The Secrets of Options Trading By Vladimir Furman You have probably heard that trading Options is a âvery riskyâ business, and you may even know people who have lost money by trading Options. It's also possible that you know people who regularly make money by trading Options, and you may think it's âLady Luckâ more than anything else that makes them winners in this seemingly hazardous occupation. So what is it that makes some Options traders âLuckyâ? What do these traders have that others don't? The answer in fact, is really very simple. As a group, successful traders have two things in common: First, they have adopted sound and sensible methods for analyzing Options. Second, they have acquired the proper tools for undertaking accurate analysis in support of their strategies. If that's called Luck, so be it! In the articles that follow, I want to show you my own fast and easy route to this elite group of âLuckyâ traders. This series of articles will show you step by step how to build profitable trades. I will not use any complicated formulas to define any subjects. I will try to explain in plain English all correlations between different parameters and how they reflect on the final results. I spoke to a lot of traders who wanted to be options traders, but was scared to death after reading some options series of articles with complicated mathematical stuff in it. They are thinking that all these âoptions stuffâ is above their heads and too risky to be involved with. And it is hard to blame them for this, because people usually afraid doing something that they could not comprehend the basics of. In reality options trading is far from rocket science. It is pretty simple after you learn the basics and understand relationship between the main components. I am strongly believe that option trading does not required knowledge of standard deviation or normal distribution and especially how to calculate some of them. Now days with the Internet and PC at your disposal you do not have to have scientific calculator and equations to perform calculations. You can easily find all these on the Internet. What I think each option trader must know is how to build and analyze trades. What market conditions to look for and how to take advantage of them by using appropriate option strategy. I am a mathematician and I enjoy all maths behind option trading. I think option trading is more structured and more science than stock trading that I consider more art than science. Look at the market âgurusâ that you can sea on TV or read in the newspapers. How many times you witness the situation where their analysis and predictions for the same company were going into two different directions. I do not want to criticize them for this. I just want to emphasize that their fundamental and technical analysis is more Art than Science. It based on their subjective interpretation of the facts and not supported by real scientific analysis. There is a big difference in the way you trade underlying stocks and commodities than Options. When you trade the underlying you are trying to predict the direction in which the underlying will go. Many novice Option traders use the same attitudes in Option trading, trying to Buy Calls or Puts based on their assumption of market direction. This is the main reason most people lose money by trading Options. Let me explain why they are loosing money. From mathematical (scientific) stand point there is a 50% probability that underlying price will go up or down, unless you have some âinside informationâ on it. Any option has so called âtime valueâ. We will learn about this and other component of option price later in this series of articles, but for right now let me define it as a price that option buyer agrees to pay for this option above its real (intrinsic) value. Now lets analyze your probability of success in âoption tradeâ, where you are trying to buy Call option on a stock that you think will go up. Your profit zone will start at least at current Stock price plus âTime valueâ you paid for this option (in many cases it will be even further from the stock price, if you bought out-of-the-money option) What it means from the probability stand point? It is 50% chance that stock will move up and, let say, it is 10% probability that stock will move from its current price into your profit zone. The simple calculation is showing that you have only 40% to be profitable. When you are trying to buy Call (Put) you have to predict not only the direction of the move, but also its magnitude. Option trading is a completely different âball gameâ. In many cases you do not care which direction the underlying will go. You are only looking for a big move in the underlying price. In Option trading there is also a way to build Option strategies with 80% or more probability of success and positive expected profit/loss (we will talk about this parameter a lot later in the series of articles). If you are in a market for just a couple trades and want to employ âHit and Runâ tactic this series of articles is not for you, because I do not know scientific way to succeed in this type of trading. For me it is combination of Art and truly luck. But if you want to be in the market for a long time and be profitable that is something I can teach you how to do. I do not promises you will always win, but I can guarantee if you follow my steps, you will be overall profitable. Las Vegas is a living and prospering example, which makes me so confident in this basic idea. Casinos are using the same mathematical theory of playing odds and expected profit/loss to pull money from their guests, as I will teach you. You probably know the only way to make money in casino is to own the casino. I will show you how to âbuildâ your own casino, where You are setting the odds in your favor and than playing against the other traders (your casino guests). Volatility analysis is the critical key to Options trading. It has been written about and discussed in hundreds of series of books and manuals. Recognized professional traders and brokers know this and it is the goal of my series of articles to unlock this key to Options trading. This series of articles will help to show how to use volatility and probability based trading to build a winning trades. Enjoy the series of articles and I hope that it will help you to find âLady Luckâ!
absolutely correct, it IS how you handle losers...my goal is to not have any. your second comment is dead wrong. and you're the one in the depths of drawdown because you believe a false statement. i notice in your journal you aren't asking any questions...you are saying things like "i must..." "i need...." etc. rather than "how do i?...." you need answers but the way you are going about seeking does not afford you any answers....an answer comes as the result of a question asked. but you are still edge trading and so losses will be impossible for you to avoid. also, what would happen if you thought in terms of 'high probability of being able to exit a crap trade with no loss' vs. 'high probability of a win....or stopping out' imagine how little you'd have to win to be profitable with the former vs. how much you have to win to get back to even and then make money (after every loss) with the latter.
Day 24 After a LONG ( 2 missed trading days) Break... # of Disasters: 3 1) Move STOP to BEP on those trades where a profit equals the amount you are risking on the trade. Never ever let such a profitable trade get away, turn around and sting you. 2) Do not move a STOP under no circumstance. There are no exceptions. Get out of a mistake right when you realize that you deviated from your rules. 3) Do not move a STOP... I always get fooled when the market makes a huge rally after it has been quite for a long time without much volume or movements. The sharp and sudden move ups in the last afternoons that are fueled by the short coverings.
Day 25 Do I call myself a TRADER? I am about to trade just 2 out of 5 trading days, and I am an aspiring "fulltime day trader". UNBELIEVEABLE... # of Disasters: 1 very big one. 1) Just when you think it can't or it can or it won't.. It can and it will do the impossible. You have to act on whats happening rather than what you think should and might happen. And you have to stay offensive at all times, and the very second you become defensive, the game is over. Eventhough I met my monetary expectations for the day, the mistake I made today was KILLER mistake, which I thought I would never ever repeat myself.. yet some how the market has a way of bringing out the beast in you.
Maybe you are being too hard on yourself. If you met the PnL expectation today what else matters? Note it and keep moving, don't dwell.
Day 26 contain RISK... # of Disasters: 3, all 3 were moving stops a bit and end up getting stopped out for huge losses. I got to contain risk on my trades. When will I ever learn? I also let so many profits get away and let me get stopped out on profitable trades way too often. I have to protect profits. No more moving around with stops....just get stopped out and out and onto better trades. thats all. Only better trades, get out of bad trades fast and get on with new trades. I need my complete attention on trading. I cannot have my mind wandering around on other things which I could've done earlier or after the market close etc. I have to be at my trading desk at 8 am. Means, I have to go to sleep at 12.00 pm, wake up at 7 am, and be up and ready to go at 8 am. I cannot hurry myself up and start trading at 9.30, I have to prepare ahead. I also need to start trading something so that my trading day starts at 8.00 exact, so that it makes me go to sleep early and thus get up early.
You need to stop trading and do a lot more "thinking" about your situation. just reading your posts makes me wince. Save up your money. Take a while to evaluate and choose a method that fits you better than the one you are using. Most importantly, learn discipline. Based on what I have read, you don't have control of your life. How then will you ever have the control necessary to put on and manage winning trades? Stay away from this site until you have yourself together. I would offer this same advice to anyone in your position. I hope you get it. Merry Christmas Steve
Ripley never give up........the one and only thing that guarantees failure is to give up. Some times by being out of the mkts for a few weeks or even months will give you a whole new enlighten on things. You will start to get rid of things and methods that haven't been working and things you don't need anymore.....become streamlined. But it can only come when your head is clear. Be like a leopard.... lie and wait for the prey. don't go chancing gazelles all they long....they will always tire you out first. Confidence comes in discreet stages.....for it to come in....emotions must leave, mind not big enough for both............
Even with 3 horrible stop outs, I finished the day with +$ 62, I mean nothing else that I could do would pay me that much. And, I only got room to go up. And I am a firm believer that you only learn by doing, and doing and getting beat out there everyday. But, great thing is, I am still making money (eventhough not a lot) while I am learning. Thus, all I need to do is, just kick it up a notch one of these days and voila.. I am going to be a kickass trader.