- We will only take the very best trade set ups in 2015 discarding the average and mediocre ones.We want each trade to have an excellent risk/reward ratio.
- We will position size based on the worse case scenario for volatility and range expansion not what I think is a safe bet.
- We will use more option contracts when their volume permits in my trades to limit my risk to the size of the option contract instead of using so much capital to trade equities.
- We will limit my total risk exposure to only two trades on at a time.
- We will focus on limiting my losses and drawdowns in 2015 to in return maximize my gains.
- We will be looking to structure trades for a more consistent monthly return by trading stock indexes primarily.
- We will focus on understanding the emotions that arise during my trades, each trade will be made with a clean slate focused exclusively on current price action.
- We will be in absolutely no hurry to place trades. I will be waiting for trades to come to me.
- We will flow with the patterns and price action of the markets and restrain from bias and options. Signals will be my guide.
- We will double my efforts in backtests and chart pattern studies of historical charts.
Archives of “Option” tag
rssTrader Types and Personalities
- Scalpers
- High energy, short attention spans.
- Usually former athletes, tennis and hockey players make the best traders.
- Able to play both offense and defense simultaneously, and able to think a few steps ahead of the game.
- Spreaders / Option Traders
- Quick and flexible thinkers, able to look at numbers and figure risk and value instantaneously.
- Not in the market to take risk, methodically search for mathematical anomalies and lock in profits immediately.
- Position Traders
- Energy level almost nonexistent.
- Put on passive positions, ride the winners, cut losers.
- As a position trader, your brains are working all the time, and you keep looking for an informational edge that might drive the market one way or the other.
Speculation, Trading, and Bubbles-by José A. Scheinkman (Book Review )
To pay tribute to one of its most famous graduates, Kenneth J. Arrow, Columbia University launched an annual lecture series dealing with topics to which Arrow made significant contributions—and there were many. Speculation, Trading, and Bubbles stems from the third lecture in the series given by José A. Scheinkman, with adapted transcripts of commentary by Patrick Bolton, Sanford J. Grossman, and Arrow himself. I’m going to confine myself here to a few excerpts that encapsulate some of the lecture’s key points, ignoring the often perceptive commentary.
Scheinkman offers a formal model of the economic foundations of stock market bubbles in an appendix to his lecture, but he lays out its basic ideas in the lecture proper. The model rests on two fundamental assumptions—“fluctuating heterogeneous beliefs among investors and the existence of an asymmetry between the cost of acquiring an asset and the cost of shorting that same asset. … Heterogeneous beliefs make possible the coexistence of optimists and pessimists in a market. The cost asymmetry between going long and going short on an asset implies that optimists’ views are expressed more fully than pessimists’ views in the market, and thus even when opinions are on average unbiased, prices are biased upwards. Finally, fluctuating beliefs give even the most optimistic the hope that, in the future, an even more optimistic buyer may appear. Thus a buyer would be willing to pay more than the discounted value she attributes to an asset’s future payoffs, because the ownership of the asset gives her the option to resell the asset to a future optimist.” (pp. 15-16)
5 Ways -Traders are Right ,But …. Still Lose Money.
- You enter your trade correctly and it goes in your favor, BUT… you do not have the right exit strategy to capture your profits and they evaporate due to not having a trailing stop or waiting to long to exit to bank those profits. Sometimes winners even turn into big losers win not managed correctly. You have to have a plan to take profits while they are there.
- You enter the right trade BUT… at the wrong time, you either exit not allowing your trade enough time to work or you are stopped out but do not have a plan to get yourself back in the trade with the right set up. The right trade with the wrong timing pays nothing.
- You have the right entry and it goes in your favor BUT.. you pick the wrong stock option to express your trade. If you pick an option with a high implied volatility your trade has to overcome that vega priced into the option, after an expected earnings event that vega value will be priced out and you need the move in intrinsic value to make up that difference. With a far out in time stock option you need the price to move enough in the underlying in the time period of the option to make up the theta cost of time embedded in the option. It is crucial to understand the option pricing model to make the right option trades to express your time period and expected move. Sometimes options also do not have the liquidity in some stocks,or far out time frames, or far out of the money strikes. Getting in and out of an illiquid option trade can be very expensive.
- You enter correctly BUT… get stopped out too soon because your position size is just too big and either you stop out from a monetary loss above your risk threshold or your fear of big losses stops you out. Trade the right size for your risk tolerance and give yourself some wiggle room.
- Your trade can be perfectly timed and executed and it can immediately go in your favor BUT… an unexpected news headline about your company, interest rates, commodity, or macro can still cause you to lose. Nothing you can do about this one but move on the next trade. The other four can be great lessons in how to be a winner the next time around.
Anti-Fragile Trader
The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.
The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.
The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable. (more…)