Author Archive for Janet

Will the Market Rally EVER End? Strategies for Getting Out of Trouble

Wow, it’s been quite a remarkable March/April hasn’t it? I don’t know about you, but when the market drove up, up, up at the end of the March trading month I was caught quite unprepared. I have been expecting a sell off for a while, in fact as a precaution,  I didn’t even get puts in March, but so far I’ve been really wrong. So as expiration day closed near, I had to make a move. There were two strategies that I contemplated, the butterfly up and the vertical roll.

Option Trading Strategies – Tips for Profitable Trading Part II

Option Trading Strategies – Tips for Profitable Trading Part II

If you missed the Option Trading Strategies – Tips for Profitable Trading Part I click here

Tip 6 – Analyze.  Most option trading software provides a wealth of tools that assist the trader in analyzing positions and trades.  I use ThinkorSwim software www.thinkorswim.com and have used their on-line tools and studies to help me make better decisions.  I consult their charts and tools every day, taking advantage of the analysis and the information it provides.   Learn more about analytics click here.

Tip 7 – Follow the news.  I have a home office where I trade.  I have a TV in my office which is always on, usually tuned to CNBC.  I’m sure my family thinks I’m really watching the Food Network during the day, but not so.  I watch the financial news during the day.  I surf the internet for upcoming events that could effect the market, housing starts, job reports, earnings reports, etc. anything that could cause the market to react, favorably or not.    The market also responds to non-financial news, particularly political news.  Remember to keep your eye on what’s happening, in and out of the market.

Tip 8 – Paper Trade first.  Most option trading software programs have the ability to paper trade or simulate the trading experience with paper money.  ThinkorSwim sets you up with a Paper Trading account that allows you to fake trade with $100,000.  Take advantage of it.  I still use my paper trading account to try new strategies, indexes or option types that I haven’t traded before.  Paper trading allows you to practice placing trades, learning how to use the software.  One thing to take into consideration, paper trading simulates the market, it does a good job of helping you to understand how to use the software, but it is not 100% representative of how the market will react in live trading.  One thing I have noticed about paper trading vs real trading is that trades execute much quicker in paper trading.  Please keep in mind things that happen while paper trading are simulations, real trading is, well, REAL!

Tip 9 – Do paperwork!  We all hate to do paperwork – okay there are the rare few who like it, but most of us would rather not bother.  Here you have to bother!  Create a process that works for you in recording your trade activity.  I use a simple report that tracks all my trades.  I go back to them often to help me plan my next trades.  At the end of the trading period I simply print out my monthly statement and put it in a binder.  I also have created an excel spreadsheet that I track profits and commissions on a monthly basis.  At the end of the year, I print and send to my accountant.  Easy, done, legal.

Tip 10 – Mastermind if you can.  If you are not familiar with the concept to masterminding, Google it, there is a wealth of information on the subject available.  I have a mastermind group of 6 people, we talk for about an hour once a week.  Same day, same time, every week.  We are all following essentially the same strategy, but that is not necessary.  We share our thoughts on the market, our strategies, psychology, wins and losses.  We learn from each other and it makes it really fun.  Being on a mastermind group has given me so much more knowledge and confidence much faster than I could have gotten on my own.  It has helped me make better decisions and has probably kept me out of trouble a time or two.

Bonus Tip – Have Fun.  I don’t know about you, but I have had jobs that were, well, JOBS..  Not much fun, working for people I don’t like or respect, working with people I don’t like or respect, spending countless hours making money for someone else, doing something I’m tired of doing, yadda, yadda, you know the drill.  Now I trade options for a living.  I spend at most, an hour a day trading, most days I don’t trade at all, I just monitor my positions and do nothing.  Fortunately for me, I live on the west coast so my day ends as 1pm when the market closes.  I do what I want to do, pretty much when ever I want to do it, and I make money every month.  I don’t have to sell anyone anything, I get to work my own hours, I carry an iphone with me loaded with a trading application (called iswim from ThinkorSwim) so I can monitor my positions and trade from anywhere.  I have a community of option trading friends with which to share this journey with.  If you are interested in finding out more about our community please visit us at www.optiontradingcommunity.com – comments and participation encouraged!

Learn My Strategy

We all know the economy is in a bit of a shambles right now, tons of people have been laid off or just frustrated with their jobs and are looking for a better and dare I say easier way to make a healthy income.  My “real job” is in real estate so I guess I don’t have to explain why I was looking for a way to make money NOW.  I guess you could say I stumbled across this because I wasn’t looking for it when it fell in my lap.  A good friend and mentor of mine called me one day last summer telling me that he was taking this Options Trading class and was I interested in taking it with him as it happened to be taking place in my home town.  While I immediately suspected he was getting some kind of discount if he got people to come to the class – and I wasn’t wrong – my interest was piqued enough to learn a little more about it.   I ended up taking the class and now its what I do for a living!

The class is a 2.5 day live class the teaches you:
How to profit whether the market goes up, down or sideways
A proven trading strategy that produces consistent monthly income
When to buy and when to sell
Trading tips to boost your profits with no additional risks
Why professional traders prefer index options over stock options

In addition to the hands on classroom experience, you have the option of two full months of personal coaching from a coach who has lived and profited by the strategies taught.

What I like most about what I do for a living – I make 8 – 12% a month and I work maybe an hour a day, and some days I don’t work at all.  I trade with a group of my friends, we don’t all make the same trades, but we are a group that supports each other.  Here I get to choose “my co-workers” not have them chosen for me.   I like the challenge of trading, making informed decisions about when and what I trade.  And I just downright like making money.

So if you’re interested in learning more about the class I took that landed me here trading for a living, Contact Us

Learn more about the strategy I use to trade for profit in the Index Option Trading Guide.

Index Option Trading vs Stock Option Trading

Most people are familiar with trading stock and have a stock portfolio or at least an IRA or mutual fund made up of stocks.  Some others are familiar with trading stock options.  Trading stock options can be riskier than trading stocks if you don’t own the underlying shares.   If you want to mitigate your risk when trading options consider Index Options.

When most people talk about the market, they usually are referring to the Dow Jones  Industrial Average which is make up of portfolio of stocks that represent the  overall stock market.  In general, index options act the same as stock options, but there are some very specific and important differences.

Cash Settlement
The biggest difference between a stock option and an index option is the underlying asset.  For a stock option, there are underlying shares of stock that if an option is exercised, must be bought or sold.  With index options, holders cannot exercise their options for actual stock shares.  For this reason, index options are subject to cash settlement which means you receive a cash payment when you exercise an index option or you owe money if you are assigned an index option.

Another very significant difference between stock options and index options is how they are exercised.  Most stock options feature American-style exercise which means they can be assigned or exercised any time before expiration.  Most index options feature European-style exercise which means they can only be assigned or exercised the last day before expiration.  This is important because the price of an index option can move up and down, you can be in and out of the money during the course of the trading month and not be assigned or exercised.  It only matters what the strike price is on the day prior to expiration.

Stock options and index options also differ in when they expire.  Stock options expire at the close of the trading day on the 3rd Friday of the month and that is when the cash settlement takes place.  This is referred to a PM Settlement.  PM settlement values are based on the stock price at the end of the day on Friday.  While some index options use PM settlement, the majority of index options follow AM settlement.  With AM settlement, the last trading day of the trading month is the third Thursday of the calendar month.   The settlement value is based on the opening prices of the individual stocks making up the index on the third Friday of the month.  Please keep in mind that the settlement value of an index on Friday can be significantly higher or lower than the closing value on Thursday due to overnight trading elsewhere in the world.  This is referred to as gapping up or down and can make the difference between your options expiring worthless and you losing money!

Why trade index options instead of stock options?

I personally trade no more than 3 – 4 indexes each month and I trade the same indexes month after month.  I don’t spend any time researching stocks.  I don’t have to, after expiration one month I go back in and trade the same index the following month.

I am able to reduce my risk by trading index options that are made up of a portfolio of stocks.  Unanticipated announcements from a company can result in wild fluxuations in it’s stock.  With index options, if one company’s stock plumuts because they miss earnings or file for bankruptcy, or goes way up do to an unanticipated announcement it will not have a dramatic effect on the index as a whole.  Also, the price of the index cannot drop to zero as could possibly happen with an individual stock.

There is no risk of early assignment with index options.  A holder of an index option can only exercise their option on the final day before expiration.

For those reasons I am an index option trader.  I have established my strategy and I stick to it month after month.  While I continue to learn and fine tune my strategy, I don’t deviate from it.  I encourage you to take a look at index options and see if they might work for you.

The Psychology of Option Trading

The Psychology of Trading – Some Thoughts Are the markets a zero-sum game? In a zero-sum game, winners make as much as losers lose.  So you’d think that trading in the market is such a “game”.  If I bet $10 the S & P will move 50 points up and you bet $10 that it will move down 50 points, one of us will win and one of us will lost.  Zero-sum, right?   Well think again.   What people fail to realize is that trading on the markets is a minus-sum game because winners receive less than losers lose and the brokers and market makers chuckle all the way to the bank. Successful traders ignore the money Trading for a living appears to be deceptively easy.  Most of us work from home, make our own hours, live where we choose to, and work for ourselves.  I live on the west coast so the market closes at 1pm leaving me most of the day to do whatever I want.  When a new trader makes winning trades, they feel like they are brilliant.  A number of good trades in a row – invincible.  Gaining confidence, he or she starts taking risks, deviates from the plan and before you know it loses everything.  The focus is on the money, typical rookie mistake.  Instead of focusing on the money, learn to trade well.  Professional traders do not think about the money, they focus on the trade.  If the trade is good, the money will follow.  Successful traders keep learning, improving their skills to the point that the money doesn’t matter and at that point ceases to influence emotions. There are no “trading secrets” Amateur traders who lose money often blame it on their lack of knowing the “trading secrets”.   A professional trader knows there are no secrets to trading.  Successful traders are realists.  They know what they can and cannot do.  They trade with their eyes open, and they stay in tune with their reactions and their emotions.  As soon as emotion enters into a trade, up goes the red flag. Journal = Success Amateur traders often repeat their mistakes, slapping their foreheads saying, oh yeah, I remember making the same mistake last week/month/year.    Successful traders keep track of their trades, their strategies and their emotions while entering and exiting trades.  I personally use a journal to keep track of all aspects of my trading.  I capture when I place a trade and why I chose that particular time.  I carefully document when I exit my trades or if I let them expire, why I did so.  For new traders I suggest also keeping a record of your feelings, before and after placing a trade, during the time you hold a position and your reactions to movements in the market.  Look for patterns, of success and failure.   Trading is not for everyone and if you find yourself overly anxious, losing sleep or freaking out, another profession might be better for you. The big 3 In my opinion there are three basic components to successful trading: a sound psychology around trading, a good trading strategy, and money rules. You need the intellectual and emotional discipline to be a trader.  Your emotions have a direct impact on the size of your account balance.  You can have the best trading strategy in the world, but if your behavior is impacted by fear, greed or arrogance, your account balance will surely suffer. You need a trading strategy with a history of success and you must follow it, period. Many a novice trader learns a strategy, experiences success, gets over confident, tweaks the strategy “cause they know better” and loses.  Just don’t do it! You need rules that determine when and at what position you enter and exit trades, when you stop your losses and take your profits.  Mitigate your risk by diversification.  Once again, you must have rules and of course you must follow them! To trade or not to trade Individual traders have a significant advantage over institutional traders.  Institutional traders have to trade.  They can’t sit on the sidelines during a volatile market move.  Individual traders need patience.  I fell into this trap my first month trading.  After paper trading for a couple of months, I funded my account and instead of waiting until the right time to jump in, I couldn’t wait and made a bad trade.  I lost money that month, but learned a valuable lesson.   Trading for a living is a long-term endeavor.  It’s okay to not trade if the situation dictates.  Amateur traders get emotional about trading and lose their money.  A sure sign that psychology is the key to success or failure trading. The crowd mentality Did you realize that the market is more often than not lead by the whim of the crowd rather than sound financial indicators?  We’ve all heard stories about the maddening crowd mentality where people behave in ways they would never if acting alone.  Please keep that in mind when trading.  Develop sound trading strategies and stick with them.  Listen to the news, and the financial “gurus” if you have to but don’t let them lead you astray from your strategy.  Stick to your strategy and your money rules.  I recently read something that I liked so much I’ll share it with you.  Opening prices in the market are typically a reflection of the amateur traders perception of value.  They read the paper, look at what happened the day before and most often trade early in the day.  Professional traders trade against the amateurs; they unwind their positions during the day and trade the close.  So if you want to know what the professionals think, look to the close.

Paper Trade First!

Most option trading software programs have the ability to paper trade or simulate the trading experience with paper money.  ThinkorSwim, the software I use, sets you up with a Paper Trading account that allows you to fake trade with $100,000.  Take advantage of it.  The purpose for paper trading is not only to test out and learn how to implement your strategies, but also to learn how the software works.  Most online trading software programs available today have a wealth of analysis and charting features.  Learn what your software has to offer and use it.  Most of the companies providing software also provide excellent user guides, online training and support.  And the best part of all of this is it’s free.  One caveat to the free software, it won’t tell you what or how to trade, identify hot stocks or provide you with a strategy.  There are for a fee based software out there that do provide these.

One thing to take into consideration, paper trading simulates the market, it does a good job of helping you to understand how to use the software, but it is not 100% representative of how the market will react in live trading.  One thing I have noticed about paper trading vs real trading is that trades execute much quicker in paper trading.

Paper trading is not only for the newbie trader.  I still use my paper trading account to try new strategies, indexes or option types that I haven’t traded before.  Paper trading allows you to practice placing trades, learning how to use the software. Please keep in mind things that happen while paper trading are simulations, real trading is, well, REAL!

Option Trading Software – Trade Online!

When looking for online trading software, lets first differentiate between free software provided by most brokerage firms when you open up and account and the for a fee software that plays the role of analysis, picking and recommending stocks or options to trade.  While the lines between these two types of software seem to be merging as brokerage firms provide more and more analytics for free, be sure to do your homework before paying for a service you may be able to get for free.

I personally stick to the free software provided by my brokerage firm.  That works for me and my strategy.  Most online trading software programs available today have a wealth of analysis and charting features and provide all that the typical professional trader needs.  Learn what your software has to offer and use it.  Most of the companies providing software also provide excellent user guides, online training and support.  And of course the best part of all of this is it’s free.  One downside to the free software, it won’t tell you what or how to trade, identify hot stocks or provide you with a strategy.    You may find that you utilize both the free and for a fee software.

Option Trading Analytics

Thanks to the internet there is almost more stock market analysis information available than there are stocks to analyze.  Most brokerage firms provide online trading software and with the software comes charts and analytics.  There is a plethora of books written on the subject, please see my resource list for some of my favorites.  I am a strong believer in keeping things simple, and since I only trade index options, and stick to the same 2 – 4, I don’t have a need for complex analytics.  If you are analytical by nature or have the desire to explore, google stock option analysis – you’ll find more information than you could ever want.  If you’re like me and want a simple yet effective indicator for where the market is headed, check out the Relative Strength Index (RSI).  The RSI measures the strength of any trading vehicle by monitoring changes in its closing prices and is included in most software packages.  It is a leading indicator, not a laggard.  The RSI ranges between 0 and 100.  When the RSI reaches a peak and turns up or down, it indicates a top or bottom.  Horizontal reference lines cut across the highest peaks and the lowest valleys.  They usually are drawn at 30 and 70.  Horizontal reference lines are sometimes effected by bull or bear markets.  In a bull market, often the lines are drawn at 40 and 80, in a bear market, between 20 and 60.  The RSI uses closing prices because they reflect the most important consensus of price for the day primarily because the settlement of traders’ accounts depend on it.  Most traders look to the closing price as opposed to the price at any other time during the trading day.

The RSI is an indicator, it is not a predictor of market performance.  I use the RSI as just another tool in my arsenal.  It helps me make trading decisions, but it is not the only tool I use.

I also look at volume and open interest.  There are three ways to measure volume, the actual number of shares or contracts traded, the number of trades, or the tick volume which is the number of price changes during a selected time frame.  Some interesting things about volume.

• A trend that moves on steady volume is likely to continue
• Falling volume shows the supply of losers is drying up and a trend is ready to reverse
• A breakout on low volume shows little commitment to a new trend and indicates prices are likely to return to their trading range.

Open interest is the number of contracts help by buyers or owned by short sellers in a given market on a given day.  It reflects the number of existing contracts.  Open interest rises or falls depending on whether new traders enter the market or existing traders exit the market.

What You Need to Know About a Vertical Roll

We never really want to have to vertical roll our positions from the current month to the next, but sometimes it is necessary and is all part of trading for profit. Vertical rolling your position can be a very effective tool for managing a somewhat unexpected upturn or downturn in the market buying you time for the market to correct.  Here’s what you need to know if you are contemplating a vertical roll.

Why Index Options?

Today was a good day in the market.  It’s expiration week and my put positions are looking a lot safer than they were.  11 days ago my NDX and SPX puts were under water – yikes.  I shared with my trading buddies that I felt like I needed to be revived -grab the paddles – CLEAR!! – a couple of times.  But I also knew we still had time in front of us.  Still I don’t know where we will end up this trading session, but I do know a couple of things.