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Given, No-Hype Options Trading

  
  Education
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Options trading can be daunting, in large measure because “the risk-adjusted return of any options strategy will tend toward zero over time.” (p. 16) It doesn’t matter whether a person engages in high-probability or low-probability trading, whether the spread of choice is an iron condor or an out-of-the-money vertical spread. Without robust risk management the options trader will over time end up with a huge goose egg in his account for all his efforts.

The author focuses on calendars, double diagonals, butterflies, and condors. His analyses don’t follow a standard pattern, but generally speaking he discusses trade structures, the rationale for various positions, and ways to enter and manage trades, including adjustments. At the conclusion of each chapter is a set of exercises to test the reader’s understanding of the material. Answers are provided at the end of the book.

Here I’ll sample his chapter on butterflies. The first important distinction is between at-the-money and out-of-the-money butterflies. An ATM butterfly, especially on a broad market index, is “a delta-neutral income generation trade.” An OTM butterfly is normally a speculative directional trade; it is an inexpensive, low-probability, high-risk trade. But an OTM butterfly can also be used as a “what if I’m wrong” trade. Let’s say the trader expects a stock to trade higher and has opened an appropriate bull call spread. But, in case the stock doesn’t trade as expected, an OTM put butterfly below the stock’s current price can serve as an inexpensive hedge.

The author outlines two ways to manage an ATM butterfly, a simple and a more advanced. The simple technique has eight steps. Here are a few of them. Sell the ATM options and buy one option at one standard deviation OTM and one option at one standard deviation ITM. Buy extra calls and/or puts on the wings to get as close to a delta neutral position as possible. Close the trade when you are down 20%. Close half of the contracts and take your profit if you are up 25% or more. Close the trade on the Friday before expiration week. (pp. 103-105)

No-Hype Options Trading is a practical book for the trader who has a modicum of knowledge about options but needs help with delta-neutral strategies. Whether this book will enable him (with lots of practice) to generate steady monthly income, the alleged goal of non-directional trading, is another matter. Markets don’t always accommodate the delta-neutral trader. Strongly trending markets present significant challenges and highly volatile markets are “the worst-case scenario.” (p. 153) by Kerry W. Given, aka Dr. Duke (Wiley, 2011) might be just the ticket. The book (for those who care about the sometimes dueling camps in the options world) reflects some of the techniques taught by Dan Sheridan, who was one of the author’s mentors.No-Hype Options Trading: Myths, Realities, and Strategies that Really WorkFor the options spread trader, especially the non-directional trader, who is looking for strategies and trade management ideas

Trading With A Plan

  
  Education
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A planned trade is one that is guided consciously, filtered according to a variety of criteria that are designed to provide a positive expectancy. The opposite of a planned trade is an impulsive one, in which traders enter markets before explicitly identifying what they are doing and why. The difference between planned and unplanned trading is one of intentionality: being proactive in taking controlled risks vs. being reactive to what has already occurred in markets. Even the most intuitive and active trader can trade in a planned manner, if many of the elements of planning are achieved prior to entering positions.

So what are these elements of planning? The ideal trade identifies:

1) What you’re trading – Why are you selecting one instrument to trade (one stock, one index) versus others? Which instruments maximize reward relative to risk?

2) How much you’re trading – How much of your capital are you going to allocate to the trade idea versus other ideas?

3) Why you’re trading – What is the rationale for the trade? Why does the trade idea provide you with an “edge”?

4) What will take you out of the trade – What would lead you to determine that your trade idea is wrong? What would tell you that the trade has reached its profit potential?

5) Where you will enter the trade – Given the criteria that would take you out of the trade, where will you execute your idea to maximize the reward you’ll obtain relative to the risk you’ll be taking?

6) How you will manage the trade – What would have to happen to convince you to add to the trade, scale out of it, and/or tighten your stop loss? (more…)

Think Less & Keep It Simple

  
  Education
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Every once in awhile I read something from another trader who I respect that I really wish I wrote myself. Here’s one such example:

 “One of the most difficult things to get investors and traders to understand is that no matter how much they investigate an investment, they will probably do better if they did less. This is certainly counter-intuitive, but the way that our brains function almost guarantees that this will happen. This kind of failure also happens to those investors frequently regarded as the smartest. In essence, the more information that investors have, the more opportunity that they have to choose the misinformation that suits their emotional purposes.

 

Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way. Yet everywhere we turn, we read and hear opinion after opinion and explanation on top of explanation which claim to connect the dots between economic cause and market effect. Most of the marketplace is long on rationale and explanation and short on methods. (more…)

Cohan, Money and Power

  
  Education
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Goldman Sachs is not exactly the number one brand in the world. Admittedly, it’s hard to beat Apple these days in popularity contests. But Goldman doesn’t even come close: on the contrary, it’s a firm that people love to hate. William D. Cohan’s Money and Power: How Goldman Sachs Came to Rule the World (Doubleday, 2011) provides fodder for the Goldman haters, exposing among other things a long history of conflicts of interest.

Cohan’s long book is not, however, the stuff that tabloids (or Rolling Stone—think of Matt Taibbi’s piece, later expanded into
Griftopia) are made of. It’s carefully researched, with well-crafted portraits of Goldman’s leading players, definitely worth reading.

Since Cohan’s book has been extensively reviewed, for this post I decided to extract some lessons for individual traders from Goldman’s successes and failures. And Goldman, lest we forget, had a lot of failures.

One lesson is to exploit the weaknesses (or laziness) of others. For instance, a Goldman trader recalled that his boss always called Friday “Goldman Sachs Day,” the rationale being that traders at other firms were goofing off on Friday. If the Goldman traders came in on Friday intent on actually doing something while others had their guard down and were less competitive, their focused energy could make a big difference. (more…)

Trading With A Plan

  
  Education
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A planned trade is one that is guided consciously, filtered according to a variety of criteria that are designed to provide a positive expectancy. The opposite of a planned trade is an impulsive one, in which traders enter markets before explicitly identifying what they are doing and why. The difference between planned and unplanned trading is one of intentionality: being proactive in taking controlled risks vs. being reactive to what has already occurred in markets. Even the most intuitive and active trader can trade in a planned manner, if many of the elements of planning are achieved prior to entering positions.

So what are these elements of planning? The ideal trade identifies:

1) What you’re trading – Why are you selecting one instrument to trade (one stock, one index) versus others? Which instruments maximize reward relative to risk?

2) How much you’re trading – How much of your capital are you going to allocate to the trade idea versus other ideas?

3) Why you’re trading – What is the rationale for the trade? Why does the trade idea provide you with an “edge”?

4) What will take you out of the trade – What would lead you to determine that your trade idea is wrong? What would tell you that the trade has reached its profit potential?

5) Where you will enter the trade – Given the criteria that would take you out of the trade, where will you execute your idea to maximize the reward you’ll obtain relative to the risk you’ll be taking?

6) How you will manage the trade – What would have to happen to convince you to add to the trade, scale out of it, and/or tighten your stop loss? (more…)

Is Money The Rationale Or The Motivation For Trading?

  
  Education
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Here’s an interesting thought experiment: Suppose you find a trading system that made money consistently in all market conditions. It was backtested objectively during independent time periods and handily beat your own trading performance. It also took less risk to obtain these results, with minimal drawdowns. The system’s price is quite reasonable. The catch? The system trades four times a year.Would you obtain the system? Would you trade it? Would you buy it and then try to tweak it in various ways? Would you be able to follow its rules faithfully, or would you convince yourself in the middle of trades to take sure gains or limit losses?Such a system would not meet the needs of many traders: needs for action, needs to figure out the market on your own, needs to feel like *you* were beating the market. Money is the rationale for trading, but it is not the only motivation. Traders also trade to make themselves feel good, to validate themselves, to avoid a 9-5 job, and so much more.
This is truly the source of most problems with “trading discipline”: what we need to do to make money conflicts with the other needs that we impose upon trading. 
If we bring a host of unmet emotional needs to the perfect trading method, we will inevitably sabotage that method. A rich and fulfilling life outside of trading might just be the best trading strategy of all.

Think Less & Keep It Simple

  
  Education
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“One of the most difficult things to get investors and traders to understand is that no matter how much they investigate an investment, they will probably do better if they did less. This is certainly counter-intuitive, but the way that our brains function almost guarantees that this will happen. This kind of failure also happens to those investors frequently regarded as the smartest. In essence, the more information that investors have, the more opportunity that they have to choose the misinformation that suits their emotional purposes.

 Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way. Yet everywhere we turn, we read and hear opinion after opinion and explanation on top of explanation which claim to connect the dots between economic cause and market effect. Most of the marketplace is long on rationale and explanation and short on methods.

A series of experiments to examine the mental processes of doctors who were diagnosing illnesses found little relationship between the thoroughness of data collection and accuracy of the resulting diagnosis. Another study was done with psychologists and patient information and diagnosis. Again, increasing knowledge yielded no better results but did significantly increase confidence, something which the smartest among us are most prone to have in abundance. Unfortunately, in the markets, only the humble survive.

The inference is clear and important. Experienced analysts have an imperfect understanding of what information they actually use in making judgments. They are unaware of the extent to which their judgments are determined by just a few dominant factors, rather than by the systematic integration of all of their available information. Analysts use much less available information than they think they do.

Think Less & Keep It Simple

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

“One of the most difficult things to get investors and traders to understand is that no matter how much they investigate an investment, they will probably do better if they did less. This is certainly counter-intuitive, but the way that our brains function almost guarantees that this will happen. This kind of failure also happens to those investors frequently regarded as the smartest. In essence, the more information that investors have, the more opportunity that they have to choose the misinformation that suits their emotional purposes.

 Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way. Yet everywhere we turn, we read and hear opinion after opinion and explanation on top of explanation which claim to connect the dots between economic cause and market effect. Most of the marketplace is long on rationale and explanation and short on methods.

A series of experiments to examine the mental processes of doctors who were diagnosing illnesses found little relationship between the thoroughness of data collection and accuracy of the resulting diagnosis. Another study was done with psychologists and patient information and diagnosis. Again, increasing knowledge yielded no better results but did significantly increase confidence, something which the smartest among us are most prone to have in abundance. Unfortunately, in the markets, only the humble survive.

The inference is clear and important. Experienced analysts have an imperfect understanding of what information they actually use in making judgments. They are unaware of the extent to which their judgments are determined by just a few dominant factors, rather than by the systematic integration of all of their available information. Analysts use much less available information than they think they do.

Think Less & Keep It Simple

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

Every once in awhile I read something from another trader who I respect that I really wish I wrote myself. Today’s post from Jeff Cooper is a must-read:

“One of the most difficult things to get investors and traders to understand is that no matter how much they investigate an investment, they will probably do better if they did less. This is certainly counter-intuitive, but the way that our brains function almost guarantees that this will happen. This kind of failure also happens to those investors frequently regarded as the smartest. In essence, the more information that investors have, the more opportunity that they have to choose the misinformation that suits their emotional purposes.

 

Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way. Yet everywhere we turn, we read and hear opinion after opinion and explanation on top of explanation which claim to connect the dots between economic cause and market effect. Most of the marketplace is long on rationale and explanation and short on methods. (more…)

Greed and Fear

  
  Education
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Greed and Fear are two of the strongest emotions that can have major influences on our trading behaviours and hence profitability.

We have all experienced these, from the inability to put a trade on to the gut ache seeing money on the table evaporate.

Recently I have been thinking of these two emotions in a different light. What I want to propose is that these two emotions have very different “time-frames” of operation, with respect to trading. Now I have
no detailed research or data to back this up, but I felt I’d put this out there and see what other traders thought…

Fear = Short Term = Most likely to be experienced before or soon after a trade is placed.

Greed = Longer Term = Emotion that plays a major role further into the trade timeline.

My rationale here is that it is FEAR that (some) people feel before putting on a trade, worrying if they should place the trade or not, once in a trade it is FEAR that makes them start hoping that it wont go
against them.

With GREED, I think this starts to come in later. For instance, if the position has become profitable, then starts to loose and become negative, it is GREED for the money that was on the table that keeps you
in the trade, not fear of loss. As it usually takes time for the trade to become profitable, the emotion of GREED by association is the emotion that takes longer to materialise. Indeed, I would argue that when
you think back to the trades ‘that could have been’, you are more likely to remember the trades that ‘could have’ made you a good return, rather than the quick losses you took?

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