Month: August 2009

Moving to Advanced Option Strategies

When traders start trading options, they learn as much as possible about calls and puts and rush out to buy some contracts hoping for a big move and a big profit. When that doesn’t happen, there’s two possible routes a trader will take. The first type of trader will rush out and buy another contract on something and hope that one is profitable. The second kind of trader will analyze his/her trades and try to determine why it didn’t work. These are the two main possbilities excluding the small variations on these scenarios.

When a trader buys a call or a put and the stock moves away from the intended direction or stays put the trader loses money. In some cases even if the stock moves in the correct direction, the options still loses premium and the trader can’t make profit. Meet Theta. The time decay. The time decay on an option will accelerate as the expiration draw near. Closer to expiration the time decay on an option can be so much as to negate any small move by the underlying in the correct direction. So a buyer is losing money unless the stock makes a good move.

On the other hand, the seller of the option is liking the time decay with each passing day. For a seller the time value of an option is on a one way road. It’s decreasing and never increasing. This means if the seller can sell the correct option and use the correct strike, he or she can be a happy trader at expiration.

This is where a trader must learn new strategies and advanced option strategies that are designed to benefit from certain scenarios. Butterflies, Iron Condors, Condors, Vertical Spreads, Calendar Spreads, etc.

I am moving towards learning about selling Vertical spreads and incorporating this strategy as part of my money making strategy. I will discuss some of the option strategies in the coming posts. I will post more about selling the option premium instead of buying it.

Untradeable Markets

Are the markets becoming untradeable? Everytime I hear pro traders and everytime I talk to others who trade on a daily basis, I hear sentiments such as, “it’s too unpredictable” or “this market is on no volume”, etc.

The market has had low volume, rally mode days, and a whole lot of shaking out stops. Some days the market rallies 100 pts, in the first 30 minutes then hold steady without volume the rest of the day. On some other days, it moves up and down during the day but closes the day almost where it started. In other words, it is getting hard to use technical analysis on many charts. It’s not impossible, but hard.

Consider AIG, it keeps moving up for no reason. Or consider GS. It keeps upgrading stocks to random buys. What is the point? What could google have changed in the last 4 months that GS would think it’s a buy?

Despite all these things, the main thing for a trader is to trade the oppurtunity. If the oppurtunity is for intraday, then trade intraday. If the oppurtunity is for swing trading, swing trade.

Pullback or Rally

The current market is drawing out two strong opinions from the trading and investing group. Some say that it has run up so much, it simply must pullback before further continuation. These are the shorts. They hoping for a short and lower prices before they join the upward leg. The second group is the people who say that market momentum is such that it will continue upwards, no correction necessary.

To confuse the issue more, some expert say this is the bottom, it will go up from here. Other experts say that the market definitely fall lower during the year later on with or without upward move.

One thing is for certain more analysts are joining the upwards move camp with each week.

In the middle of all this where do the normal traders, swing traders stand? It seems necessary to know for the trader, when swing trading, whether the market is headed up or low, so they can trade the right side. It’s easy to tell them, just go with the flow. But if there’s a moderate pullback day such as 100pts down, that trader will lose lot of money betting on the wrong side of the securities. It’s hard to really predict. Unfortunately, many experts have been saying that it’s really hard to determine the direction. They say it could go either way. But the investors and traders are watching the prices rise everyday a little more and good oppurtunities are going.

Hopefully, a clear direction will emerge. At the time of this writing, I’m slightly bullish. In other words, I have a bullish position on one stock. I’m not against taking bearish position on other stocks at the same time. Even when the stock is big and moves with the indexes.