stock blowing up and ending up below 35 on 12/06. Normally, if I had just a few positions on, CMTL would have killed me. Instead, I simply lost a bunch of money and went on trading as usual. I am ending this month still up 5% on my entire account.

    Other examples in the past would include LXK, EBAY and many others that went badly.

    Lesson: EXPECT stocks to blow up. No matter what kind of analysis you do, they will still blow up in your face. Now, knowing that this will happen, make sure that you have other premium to cover the coming loss. If you don't, then you WILL lose more than you have in your account.

    So, your MYOG trade is a normal outlier that should have been fully expected. Problem is, you didn't have (based on what I've read about your trading) enough premium buffer to save yourself.

    Be honest with your trading and admit to yourself that you can't expect things to move "continuously" so that you could get out at will (read up on liquidity gaps). Markets will do what they will do and you should be prepared for anything they throw your way.

    Cheers,
    /Wulfrede
     
    #47     Dec 12, 2005
  8. Wulfrede,

    Thanks for the reply. The MYOG trade was based on an idea to sell lots of premium based on volatility. I did a quick search for low ratios of historic volatility to implied volatility and came up with this pos. I believe the ratio was something like .25 or less. I also tried to create this as delta neutral as possible.

    Although you can write some good time premium when volatility increases, the implied volatility goes up for a reason, i.e. rumors, news, etc. and therefore a strategy of selling volatility can be dangerous.

    If you don't mind me asking, what criteria do you look for in option writing and are you writing strangles, straddles, naked calls/puts? Thanks for your input!
     
    #48     Dec 12, 2005
  9. Sorry for the harsh tone but naked strangles and newbies do not go together. The loss you took on paper is easily brushed off because it is only paper. It means nothing to enter another trade with the same potential for loss because you are just learning. However, coaches always tell their players that the way they practice is usually the way they play. If the practice loose and walk through it, they will usually be that way in the game situation. So loosely trading these positions and discounting losses is letting you develop bad trading habits. If a strangle blows up like that, then you need to think about ways to reduce the risk or better manage the position. You seem to be reaching for the premium without regard to the stock.

    The stock you chose had two large price gaps in the past 4 months, the kind of moves that would blow up a naked strangle. ou are using 5-point spreads which means the stock only has to move a little to produce a loss and the stock has a history of price swings. I am not saying this position is a losing one, but you are playing these rather loose on paper and therefore are enforcing bad habits that will be ingrained at game time when real money is on the line.

    Is it nice to blow off $4,000 in losses and just state that it will take some premium selling to get it back. What if the next stock gaps 10 points and the third one 5 points. I think experimenting with paper trades is a good idea for learning but my comment was direct in that I do not see any lessons learned from your trade but rather a "Hey it aint real money attitude".


    Remember you play like you practice and if you treat it as fake money you will never develop the risk management discipline that is needed for selling naked options.

    So do not just sell another strangle and brush off those losses. Investigate other ways to trade a stock you expect IV to drop and for the movement to be quiet. What about certain types of calendars, condors, butterflies, etc...

    It is paper money but it is real education and if you fake your way through it, you will not perform when real money is on the line.



     
    #49     Dec 12, 2005
  10. Wulfrede

    Wulfrede

    Knocks,

    You're asking a very broad question but I'll try to at least give you an idea of what I do.

    I rarely sell straddles or strangles. As I stated above, I identify with directional bias of trading much more than with any market neutral strategy. Thus, the majority of my trades will be mainly based on the the view of the stock's direction with a healthy, but still secondary consideration given to IV.

    Now, I don't like betting long because personally I like taking a large number of small profits and don't mind occasional large losses. Selling premium fits this approach well and that's why it is the backbone of my trading approach.

    Again, understand, I don't mind taking large losses. It is important to realize that in any trading approach you either go for homeruns (which happen infrequently) and encounter lots of small losses (meaning stop-outs), or you do the oppose. I prefer the opposite, even though it is counter-intuitive to most new traders.

    Now, selling strangles or straddles is non-directional so you are essentially hoping that the stock will do mostly nothing. I have toi say that I am not nearly good enough to anticipate that with a dependable sort of consistency.

    However, since I am usually short both puts and calls (but rarely on the same stock) I am essentially selling strangles, but in a very diversified way where every leg has a directional bias and thus a defined edge.

    As far as the actual criteria for selection of the stocks, I use TA, just like many other traders. And, just like for most traders, it is a proprietary mix of things.

    I hope this helped a bit.

    Best of luck!

    Cheers,
    /Wulfrede
     
    #50     Dec 12, 2005