Freeus - I have to give you several cautions here
1) I have made a fortune last year on options.
2) I have lost a fortune last year on options.
3) You must be right in direction as well as how quickly it happens.
4) When wrong you have to cut losses and bail.
5) When wrong you can lose a lot of money fast.
6) When right you can make a lot of money fast.
7) The shorter the duration on the options the "righter" you must be (as in now).
8) Your market timing skills need to be excellent.
9) You need to get control of your emotions.
10) You only need to be right about 40% of the time to do well, possibly less if your entries are good and you cut your losses.
11) Start small, very small,to gain confidence.
12) Patience Patience Patience.
13) Sometimes the bulls win, sometimes the bears win, but the pigs get slaughtered. If you get a 100% gain in an hour, just take it unless you are quite sure (based on Level II bid-ask volume, or some other real factors, to stay in the trade.
14) Plan your trade. How many points against you will you let the position go before you bail. No matter what STICK WITH IT. If you lose money instead of making it (the trend reverses), then either your stop loss point was too tight or your entry too poor.
15) With the volatile issues like JNPR, BRCD, etc you can get a 20 point swing in your direction and have it completely vanish. This means, that these issues need to be watched closely. This takes a time committment that people with day jobs might not have.
16) Manage your stress. If you feel stress you are probably over leveraged.
17) Read up on options before attempting to play with them.
Leaps, by Harrison Roth is a good book solely devoted to leaps. The Option Advisor by Scaheffer is another good one.
Bear in mind that these books tend to give favorable examples. Neither is particularly good with thaings that can go wrong. In short, they make it look far far too easy.
18) If you really wish to trade, read up trading. 75% if not more of trading is mental. I just finished The Disciplined Trader by Mark Douglas. I recommend this book. I just started Trading In The Zone (by the same author) as both were recommended to me. I have not finished this book so I can not comment. READ READ READ, not just these books but anything that looks good.
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On Friday I bought a fair # of AMCC FEB PUTs. My exit point, for reasons unknown to even myself, was 76 (see point 14 above). At 75 3/4 I had my hand on enter to bail. I decided to "honor" my exit point. Had I pressed enter, I would have sold, exactly at the bottom (from my perspective), exactly at the point I should have been buying PUTs not selling them! Now I am in fear of exactly the same thing on Tuesday. Quite simply, I should have waited until earnings day to decide what to do if anything (since I am making an earnings based play). Impatience cost me a fair amt of both $ lost as well as stress. Quite simply, this stress tells me that I am over-leveraged. This problem is the same whether or not one is in common or options.
I sense that you too are under stress, hard for me to read, but that is what I sense. On a combined, total portfolio basis, I am about 75% cash. Whether or not you choose to do options or not, you must get down to your comfort level. I certainly do NOT recommend anyting more than 10% on options plays. If you continue with common rather than options, perhaps you should keep 60% of your money on the sidelines and stay 40% invested (or vice versa).If you wish to have a rule that says 40% invested but 30% more can be alloted to buying dips, perhaps that is a great strategy, as well. Whatever your strategy is stick with it, and make sure you are comfortable with it. If you keep a "buy the dips" approach, you will have to sell the rallies to be able to keep buying the dips. If a stock rises past where you sold it, who cares? There are always other opportunities. How many people chased QCOM to 90, sold it, watched to get above 100, and bought it back again because of "sellers remorse"?
Right now I am in Leap PUTs on financials. I have not exactly done well with these but I have not gotten killed either because of the lack of time premium decay. LEAPS act much like common in this regard.
As for what expirations to choose, it all depends upon how greedy one wants to be. On non-volatile issues I will pay the premium and go out as far as I can, even into leaps. Plenty of time to bail. If you get lucky and get a spike in your direction, or if the overall trend is steadily in your direction, you will do very well. With Leaps all you have to do is be right eventually, as opposed to now.
On Volatile tech issues, 1-2 months out is probably best in general(because the time premium is huge). But You have to bail almost immediately if you guess wrong. Because of the difference between bids and ask you can lose a decent % on just a couple point move against you. However, that % against you should be far less $ than you held the same position in common.
For example.
If you short 200 shares of BRCD and it went 10 points against you, you would be out $2,000. If you bought a couple of at the Money BRCD PUTs and got a 10 point move against you, perhaps you would lose $1,000 instead. With At the money PUTs, a very quick move in your direction of 10 points might still net you close to $2,000 (but probably more like $1,700 because of bid-ask arbitage).
Thus, managed properly options can reduce risk.
Another big plus with options is that you have a guaranteed fixed risk (assuming you do not do something as stupid as sell naked calls or puts).
I am somewhat hesitant to provide this information. One of the worst things that can happen actually is for your first 3 or 4 trades be right. This leads to overconfidence, a huge $ bet and then a huge loss. One rule of thumb is that if you would consider shorting 200 shares buy 2 puts. If you would consider buying 200 shares consider 2 calls. Do not fall into the trap of spending the same $ amt on options as you would buying common.
Options play is about money management.
Mike Burke recommends a portfolio of 90% cash and 10% options. He takes a swing with 10% every now and again when he sees a no-brainer, or senses a market reversal.
I have violated some of those rules right now, most notably Patience Patience Patience. This has cost me quite a bit of $ recently I assure you. Wait for something that looks absurd and pounce. If the move goes against you, it was not absurd enough so bail, without remorse.
M |
