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     roh_2003
Member
Username: roh_2003
Post Number: 1
Registered: 08-2003Rating: N/A
Votes: 0
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| | Wednesday, January 14, 2004 - 11:22 am: |  
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Hi all,
Being new to the option scene and just developing my trading plan, i was wondering what the more experienced traders suggest are the best strategies for exiting a profitable position with their options....
I have heard and tested many strategies from percentage exists to moving averages through to fibonacci targets but to no avail...
Are there any strategies which people find particularly useful for the ASX Market?
Thanks in advance!!!
Roh
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bundy
Member
Username: bundy
Post Number: 197
Registered: 03-2003Rating: 
Votes: 22
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| | Thursday, January 15, 2004 - 08:31 am: |
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Welcome to the exciting but turbulent world of options trading.
You may be new to option trading but you seem to have twigged to the secret of profitable options trading - trade management.
The added elements of leverage, volatility and time decay make trade management the absolute overriding consideration if you want to stay in the game in the long run.
I know you asked about exiting from a profitable trade - but in my view the management of losses is more crucial. You can't go broke badly managing your profits - you just incur an opportunity cost - but you can quickly go out the back door if you don't manage your losses.
Manage your losses and the profits will look after themselves!
You haven't indicated what type of option strategies you are referring to - buys, writes, spreads, etc - but as you are new I will assume you are talking primarily about buying calls and puts - which realistically is all a new option trader should be attempting. In fact - with most options underpriced at the moment and stock trading below historical volatility levels, now is the ideal time to buy value options.
Ok, to losses.
I'm not sure what your exit strategy is at the moment - but I'll outline some of my considerations.
I've found through experience that if a trade does not go my way the day after buying the option - the odds of it eventuating as a profitable trade are generally poor.
If the option price moves against me by 20% - I am out - no questions asked. Often if prices gap overnight you may be looking at more than 20% on opening - which with slippage can take your loss to 30% or more. That's why it's crucial to have a benchmark that you automatically exit at. Don't get cute when you are staring at a loss by trying to squeeze an extra cent or two out of the market maker - get out of the trade - that should be your first priority!
As I stated above, if a trade doesn't immediately go your way it's unlikely to be a profitable trade, and for that reason many option traders set a lower stop loss of say 10% which, with slippage, often takes them out at 15 to 20 percent at times.
I find 10% takes me out of a potentially profitable trade thorough whipsaws - so I use 20%. Having about 80% win ratio also gives me the confidence and maneuverability to set my loss level at a higher level.
I know many traders - especially new traders - are tempted to let their losses run in the hope that they reverse. Often they do and the trader is filled with confidence and then the next time a trade goes against them, they repeat their previous mistake. Eventually it doesn't work and they are perplexed - so they do it again - and fail - and before they know it - they have strung together a series of losses that has wiped out most of their trading bank.
I was lucky when I started trading options - I exited my first trade at a 20% loss and it taught me a valuable lesson. My trading buddy at the time developed the bad habit I described above - and eventually blew his trading account by letting his losses run in the hope of recouping them. If he had simply cut his losses and adjusted his position size - he would still be trading now - it's that simple!
Enough of losses - I think I've probably impressed on you the need to manage that side of your trading.
As I said above, profits tend to take care of themselves.
I have no hard and fast rule for taking profits.
We've all heard the adage - cut your losses and let your profits run - and while it has some relevance to options trading, I think that it applies more so to shares rather than options - due to the added variables of volatility and leverage. I mean - you can't go from 100% profit to 50% loss overnight trading shares - but it is a common enough occurrence with options - and this must influence your decision on taking profits.
So if, as happened with 3 trades last Tuesday, I was looking at about 70% overnight profit on each trade, I don't look a gift horse in the mouth and I take the money and run and count my blessings. I don't let greed turn a profitable trade into a loss - which would have happened on two of the trades if I had let them run one additional day.
This sort of situation - more than 30% to 50 % overnight profit - tends to happen fairly regularly trading options - and if presented with the opportunity - I tend to exit with the profit and move on to the next trade. It's a simple, but for me successful and profitable, strategy - I have never let a profitable trade turn into a loss.
If the move is particularly strong, I may sell part of my holding to cover my costs or made a small profit - and let the rest run - depends.
In other cases, I monitor the trade and price in the underlying - but I make my decision on the basis of the trade and price of the option itself. In other words - I trade the actual option - not the underlying. To do this - I have a dynamic feed of share prices - two running concurrently actually - and a live option data feed.
I certainly don't use some arbitrary rule like retracement level or moving average crossover, etc - as the option with it's own market and volatility swings frequently moves independently of the action in the underlying.
Finally, I can't emphasize enough how important it is to only trade stock and option series with high liquidity.
Why?
There is nothing worse than being in a trade - be it profitable or a losing - and not being able to exit the trade because there is insufficient liquidity. Your only option then to exit the trade is the price offered by the market maker - and he is going to try to screw something terrible.
Most option traders have been there - and for that reason I have pruned my stock list to 20 stock - certainly makes life easy and manageable and still gives me plenty of trading opportunities.
Having said that - there are plenty of times when I consciously have no positions open. I have friends who naturally inquire what positions I have open and when I say none at the moment - their immediate response is - "Oh, aren't you trading?"
Of course I am trading - but the decision not to trade is in itself a trading decision.
Never compromise your trading rules!
---
Bundy
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gilk
Member
Username: gilk
Post Number: 8
Registered: 11-2002Rating: N/A
Votes: 0
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| | Thursday, January 15, 2004 - 09:40 am: |
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Hi Bundy,
Great Post.
What do you consider adequate liquidity?
Would you care to share your asx top 20 liquid stocks?
TIA
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investinit
Member
Username: investinit
Post Number: 32
Registered: 08-2003Rating: 
Votes: 1
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| | Thursday, January 15, 2004 - 11:39 pm: |
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Hi Bundy,
This is more about options strategies in general and resources.
I haven't traded options yet but have been doing some research including reading a book by George A. Fontanills (of Optionetics) called "The Option Course".
I have a couple of other books - "The Secret of Writing Options" by Louise Bedford and "Options in a Nutshell" by Brad Booth.
I've read the ASX booklets and various other sources, but I've been most impressed with "The Options Course" (read it several times over Christmas as it is an easy read and you pick up different things each time).
Have you seen / read this book & if so what do you think of the methods? Otherwise, do yo have a favourite?
(The Optionetics web site also seems very good.)
I'd be really interested in your thoughts.
Regards,
Investinit
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bundy
Member
Username: bundy
Post Number: 200
Registered: 03-2003Rating:
Votes: 5
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| | Friday, January 16, 2004 - 08:40 pm: |
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gilk
My watch list comprises AMC AMP ANZ AWC BHP BIL CBA CML LLC MAY NAB NCM NCP QAN RIO TLS WBC WMR WOW WPL.
All of these have option series each month - which is my principal criteria - and healthy turnover at the one or two strike prices either side of ATM.
When I buy options it's usually 6 to 8 weeks out - even if I only hold for 1 night or intraday. I seldom write more than 3 weeks from expiry - so I can readily cash in on time decay - and spreads or other combinations can be anything.
I don't want to be distracted looking at stock that I can't trade at the time,
Also, I feel comfortable focusing on a small number of readily tradable stock that I have gotten to "know".
More importantly, however, is that if I am in a trade - and additional trading opportunities present themselves - or if I get into dogie doo - which can happen from time to time - I am not fettered by the fact that no options can be traded for say the next two months. So, for example, if I want to roll out a position to the next month - it's no problem - I'm not locked into a position for a few months or forced to get out of a trade when I don't want to.
By having a healthy turnover at a few strike prices - you can see where the crowd is going - and that is where I want to be.
In the past I have been caught out in front by myself trading illiquid stock - just me and the market maker - it's not a good place to be.
---
Bundy
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scarrie
Member
Username: scarrie
Post Number: 46
Registered: 08-2003Rating: N/A
Votes: 0
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| | Friday, January 16, 2004 - 09:26 pm: |
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Good post Bundy,
I do a similar thing, but my watchlist is only ANZ, CBA, NAB and WBC. Its only a short list but I can get to know their habits, and for the most part the banks tend to move in much the same direction, so there is a bit of cross confirmation between the 4. I started with a list like Bundy but wasn't able to get to know the stocks as well as I would like. As Bundy said, liquidity is the key, as market makers can be pretty much a pack of thieves.
Cheers
dave
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bundy
Member
Username: bundy
Post Number: 201
Registered: 03-2003Rating:
Votes: 5
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| | Friday, January 16, 2004 - 09:40 pm: |
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investinit
No, I haven't read "The Option Course" - I looked it up on the net - but it's hard to form a view without at least flicking through the book.
Having said that - it sounds like a reasonably starting platform - you have to start somewhere - and an all -in-one package is as good a place as any.
I have been to the Optionetics website - it's not too bad.
Try Optionvue as well - it's one of the better ones IMHO - nice archive of trading tips and articles - forget about paying big bucks for the software - it's hardly needed trading the local market - I can flick through my 20 stock watchlist and identify a trade in less than a minute.
I've not read "Options in a Nutshell" - but flicked through it in a bookshop. I did however make the mistake of buying "The Secret of Writing Options".
Lots of books sound great but they are only regurgitating generic information that you get anywhere and that umpteen other "gurus" have already sprouted before hand - albeit in a slightly different format.
Most option books in the say $20 to $50 range probably fall into that category.
I think the two mentioned above probably fit the bill.
One book I can recommend is "The new Options Advantage" by David Caplan - comes in at about $140 - but I think it's probably worth it - you can write it off on your tax anyway.
Another good book is "Option Volatility and Pricing" by Sheldon Natenberg - also a big price tag. This book is exceedingly technical and definitely not for everyone. I lent it to my trading buddy and he couldn't even understand the introduction - so check it out before you commit any dough - else it will end up as an expensive bookend.
There is probably more misleading information and BS written about options than any other aspect of trading - except possibly fail-safe trading systems.
And a lot of it is only relevant to the USA.
You have to make up your own mind what is right or wrong - what is relevant and what is not - and what is BS and what is something you can take away and use in your own trading.
Never stop questioning.
The only way to do this is to continue your research - read, read, read.
If you find a good site on the web - use a ripper like Teleport Pro or Offline Explorer to dump the site to your hard drive so you build up a reference library. Then you can search it for keywords whenever you like. I use "Search and Replace" for that - a nice little program that can search through any type of file for keywords - even through compressed archives.
I've got a gig of stuff on my drive just on options and trading - sites, articles, newsletter, etc.
I've read the lot - and often go back to it for reference or research - better than any book (apart from the two I mentioned above} that I have read.
Finally, I think the best piece of advice I can offer you is to spend your money on QUALITY books - don't waste thousands of dollars doing a you-beaut options trading course run by some local "guru".
There are heaps of people out there (some here in IC) that are in that boat - that have done these courses - and I doubt any of them have realized the promises made in the course(s).
Most have probably lost at least one trading bank.
I'll bet too that they have probably learnt more on this Forum than they did on the course(s) they attended.
Trading options is high risk and requires iron-clad discipline - learn and understand fully the risks before you commit yourself.
Having said that - it is highly profitable and offers a fantastic lifestyle.
I guess that's the lure of options trading.
---
Bundy
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bundy
Member
Username: bundy
Post Number: 202
Registered: 03-2003Rating: N/A
Votes: 0
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| | Friday, January 16, 2004 - 09:43 pm: |
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scarrie,
That's the nicest thing I have heard anyone say about market makers. 
---
Bundy
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scarrie
Member
Username: scarrie
Post Number: 47
Registered: 08-2003Rating: N/A
Votes: 0
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| | Friday, January 16, 2004 - 09:52 pm: |
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Bundy,
Forum ettiquette prevents me from giving them a proper description. "Pack of Thieves" doesn't do them justice.
Cheers
dave
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vesta
Member
Username: vesta
Post Number: 25
Registered: 05-2003Rating: N/A
Votes: 0
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| | Saturday, January 17, 2004 - 03:09 am: |
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Thanks for the great posts. I have an options account and have made about 4 trades buying call options using comsec. i.e I am a beginner.
Generally my trade value has been between$600 and $900. I find that the $60 commission in and $60 out is quite steep however and necessitates a decent jump in the option price to make something. I can trade higher values but have been a little hesitant too.
What is the dollar $ range of some of the other traders out there that they find is reasonable for a return using buying calls as an example. I know about limiting potential losses to a certain % of your trading capital which is around 50K of my money. With that sort of bank do you invest 2500-5000 on a trade and look to make a lesser percentage return but higher success rate or do you invest a lesser amount and try and get a higher return.
Basically Im asking how much should I trade and why?
My second question is for call option buying or put option buying. what are some good setup and trigger signals for option buying opportunities. For buying shares, currently I use IC stock screening and look for the RSI coming out of oversold as well as the stock being in an uptrend overall (e.g. above or close to the 30week moving average). I also check that the slow stochastic is in the oversold or just coming out. This has worked well but I need to spend about 70k on shares and be happy with a 5-10% gain over 2-6 weeks. ie. I might make anywhere from 2k to 6k on a trade or lose 2k if I have to activate my stop straight after buying in. Are these the same triggers that mean that stocks call options are a good possibility. I am assuming yes but then I am wanting to know which series of options in that stock do I buy.
For example if the share is say CBA - chart below and the signals appear to me as below. RSI is overbought and coming back down and the candle is red and goes below the lows of the previous days which option series do you go for. I have attached the march put options as they are two months out which you recommend is better than the Feb ones as this is too close.
Vesta
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bundy
Member
Username: bundy
Post Number: 206
Registered: 03-2003Rating:
Votes: 4
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| | Saturday, January 17, 2004 - 09:04 am: |
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vesta,
Firstly, get a cheaper broker!
As you rightly noted, you need a fairly decent price hike in the option to cover brokerage trading at the levels you are currently trading.
On a $600 trade, an increase in the option price of 30% or $180 is going to give you a 10% return after commission.
Paying something like $40 a trade is going to increase your return on the same trade to nearly 17%.
Frankly, however, I think the prospects of turning a profit in the long run trading at your current level are not high - losses and slippage will probably slowly erode your options trading bank..
I think $2000 is probably closer to the minimum trade size - $3000 is better still - and $5000 will get the dough rolling.
However, you should always trade the range you feel comfortable with and which is within your means and is an acceptable risk to you!
If you really feel uncomfortable moving up to a level to give you the sort of returns you want - don't!
You might consider then whether you would be better off paper trading till you have confidence to trade at a viable level rather than dicky around with small trades that expose you to risk without really giving you any sort of real prospects of profit.
Which takes me to next final point in your post - the trade you have identified as a possible entry point for a PUT.
I think you may need to review your entry criteria - certainly for this trade anyway.
CBA has been in a steady up trend for a few months - making higher highs and higher lows. The RSI has been in oversold territory most of this time - so I don't see what relevance that has to anything.
We have had two down days - that's all - absolutely no suggestion of a trend reversal or even a break in the uptrend.
What you are seeking to do is trade a short term counter trend - a very sure way for any beginner options trader to quickly deplete their trading account.
A better trade is to wait for the counter trend to end - and then trade CALLS with the trend if/when it resumes.
There have been many discussions on IC about entry signals and the general message is clear.
TRADE WITH THE TREND!
OK - setting that aside - you still have the matter of selection an option series to trade.
This is a very complex question not fully understood and appreciated by many option traders - even some experienced traders.
I can only give you a broad overview in this short space - you would be well served to do some research and reading for yourself so that you fully appreciate what is involved and feel comfortable making a decision that reflects your risk profile - become familiar with option Greeks and their full implications for trading.
But briefly, trading ATM gives you the best leverage with the highest probability of profit.
Trading first ITM gives you a bit more security and margin for error if the stock doesn't immediately move your way by virtue of the intrinsic value and less time decay bought.
These two option series are higher pric | |
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