Thanks Kymar, yes we certainly have put a lot of thought into it! That reflects the 20 years (net) short-term trading experience between the three of us - not including our previous years as - gasp - investors. The key thoughtful discipline is to structure it so you have high odds of walking away most days with some kind of profit after slippage and commissions... that is, we focus on the equity curve, per my educational post #41 on this thread.
Today, it might have appeared that we worked too hard for a couple of points (net, after losses, commissions, & slippage), but we easily could have had a 20-point day with today's entries, had the market been a bit more cooperative. Because we knew the market was trading with light pre-Holiday volume and was prone to whip-saw our positions, we were quick to take small profits, and were in there aggressively managing risk on our open positions to break-even (see post #41), so we didn't lose, which was an accomplishment! I have found that keeping the losses small and salvaging the small days to avoid going out negative on the day is more important than having 'big days' over time, because of the way compounding works.
Regarding options, we model them all the time, using OptionVue V (reviewed in the latest - June 2001 - stocks and commodities) and occasionally post the graphic analysis of a position online - we've done that probably 6 or 8 times over the past month, before entering spreads to explain the strategy, risk/reward, sensitivity to the all-important implied volatility, time (premium decay), and to changes in the underlying instrument of course. For example, with spreads we're able to explain how the position is basically immune to large gaps against it, what the maximum gain and loss looks like at any point up and including expiration, differences in how using different strike prices help you, etc.
The type of option we use depends upon the trade... that can be all over the map depending upon the application. For an OEX swing trade (long call or put) we are buying at-the-money options; an intraday OEX trade would likely be a strike or two in-the-money (better Delta and can control risk moment-to-moment). When selling naked premium we are often using out-of-the money options, like the KKD calls shorted Thursday and Deron's April short of the $BKX (Banking sector) 860 calls which was a big winner. Ed also uses out of the money calls to put strangles on the Nasdaq, which generates a nice level of background income and can be "adjusted" to keep them fairly Delta-neutral, and simply rolled into the next month at or near expiration when conditions warrant. When using options as a stock surrogate or to trade out of a stock position to limit overnight risk (e.g. playing a long or a short into an earning or acquisition news), we'll then sometimes go anywhere from slightly to deep in-the-money puts or calls, to get the high Delta (up to 1:1 movement with the underlying).
Holding time is sometimes simply overnight; some trades (typically, a naked call or put) two days to a week, but sometimes we just daytrade puts and calls (very selectively and for a reason). You just have to watch out for the slippage (spread) and liquidity (check the open interest/volume carefully) but sometimes we will bid for them or offer them out (like a stock daytrader, but using limit orders through an online options broker) when the momentum is right, making the spread - our experience with Level II/daytrading stocks helps there, as it's a very similar process. Only difference being, it's often more like trading a very thin stock -- it can (literally) be you vs. the guy in the pit. For example, in trailing a contingent stop down and then covering 50 BKX 860 short calls I was setting on the Bid into downward momentum and the pit didn't want to fill me, then I'd move my Bid down and finally got a great fill as the market maker HAD to slam the bid as the underlying went to pieces.
I'm amazed there isn't MORE daytrading of options going on as in some ways it's sort of the great unchartered territory;) At one point, after trading the S&P Futures for a year, I went into trading the OEX's almost exclusively for about six months, those things are a blast and the moves can be just mind-boggling - especially on expiration week. So we mix those trades up in the room when conditions are right. The beautiful thing about options is the incredible flexibility they give you to control risk and to tailor positions to market conditions. Once you understand how to trade them short while controlling risk, the time decay problem doesn't even have to enter into the equation. I've found that very few experienced options pros trade straight puts or calls - that's just the tip of the iceberg!
Steve |
