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.
Option Trading Resource List
This is a list of some of the best resource books I’ve found to learn about options trading and strategies. If you have some good resources you’d like to share, please comment below and I”ll add them to my list. Thanks!
Resource List:
Understanding Options by Michael Sincere
Options Made Easy by Guy Cohen
The Bible of Options Strategies by Guy Cohen
The Rookies Guide to Options by Mark Wolfinger
Option Spread Strategies by Anthony Saliba
Trading for a Living by Alexander Elder
The Swing Traders Bible: Strategies to Profit from Market Volatility by Mathew McCall
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.
Trade Execution Insight
Hi all, didn’t want to wait until our call next week to share some insight that I got from Scott this am.
Net net of what he is getting from his students and coaches:
Orders go through quicker if you trade in 10 point increments. (Obviously referring to the SPX)
It doesnt seem to matter what increments as long as they are 10 point spreads
If you trade 1-19 contracts your order goes to a routing desk and it takes longer to get orders executed
If you trade 20 or more contracts, it goes to the market makers and they have a little more leeway and your order will go through faster.
Exception is NDX in which case it doesn’t matter how many contracts you sell, they all should execute fairly quickly.
Cool stuff!!!
Jack, question for you, if you have a limited amount you are trading on lets say the SPX, should you trade 5 point increments and more than 19 contracts or
trade in 10 point increments and less than 20 contracts. Which trade will go through faster?
Thanks!!!!
Janet
Volatility and the Stock Market
Stock market volatility can be defined as the degree to which the market goes up and down and up and down. Sounds pretty simple, right? Well of course there is a lot that goes into market volatility, and while we won’t address in depth factors that lead to market volatility here, we will instead focus on indicators that can help us determine where the market is headed.
Some say that market volatility is a measure of investor nervousness, and while there may be some truth to that, most investors are professionals that are lead more by fact than by fear. At least we can hope this is true. Another misconception is that a market going up, up, up is a volatile one, well, that just simply is not true. Volatility if a measure of the speed in which the market goes up and down, up and down. So a market which slowly goes up, up, up over the course of time is seen as having very little volatility.
How is volatility measured and how can we use it to our advantage? In 1993, the Chicago Board Options Exchange (CBOE) introduced the CBOE Volatility Index, known as the VIX. Originally it was designed to measure the market’s expectation of the 30 day movement of the at-the-money S&P 100 Index (OEX) option prices. In 2003, the CBOE updated the VIX so that it better reflected the movement of the overall market. As of 2003, the VIX is based on the S&P 500 (SPX) index option prices. The VIX estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices. If you are interested in learning more about how the VIX is calculated you can find the mathematical formula on the CBOE website at www.CBOE.com. In February 2006, CBOE launched VIX options which, since inception, has grown to more than 100,000 contracts traded per day.
All options used to calculate the VIX are either in the front month (nearest to expiration) or the second month. Technically, the VIX estimates the implied volatility of what an at-the-money option on the S&P 500 would be with 30 days left till expiration. The VIX is quoted in numbers between 0 and 100 and normally trades at the lower part of that range. Lets look at an example. On March 11, 2010 the VIX was trading at 18. That number represents the movement – both up and down – that could be anticipated in the S&P 500 over the next 30 days. What that means is, based on implied volatility in the S&P 500 options, the index is expected to move approximately 1.5% (the VIX at 18 divided by 12 months) over the next 30 days. Okay, that’s interesting, but how do I make use of the that information? What that means is that within the next 30 days you can project that the S&P 500 will move 1.5% either up or down. It gives you a range in which you can expect the index to move. Using our example of March 11, 2010, the S&P 500 closed that day at 1150. Option traders and investors anticipate that between March 11, 2010 and April 10, 2010 the S&P 500 is likely to trade between 1132.75 and 1167.25. Of course that doesn’t mean the S&P 500 will actually trade in that range just that investors and traders anticipate that to be the case.
Keep in mind that the value of the VIX is constantly being changed and is only a measure of the expectations of traders and investors. Historically speaking, a very low VIX is an indicator that the market is ready for a sell off, if the VIX is high, that indicates a rally. Others argue that while that used to be the case, in today’s market there are so many other factors that influence market movement that the past behavior of the VIX is a poor indicator of where the market is headed. In either case, the VIX is just another tool in your toolbox to help gauge movement in the market.
One important thing to also know about the VIX, it’s expiration schedule. The VIX typically expires on the 3rd Wednesday of the month, but that is not always the case. If you are actively trading the VIX, please consult with a VIX expiration calendar so you are not caught unaware of the actual expiration date. Just Google “VIX expiration calendar 2010″ and you will find the current schedule.
While this article has primarily dealt with the VIX as an indicator of volatility as it is one of the most utilized and understood, there are a number of other calculations and tools available to determine market volatility. To learn more about stock market volatility, I recommend The Swing Traders Bible – Strategies to Profit from Market Volatility by Mathew McCall.
