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Hi all ~

I've been lurking for a couple of days and, I must admit, much of the conversation is a bit over my head. But I'm wondering if there are any among you who will join me in beginner's talk about options trading?

I enrolled in the training at www.investools.com, but I'd enjoy some daily banter from more experienced folks so I can pick up some pearls of wisdom that way, too.

What say you?

Catherine
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I'm willing to talk options. There are several TMF boards dedicated to options but not alot goes on there. I use options strictly as a proxy to the stock. I also have strict rules (with exceptions) for volume and price of the stock before jumping into the underlying option.

Before doing anything I would suggest you read this:

http://www.therealtimetrader.com/understandingriskreward.htm

Thanks to Russ for that. I think people screw up sometimes because they risk the same amount in the underlying option as they would in the stock. Very nice if it works. Very very bad if it doesn't.

I have


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I have = halon.

Doh!


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Hi Halon,

Great post!

Before doing anything I would suggest you read this:
http://www.therealtimetrader.com/understandingriskreward.htm


Cath,
ALSO... when trading as a business (rather than investing as a gamble,) keep in mind your "Costs Of Doing Business."

Every trade has commissions.
ALSO, every trade has bid/ask slippage.

THUS... you must plan on a theoretical minimum positive profit on each trade of "X" (slippage plus commissions) in order to merely break even!

Since you can't count on every deal being profitable, you must then trade so that your expectable percentage of winners earn a minimum average enough to cover ALL of your CODBs across ALL trades (winners AND losers.)

THEN (again, if trading as a business) you must budget in your business overhead (office, equipment, market-access (broadband, etc.) insurance, etc.)

THEN (yadda, "as a business,") you must budget your costs of inventory... i.e. the carrying costs of the cash (your inventory) you use to fund your trading account. Money is not free (as you very well know,) so don't steal from yourself... ad an expense line item to your budget for carrying-cost interest on the liquid cash you are using as your trading inventory.

Looking at ALL of this, you'll see your "monthly fixed nut" and your "average trade nut" that have to be covered. ONLY YOUR WINNERS will have to pay the bills on your fixed overhead, ALL of your marginal trading costs (commissions and slippage,) AND ALL of your LOSSES.

THUS.... you must methodically hammer out your specific trading strategy so you know approximately;
A) What percentage of your trades will close at profit? At a loss?
B) Of the losers, at your systemic stops, what is your average loss? (including comms & spread.)
C) Of the winners, at your systemic stops (including trailing trend-following stops,) what is your average profit? (including subtraction of comms & spread.)
D) Based on these numbers, how many bullets (trades) can you pull the trigger on before you run out of ammo ("blow up.")
E) Based on your available account funds, what is the maximum loss-risk per trade you can put on without blowing up (given the gaming laws of statistics)?
F) Does your chosen market allow you to make the kinds of trades you desire, with sufficiently reliable stops to diligently limit loss-risks, with the amount of account funds you have available?

Remember... it's the investor's/ganbler's mindset to focus on entries...

It's the professional trader's mindset to focus on surgically managing risks and extending profits, in a way that survival is of the highest percentage.

Luck!
Dave
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Dave (one of my favorite Fools of all time) and halon (pleased to meetcha), thank you for this excellent starting point. You both had the same idea (great minds slink alike), so I'm going to order the book today and read it before I ask even one stoopid question.

Smell ya later!
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Cath,

Russ published a BRILLIANT page here;
http://www.therealtimetrader.com/buildingatradingmodel.htm

Print out MANY copies, laminate them, and;
A) Tape it to your bathroom mirror,
B) Tape it to your shower door (read while shampooing,)
C) Keep a copy by the loo,
D) Use it as a placemat at the dinner table,
E) Tape a copy on your car dashboard to review in stop & go traffic (mind your risks! LOL!)
F) Keep a copy under your keyboard to review any time,
G) Put a copy under your pillow to ABSORB BY OSMOSIS at night!

It is the VERY ESSENCE of professional trading!!!

Cheers,
Dave
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Catherine - the learning curve takes time. Take it slow, after you have a plan, and stick to your plan, for if you don't, you will never know if it is good or not. Emotion kills. Don't rush - learn first -the markets will be there every day. This is a very good board to frequent - many good traders, good ideas, and most importantly good people willing to share.

Good trading,

Russ

PS - one last piece of advice - no options until way down the line. I made that mistake and lost $20,000 my first year back in the early 80s.
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Cath,

Russ published a BRILLIANT page here;
http://www.therealtimetrader.com/buildingatradingmodel.htm

Print out MANY copies, laminate them, and;
A) Tape it to your bathroom mirror,....
blah blah blah...

Thank you Dave, I thought the stuff was important but that post humbles me... and my wife printed out your post - guess it will be laminated and put under my pillow :)

Good trading,

Russ
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one last piece of advice - no options until way down the line.

Way down what line? I plan to buy equities the way I buy real estate--fully leveraged!
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guess it will be laminated and put under my pillow :)

Good trading,

Russ
.....................brother you are slipping, you should have told your wife you would rather have her picture under your pillow...........mrbear
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No. of Recommendations: 21
Cath,

Russ advised (and I concur,)
one last piece of advice - no options until way down the line.
You asked;
Way down what line? I plan to buy equities the way I buy real estate--fully leveraged!

Options aren't just "leverage" but a set of derivatives with their own unique markets completely seperate (though related) to the underlying securities. The DO NOT operate in "lock step" with their underlying securities... and their behaviours are amazingly tricky.

For example;
MSFT stock may move up 10% over a particular period of time.
Their August 25 Calls may simultaneously move up 150% (to pull a num from my butt.)

THEN, MSFT may move DOWN 10% over another period of time...
The Aug25 Calls might only drop 25% during the same period...

For another period MSFT might sit still for a week...
Their Aug25C's might also sit still (defying time decay gravity,)
Their Aug30C's may actually INCREASE, and
Their Sep30C's may DECREASE!!!

Why?
A) Implied Volatility
B) Supply & Demand (traders building & unwinding cross-hedged positions,)
C) Changes in economic interest rates triggering changes in A & B.

In my opinion, Options (which are, in actuality, my FAVORITE trading class) are a very, VERY sharp blade to be playing with because of their extremely deceptive complexity. If you do not understand what all the greeks are, what they mean, and how to calculate them (or even what I am referencing,) then you'll simply have no idea why others (like me) are taking your lunch away from you without you even knowing we are.

In order to learn to trade options, I would suggest;
A) 2+ years under the belt of straight security trading (using margin is fine... learning to think short, as well as long is required as well,)
B) Start with an Options account, when you are able, of NO LESS than $10,000,
C) Start to trade options with STOPS, never EVER risking more than $50 per position (including commissions and slippage,)
(If you're smart, you'll become addicted to the discipline and NEVER EVER trade without stops for the rest of your days!!!)

((And to my fellow delta-freaks... YES, I know option stops are hunted... but by the time she's ready she'll learn about stops contingent on an underlying, or cross-market.))

BEFORE you trade any more CASH in your accounts... I would invite you to do the following right here, on the boards;

A) Before tomorrow's open (or any trading day's open,) MAKE YOUR TRADE ENTRY ANNOUNCEMENTS HERE!!!

For example, say;
Buying 50 Lot MSFT Buy-Stop at 28.125,
IF FILLED, Sell-Stop at 26.4, and Sell-Stop at 32, OCO.

YOUR FAITHFUL BOARD (here) can referee whether you got filled, and when, for how may shares... according to the time & price prints available realtime & ennd of day.

If/When you get filled, and your safety & profit stops are NOT triggered by the end of trading day... you can then;
ANNOUNCE Trailing-Stop and Profit-Stop ADJUSTMENTS as orders to be laid on the next day.

Again, your faithful peanut gallery can hoot & holler & jeer & cheer you on... announcing fills or near-misses as the day progresses.

IN THIS MANNER, you will learn more than ANY seminar, videotape or CD/DVD course can ever teach.

This is how I created & tested my volatility arbitrage... in the days before discussion boards. I broadcast-emailed my charts, entry calls, stop calls, and position adjustments the night before each day to about 50 other traders. NOTHING makes you more honest than papertrading in advance, nekkid, with fellow traders cynically, hopefully & helpfully watching over your shoulder...

NOT EVEN REAL CASH TRADING... because you can always quietly go broke yet learn nothing!

SO... are you willing to give it a try?

I guarantee *I* will support you here!!!

Dave

(ANYONE ELSE WILLING TO SUPPORT OR TRADE!?! SPEAK UP (and gimme arec, for gadd's sake!!!)
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There are many trading systems that work, but none of them work unless the trader masters the single most important element of any trading system - risk management. It's true of options, stocks, bonds - any system you want to trade. Protect your capital above all else. Remember that all or nothing inevitably leads to nothing.

OK, so it's cliche advice but it's still something I always need to remind myself of.

-chris
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Russ
.....................brother you are slipping, you should have told your wife you would rather have her picture under your pillow...........mrbear


Wise words mrbear - we constantly learn
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Catherine - the learning curve takes time.


Catherine,

I started at the top of the curve and then fell down the hill a couple of times. If you have a good set of ideas for how to trade use them one at a time with a bit of capital...not much.

Can we ask you what sort of trading in the past you have been successful at? And what sort of track record you have? Because all I would do if I was you is try and magnify that approach.

To each his own.

dave
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Great Post, I would only add that ClearStation has a great system in place for paper trading...through their Rec Ports.

tj
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Can we ask you what sort of trading in the past you have been successful at? And what sort of track record you have? Because all I would do if I was you is try and magnify that approach.

What I'm going to do is put a little dab of real money into options and paper trade the extensively in a parallel fashion.

I have no experience trading equities. I typically just buy and hold.
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ClearStation has a great system in place for paper trading

Perfect! Thank you.
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