All Entries in the "Option Trading" Category
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!
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.
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.
Option Trading Journal
I’ve been trading now for 6 months so yesterday I decided to go back through all my trading paperwork (which I do diligently by the way) and journal my thoughts, decisions, strategies, etc. It was a very interesting experience which I found very valuable. I also added a couple of statistics to my trading worksheet. I added a open and close stock price on all my executed trades and the spread between stock price and position. I also took notes on when I placed my trades throughout the trading month and %age return. And I made note of Thursday close value, Friday settlement value and the amount of the gap up or down. I plan on continuing the process of journaling and I recommend it to any new traders.
