Options, understandings and tacticsAlan – We open here a forum for discussing options. It might be helpful to open the discussion with a copy of the paragraphs that I wrote 4/24 about options. I don’t know how to cut-and-paste that material.
Before I opened this discussion forum, I noticed a question about choosing a stock that might perform well as an option. I’ve already briefly addressed the subject…and would appreciate knowing about the thinking of others.
I have years of experience, but could not pass myself off as an ”expert.” I prefer that this discussion forum be a gathering of investors with an interest in options…with all of those with greater experience contributing things that they have learned. Our goal is to benefit one another.
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
I am really looking forward to learning about option trading…..thanks Margaret and all.
Hi Y’all. Margaret Kittelson Asked me to cut n paste some comments from the Regado thread. No so simple but heres my best effort
Margaret Kittleston says:
April 24, 2014 at 9:31 am
Some of you were commenting about options for GILD (that I mentioned yesterday), and wondering how a person can buy a call-option “with conviction.” For those who are interested, I’ll address this subject.
A basic understanding of options is helpful, I think. With each option, the investor controls 100 shares. So when I bought 3 options for GILD, I then controlled 300 shares. 300 shares of GILD would have cost me about $21,000.00. My 3 options, controlling 300 shares, cost me $1,225.75. Here you can see, I think, the advantage of options. They give you leverage.
It is also helpful to buy “a basket” of option plays, with 4 or more in the basket. WHY? Because the majority of option plays are losers. So I would delude myself if I had a goal of buying options “with conviction.” The probability is that one out of 3 is profitable. But that one profitable option-play will cancel out losses on the 3 losers. If you choose the underlying stocks with care, half your options-plays make money for you.
The basket of options that I bought last week had two in biotech, one in solar, and one in gold. Each of these sectors had been in a slump that appeared to be ending. This is my favorite time for buying stocks, and my favorite time for buying options too.
My option play on GILD has ended, so I’ll start with this one. GILD rose each day…up 1%, 2%, or 3%. Not a great gain. But during that same week, my options gained 125%. This gain was greater than my goal, so I sold GILD options Wednesday morning. I might buy a new GILD option play.
I still hold my other option plays…MNTA, CSIQ, and SA. Take a look at each of their charts, and I think that you will easily recognize the sort of chart pattern that I like best for option plays. I will also buy options on a stock that is in a sustained up-trend.
MNTA (that is in trials with a drug for MS) had a stock price of $20.00 in December, followed by a steady down-trend to about $9.00 (a drop of 55%). I bought the options when MNTA’s stock price was $11.55 (so, soon after it broke out of a long slump). I chose a May expiration date with the strike of $11.00. I usually choose a strike that is the same as the current price or less . I prefer an expiration date further out, but went out no further than the end of May in order to get a lower option price. Each option cost $1.27 per share, therefore $127 for 100 shares in each option. I bought 5 options, controlling 500 shares (that would, as stock, cost $5,775.00) that cost me $648.25.
SA is a favorite of mine in the gold sector. Gold peaked last fall. SA was at $16.00 and fell to $8.00 in January followed by a zig-zag consolidation period since then. [So a buy-and-hold investor would have lost ALL gains during that fall from November to early January. Buy-and-hold does not work for this sector.] I chose May options near the stock price. With SA, I am more confident of continuing gains, so may keep it until the week of expiration in May. I might gain X10 or more. One such gain cancels a LOT of loss from dud option plays!
CSIQ has the highest percentage gain of any solar stock across the last year. And the solar sector is also emerging from a slump, giving high probability of good gains for the next weeks. I have 5 options controlling 500 shares (that would cost $14,000.00 as stock, but cost me $1,593.25 as options). I chose a June expiration, and will hold until expiration week unless CSIQ falters along the way.
When deciding whether to buy options for any given stock, I head to the website’s option research page. I type in a symbol, then move to the expiration month that I might want. I look first at VOLUME. Volume is hugely important. I tell myself, “Go with the flow.” If there is little volume, there may be no buyers when I want to sell my options.
One last point regarding options. I am a thrill-seeker…so I really enjoy options. Yet, my primary goal as an investor is to preserve capital. So I did not put any of my money on QRXPY, because the odds do not favor a good outcome as a product comes under scrutiny of an AdCom. High reward when it goes your way, but too much risk for me. And I do not hold a stock as it falls, therefore sold out of BNIKF when it dropped to $1.70 (so far saving myself from a big paper loss). I will not re-enter BNIKF until it stops falling and is in an up-trend. In the meantime, money I got from selling BNIKF allowed me to buy the MNTA option (that might give me a fine return).
Management of capital is what an investor does. Preservation of capital is crucial. Therefore, I would never chose to “buy-and-hold” any investment. For I cannot identify an investment situation in which buy-and-hold methodology is effective. Definitely, buy-and-hold is not appropriate to high-beta stocks….unless great loss of capital is okay with you.
All of the small biotech stocks are high-beta. Playing with options is high risk, too, so also requires a pre-conceived method of limiting loss and maximizing gain.
I limit loss by buying in baskets of 4 or more option plays, with the high probability of fine gains from one of them. My personal goal is to easily accept loss with three of them and move right on. Others limit loss by selling an option play after it has a gain of 20%, and buying one option play after another for short holding periods. I don’t know which method has the best outcome. But I surely get a kick out of each option play that multiplies my investment!
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Linda Kulow says:
April 24, 2014 at 11:11 am
P.S. Anyone brand new to options trading. I found this website (link below) very helpful as an introduction to options trading. They have free courses and quizzes at the end to text your knowledge.
http://www.optionseducation.org/en.html
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s s says:
April 24, 2014 at 1:08 pm
Guys there are thousands of sites on options. Options are a complex animal. They limit your risk and you can control more shares for less but are a decaying asset.
Margaret please warn people about Implied volatility too.
I will be more than happy to refer sites if people are really interested.
Don Barrett says:
April 24, 2014 at 10:07 pm
Margaret, you know your stuff.
When I bought LEAPS on GILD, I did so in order to hopefully hold for more than a year so that the long-term capital gains would cause less of a tax burden than the short-term higher rate.
Next, I looked at calls which were in the money, at the money, or out of the money to see which would give me the best return for my investment.
One of the most important factors in making this kind of judgement is called the delta of a given strike price of a call.
Most people mistakenly believe that since out of the money (otm) calls are cheap, it is smarter to buy lots of cheap OTM calls in the hopes of making a killing.
The problem with this thinking is that for OTM options, the delta is usually low. For example, a delta of .50 means that for every dollar the stock rises, the option will only rise by 50 cents. The more OTM the option, the lower the delta, and the less the value of the option will thus rise.
I go for deltas of at least .80 which gives a great return, but are more expensive as they are in the money (ITM) options.
In the money simply means that the strike price of the call is below the price of the stock. For example, if you pick a call with a strike price of $5, and the stock is selling for $8, the call will already have $3 of intrinsic value making the $5 call in the money.
On the other hand, if the stock is selling for $8, and you buy a $12 call, it will be cheap since the call is way out of the money, but remember the delta will be low too giving you a poorer return as the stock rises in price.
If Margaret doubled her money, I would bet that she bought ion the money calls as well; more expensive yes, but with a high delta thus giving a good return.
Don
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Margaret Kittelson says:
April 25, 2014 at 10:30 am
Don – Yes…You guessed correctly. For the GILD options, I chose a strike-price that was LOWER than GILD’s stock-price. I also chose an expiration date only one month out, that also explains the gain of 125% when the underlying stock did not rise all that much.
Don has now taught me what “delta” is. So I can say, During the years I chose a strike-price several dollars greater than the stock-price, my option plays were very low delta. Therefore, a rise in the underlying stock’s price from $7.50 to $7.80 did not give me much gain in the option’s share-price. Then the underlying stock would stall while it took a month-long nap. And even when the underlying stock woke up and made a fairly good gain, it often didn’t reach the strike price.
I also got led astray when I subscribed to an option service. The “guru” advised picking out-of-the-money (OTM) strike prices, just as I’d already been doing on my own. So I persisted for years choosing OTM strike prices (that were higher than the stock-price). I would have benefitted hugely if Don had told me about advantages of choosing a strike price that is LOWER than the price of the underlying stock.
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Howard Spiegel says:
April 25, 2014 at 10:36 am
Just remember that the high delta works in both directions. That is it also goes down quicker if the trend is against you. So you should always set a price target for the underlying security that is your stop out point. I normally use 15% for the underlying stock (not for the option which will go down greater than that).
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Don Barrett says:
April 25, 2014 at 12:36 pm
You are so right, Howard. I have learned the hard way not to buy options frivolously on stocks I hope will go up, but only on those I truly believe will move upward, and even then, it doesn’t always work. GILD was just one of those too good to pass up.
Don
Howard Spiegel says:
April 25, 2014 at 2:52 pm
“”I ask Howard Spiegel to expand on his comment regarding setting a price target on the underlying security”
Quite simply this means that if the price of the underlying security has moved against your options position by a fixed percentage, you terminate the position. For a call this means the price of the stock (not the option has dropped) and for a put the price of the stock (not the option) has moved up.
If you sell a call or sell a put it is the opposite of buying so it moves against you by doing the opposite of when you buy.
Some folks will find that letting the underlying security move up to 15% against their position will be too big a loss in the option, so adjust accordingly. Just remember that smaller stocks have greater percentage movements (both for and against) which could lead to getting out of the position before the “big” move.
Of course you can protect yourself from large losses by position sizing (how much can you afford to lose??)
In the long run, if go for homeruns, you will rarely hit them. Go for singles and doubles and you will sleep a lot better and live to get up to bat again………
Margaret Kittelson says:
April 24, 2014 at 9:45 am
Dr. KSS just mentioned CBST. Options on CBST might be profitable at this time, following its 30% drop from $82.12. It broke out of the down-trend on April 16, and the stock has volume over a million (so perhaps it has high volume as an option-play, too).
Another reason that CBST appeals to me as an option-play is its price. I prefer a stock-price of $15.00 or less. But options on higher priced stocks, such as GILD and CBST, allow me to control many shares at a lower cost than purchasing stock.
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Margaret Kittelson says:
April 24, 2014 at 12:50 pm
Linda – I will respond to your question here, in brief. As with so many issues, there is no “right” answer.
When you choose a distant date, such as April 2015, you allow the underlying stock a long period to make gains. So the option is less likely to expire worthless on its expiration day.
When you choose a close-in date, such as May 2014 or June 2014, you have the potential of high gains within a short period. And you do not have your capital tied up across many months. Another advantage is that the cost of each option share is a lot less…so you use a smaller percentage of your investment capital for the option-play. On the down-side, the underlying stock may hightail down a mountain path, leaving you with a loss and not much time to make it up before expiration date.
I use a stop-loss for all stocks that I hold (typically allowing a stock holding to drop no more than 12% below its highest point since I purchased it). And I use a stop-loss for all option-plays, also. Typically I sell options that fell 30%. Sometimes I buy options on a stock on Monday, and sell after a 30% loss on Wednesday.
CUT YOUR LOSSES QUICKLY is good advise, I think. Do not allow an argument with yourself about whether to cut losses, is also good advise….and will greatly increase your average yearly percentage gain.
Never, ever marry a stock. Never, ever consider becoming friends with an option-play. Be ruthless with both investments.
When I was first trying some options, I did get stuck with some that fetched no buyer. I learned by trial and error that I needed to require ample volume for options. Since learning that lesson, I’ve had no problem selling options.
Another hard lesson: Some online brokers are slow to execute buys and sells. With options, you want VERY RAPID execution of both buys and sells. I was not happy with Ameritrade’s execution time or cost [but they may have improved across the past several years]. By contrast, I have not even once had a complaint about Scottrade’s speed of execution (or about their charge for option trades, either). This morning, I placed an at-the-market option order for SAND. Immediately after I clicked the box for making the trade, I went immediately to my home-page. Already, my order for SAND had been executed. That is typical of their speed.
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greenfire67 says:
April 24, 2014 at 8:56 pm
Margaret,
I currently use both Td Ameritrade and Scottrade. I currently do not buy options, but have the opposite you describe. Scottrade is way slow for me, sometimes taking all day to fill a standard order, at asking even.
Tdameritrade has dumped huge money into new platforms, research options, ect. I absolutely love it, except they change the ratings per equity too often as Scottrade does not. That rating change in a margin acct. can be quite frustrating, and costly.
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Margaret Kittelson says:
April 25, 2014 at 10:49 am
greenfire67 – That’s good to know. I still have two TD Ameritrade accounts, each holding only one stock as place-holders. So I’ll sell those to use the proceeds for option plays with their new system.
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Hi Pockets says:
April 24, 2014 at 11:34 pm
Margaret – post 293 –
Margaret, you are one of the Very Important Irregulars. Thank you for your posts; they are very educational.
I’m going to re-read post 293 several times so that I will remember the principles.
Vive la Margaret!
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Margaret,
Thank you for answering my questions. I didn’t see this until just now. Also, I look forward to the development of this thread on options. I’ve already learned quite a bit. I appreciate your detailed explanations and examples and I’ll continue to be watching and learning!
Linda
oops
Testing 123
Welcome back Kotter. The class is in session.
Very interested in options….Thank you!
For anyone new to options, or even interested in them at all, check out http://www.theoptionsinsider.com/ Top shelf educational podcasts and such there, with former floor traders and capital management types.
What are the favorite strategies people are using in IRAs?
Mine is the near month ratio call spread, with stock to cover the short leg (or sometimes LEAPs). I’m not saying it’s a never lose strategy, but I’ve never lost on it in about a year of using it.
To describe it with an example for anyone unfamiliar:
Buy XYZ at $20 (or an XYZ LEAP call in the money). Let’s say XYZ goes up to $21. Buy one call for this or next month at $22, and sell two with the same expiration at $23.
The trick is, to only do it when the sold calls not only pay for the bought one, but also generate some cash. This works best on a stock that is trending up. When ABC moves up to ~$22.50, and the time to expiration is down to a week or a little more, you can buy the sold calls back at less than you paid (far less, usually), and sell the bought call for more than you paid. The end result, is profiting on the entry and the exit.
Then you still have the original XYZ stock or LEAP, and you can do it all over again. However, if it’s still moving up, you can also sell it at a profit, although then it’s probably not an efficient strategy.
I have yet to try this in a taxable account, because I’m not sure how it looks from a U.S. tax prospective.
Sorry for the long post, but hopefully this is interesting to someone.
Oh, I guess I should clarify, that when I say buy one and sell two, I mean in ratio. So, if I bought 400 shares of ABC, I would buy four calls, and sell eight. Whatever quantity of stock and/or LEAPs I had, I would buy and sell to keep it balanced. It is just a call ratio spread, with the short leg covered. Some people call it the “portfolio repair strategy”, only I’m using it to make money, not recover it. Pretty standard stuff, but I had a lightbulb go on over my head, when I first heard Jon Najarian (AKA Dr. J.) mention it on some podcast.
Thanks for sharing your option trading strategy, bdt. While I understand the basic dynamics of the trade strategy, what is your exit plan in the event that the underlying stock (and derivatives) move in the wrong direction? I assume that you must use trailing stops. If so, what % ?? If not, what alternative protection ??
@lawrence mckenna: I generally only do this with stocks I am happy to own, and that are stable(ish) or in an uptrend of some sort. I am one of those people who
doesn’t like entering stops in the market if I am able to monitor daily or at least a few times a week. However, if it does go against me, as happened with TOL
a month or so ago, I do use a pretty tight mental stop of 5% to 10% (depending on whether it is a new position or a profitable one that I can afford to let ride a little). Of course, if I am going away or can’t log in several times per week, I would seriously consider entering an actual stop order. I’m using this to generate income, not to repair a losing position as it is often used for, so I would want to get out on any decline that looks dangerous. I do tend to stay closer to the 5% than the 10% on that trailing stop.:)
This all requires someone to be very comfortable with multi-legged options trades. It is, as you say, conservative. It makes money on positions that you want
to hold anyway–like a covered call on steroids. I wouldn’t really use this if I was planning to sell the covering leg (be it stock or a LEAP) as soon as the trade is over; it has to be for something I’m hanging on to for a while.
LEAP: http://www.optiontradingpedia.com/leaps_options.htm
bdt; I do not understand selling more calls than you buy,,,If you do not hold the underlying stock would you not be selling un-covered calls? My broker would not allow me to do that because of the risk involved.
Hi Frank. Although I am a relative newcomer to option trading, I do understand the basic trade dynamics and management of risk factors associated with options. The strategy outlined by BDT appears to be relatively conservative – primarily because you can functionally “cover” the 2 options that you sold with the combination of your initially purchased 100 shares and the 1 call purchased at a strike price less than the strike price of the 2 call options sold. I am not sure whether any broker would consider this set up fully covered if you have limited options permissions – but functionally your risk exposure related to the 2 calls that you sold is “covered”. When you reach a higher comfort and experience level, you could ask your broker about qualifying for a margin account that would clearly empower you to use this strategy – but don’t do that until you’re confident that your knowledge level is sufficient and that you can efficiently track and monitor your option positions.
@frank archambeau: I would not suggest entering into something like this without being experienced at single leg options trades (selling covered calls, etc.), and double legged positions (such as normal credit or debit spreads). Lawrence explained why this method has no naked legs. I trade these in a non-margin IRA,
with level 2 options permissions. I don’t know if brokers other than OptionsHouse would allow this, but in theory it is the same as having one covered call, and one debit spread, so it should be considered limited risk all around from a broker prospective.
Since somebody asked, here are definitions for some related concepts:
Call Debit Spread (half of this trade): http://www.optionseducation.org/strategies_advanced_concepts/strategies/bull_call_spread.html
Trailing and other stops: http://www.investopedia.com/terms/t/trailingstop.asp
The portfolio/stock repair strategy: http://www.schaeffersresearch.com/schaeffersu/beginning_options_strategies/hedging_portfolio_protection/stock_repair_strategy.aspx
bdt; thanks for answer , I must have misunderstood what you were saying. I thought you meant buying one call & selling two without holding the underlying stock. I only sell covered calls if I do not mind the stock being called away,,, or selling puts if I plan to hold a position . For instance sell one put btm & one at the money or above if I foresee stock rising. I often adjust single leg to multi as conditions change.
BDT, I withdraw my earlier question posted at 9:00 am. I figured it out. Essentially, if the underlying SP turns south and stays tracking in that same (wrong) direction, the options prices should likewise decline. That gives you a choice: (a) If you want to keep the originally purchased underlying shares (or LEAP), you simply let the call options that you sold expire worthless. (b) If you want the ability to sell off the underlying shares (or LEAP) prior to the near-term option expiration date, you can buy back the sold calls (presumably at less than the price that you sold them for) to untie your hands.
Yes, but I still use that 5%(ish) trailing stop on the underlying, to help decide when to act. If it only falls a little, then the options expire and I have the initial credit to subtract from my cost basis.
If the sold calls fall to zero (or near zero), I’ll buy them back, and sell the near term call to recover what I can, if there is any value in doing that.
If the underlying has fallen below my mental stop of 5% or a little more of the price where I entered the near term part of the options trade, I will calculate whether it is still profitable over all, in which case I may let it fall to something closer to that 10% (but staying above breakeven) before I close it. If it’s not yet profitable, I’ll usually cut and run at the first real sign of trouble (I.E. that 5%), as it probably means I picked the wrong underlying. I’ve been using this for a year, and I’ve only had to do that once that I remember (on USO).
Let the lessons begin.
KennyG says, Class is in session.
We are a class with a huge difference in experience and in knowledge of options. The Blind DayTrader and lawrence mckenna talk a language many will not understand at all. Others wonder how to start an option play, likely wondering WHETHER to open an option play at all.
Our option website here provides a forum for the entire range of familiarity with options, right down to none. In order to benefit all, we depend on those with knowledge and experience to help one another, as well as to give the rest of us explanations that are clear enough [dummied down enough] for us to understand.
Goals for our discussion forum – to launch novices….to generate confidence…to increase knowledge…to share experiences and thoughts. And for those ready to experiment, to learn new approaches to using options and to expand the range of tactics used.
Assignment: Jot down stocks you have thought about as possible option candidates. We will do some analysis of these, determining ways to identify what makes a good underlying stock for an option play.
Thanks Margaret, Allan, and all others that made this possible and offer future opportunities.
Margaret, hopefully I didn’t hijack the thread with too advanced a topic. Some people suggest that strategy for relatively inexperienced traders, although I’m not sure I would. That said, I agree with lawrence’s comment regarding resources. The links I provided on my “advanced” topic above, are all to sites that have a lot of great information for options newcomers. That’s the main reason I used several different sites in my various comments. Some have different styles than others, and there’s probably something for everyone on all of them.
A popular stock worth some analysis might be MSFT. It’s had some recent good action, and is a popular one for many people. Disclaimer: I am long MSFT with Jan 2016 calls.
Whatever shape this thread takes, thanks for creating it. I love options, and this should be interesting.
Thanks to Margaret and Alan for your joint efforts in launching this new discussion strand. I don’t think that it is reasonable to use this strand as a “complete” training platform – but I do think that it would be very helpful to point out training resources that are available. One such resource is jimfinksoptions.com. Although I have not yet subscribed to his service (highly rated by Gumshoe readers), I was somehow able to download his excellent “Options for Income Strategy Manual” that clearly spells out the key concepts that we all need to know to get started in options trading. Try this link: ki.nlh1.com/downloadablePremiums/OFI_OptionsManual.pdf
My thanks, too, to Margaret and Alan, and to Lawrence for the info about the Strategy Manual. His link did not work for me; this one did:
http://ki.nlh1.com/downloadablePremiums/OFI_OptionsManual.pdf%E2%80%8E
And thanks to all of the contributors to this thread, too. I feel very lucky to be a part of the Irregulars.
Blind DayTrader – Your topic was too advanced for me, and was obviously a pleasure for both Lawrence McKenna and Frank Archambeau. Those with your capabilities will enjoy joining your discussion threads. I will read things that you all are talking about, and maybe one day I’ll understand what you’re talking about…and I’ll feel a thrill on that day! Also, thank-you for the link you gave us.
http://www.theoptionsinsider.com/
Lawrence McKenna and Hi Pockets – Thank-you for the link for the manual.
http://ki.nlh1.com/downloadablePremiums/OFl_OptionsManual.pdf%E2%80%8E
Margaret; I am not sure of the level you would like this thread to be . I am one who likes to keep things simple with plain language, not what I call insiders lingo. Words & terms not understood can easily be defined using Google or another search engine. I look at options as what it is at basic level,,,, a contract to buy or sell a commodity,,,such as a cow or a pig,,,hence the term “stock market” for livestock at a future date because the buyer or the seller, does not wish to take/give immediate delivery . Of course any “thing” can be traded ,not just livestock. I see no need for “Greeks” “Blackswans” “Iron condors” “collars”,,,etc. etc. in the trading I do. I am long past trying to impress people with my “qualifications” or “expertise” so I claim none.
Frank – I really like your take. Yet, it appeared to me that you comprehend the talk that is Greek to me. So I hope that we can count on you to do some translating.
A STRONG goal of mine is to avoid confusing people, and to generate confidence to try some new ways of investing for fun and for profit. Frank, you can be a vital link toward those goals.
margaret, I have zero option experience
To teach me, a novice, initially it needs to be concrete. Simple facts and process.
with an example.
1. Margaret , Name a stock you would take an option on now.
2.Go thru the actual steps for betting on an up or down price.
3.Give a flowchart of steps to take if it works, or if it reverses.
Then comment as it unfolds
Teaching something new to any age group starts with the concrete.
Details come later.
It means smarties with extra knowledge need to be silent for a bit.
FYI I started trading because I had been asset stripped and needed a big lot of unrelated free conscience money so went to US indicies and top 30 on a CFD (leveraged)platform.
I knew zero. I traded symbols of which I had no knowledge apart from charts.
1.Opened the site to the flashing numbers and lights, then found 1 tick charts and watched patterns.
2.Then opened with paranoid stop losses because there was spot for them. closed positions according to price movements on the charts
3piggbacked …used some profits to add to the position
4Then hedged a position on a brief reverse. That was concrete and straightforward and observable by inspection of price action. Very thrilling the first time.
5 Then used a bollinger charting system helped me see the price movement patterns unfolding in front of me.
6. Very primitive but worked. No abstract thought at all. No names like hedge or piggyback or trendline..
Janet: I think we are expecting rather a lot of Margaret (and others) to shape their comment to each individuals precise needs. It relies on each of us achieving a base level understanding of the subject for ourselves. There is no need to re-invent the wheel. There are reco’s above to sites. I was reading Investopedia Options. It provides a very low level of description about every aspect of trading, bar one….personal experience. That is what we have the chance to experience in this class room.
But we each have a personal responsibility to get a base understanding so that we can comprehend the language that is spoken in this strange new land.
When I research a stock, I draw its chart. In my desk’s top drawer are my research pages. Each page shows 12 charts (3 charts across, and 4 charts down).
In the right upper corner of each page is a title. I have a small stack of pages with the title GOLD/SILVER… another stack with pages labelled SOLAR… REFINERS… STEEL… CHINA/ASIA… ALTERNATIVE ENERGY… RARE EARTH… OIL/GAS… TECHNOLOGIES… BIOTECH/HEALTH… MARIJUANA… E-CIG… SHIPPERS… MISC.
Using this method, I can quickly find any stock that I’ve researched in the past few years. I can also, with a brief scan of any page, readily recognize differences in trend-lines and identify stocks that I might consider purchasing. I made for you a row of stocks:
__________________________________________________________________________________
CBST 1/6-$63.61 ARNA !/17-$7.26 DRTX 3/25-$5.54
lCubist l Arena Pharm l Durata Therapeutics
l antibiotics l weight loss l super-antibiotic
l l l
l_________________________ l__________________________ l_______________________
1.2M % YTD 8.2M % YTD 468K % YTD
_______________________________________________________________________________________
ASSIGNMENT #1: Fill in the current price and volume, the % gained year-to-date, and draw the trend-line (drawing it right over any writing on the chart, if necessary). Analyze the trend-lines. Would you put one or more of these stocks on a POSSIBLE BUYS list? Is there any reason to consider one or more of these for the underlying stock of an option play?
ASSIGNMENT #2: Research MSFT.
WHOOPS!! Your row of stocks came out in a garble here. So you will need to separate out lines 2 and 3, align each chart’s vertical line, and properly stretch out the volume and % YTD. Hey! I’m sure that you’ll sort it out.
Compulsion disorder…I just HAVE to fix the garbled assignment.
________________________________________________________________________________________
CBST 1/6-$63.61……………………..ARNA 1/17-$7.26……………………….DRTX 3/25-$5.54
l Cubist…………………………………..l Arena Pharmaceutical……………l Durata Therapeutics
l antibiotics……………………..l safe weight loss…………………l super-antibiotic
l……………………………………………….l…………………………………………………… l
l________________________…….l____________________________…..l________________________
12M……………………..% YTD…………8.2M………………………..% YTD………468K…………………….% YTD
________________________________________________________________________________________
When you make your own giant L for each chart and draw the trend-lines, just leave out those lines of place-holder dots.
Okay, you guys….No laughing at me allowed. And now I am going to try again. Yet again.
I just noticed that I’m now “Meg in Minneapolis.” I’m still Margaret…and happy to respond to either name.
I have a question; how can you short a stock you do not own & Is not available on the option market,,IE. non-optionable?
I haven’t shorted stocks, but as I understand it, if you truly believe a stock will go down in price, you literally borrow the shares from your broker and sell them; that is the essence of shorting. Then, if the stock goes down as you hope, you buy them back at a lower price which returns them to the broker, and you keep the difference between what you sold them for initially and what you paid to buy them back at a lower price. If the stock goes up, you have to buy them back at a higher price and you lose money, but you must do this to return them to broker since you borrowed them to sell to begin with.
Don
Shorting is not hard, and basically all that has to happen is Your broker has to have shares to borrow. Instead of buy you sell, then to close the transaction you buy to close. I am very happy with Interactive Brokers, even though they do not have some of the HTB (Hard To Borrow) stocks like pennies that I would like to short.
Welcome to the thread, James! You clearly know your stuff, and I’m glad to have another dark sider (premium seller) in the mix–it was getting a little lonely hanging out with all the call buyers. Just kidding, I love call buyers. (After all, where would premium sellers be without them?:-))
James, this is obviously a stupid question, because I think the answer is obvious – but – To short a stock, one borrows the stock from the broker and sells it. Then, to close the position, at some point in time one buys the same amount of stock, hopefully at a lower price than the purchase price, and “gives” it to the broker. My question: Providing the borrower stays within the rules and financial guidelines of the broker, is this point in time is strictly up to the borrower ?
Glad you joined the party!
Frank – You already know that I have never shorted a stock. So you and I will
both be glad when someone comes along who is capable of responding to your question.
Before I exit, I wanted to respond to something you said. You wondered what level I might want this thread to be. If you would enjoy the process of bouncing ideas with me, let me know.. mkittels@msn.com For now, I set out a bit of my thinking.
If this forum is approached as a class, with experienced teaching novices, then a mix of skill-levels is needed. And The BlindTrader has set up our first class-format, and I’m really looking forward to his analysis of MSFT. He also taught me today that I could better manage my options if I put my stop-loss on the underlying stock (not on the option) and allowed only a 5% drop to a 10% drop. So it would be a TIGHT stop-loss on the underlying stock.
My preference is for us to start with a classroom approach. We would then maintain awareness that this microblog was created in response to requests for it by people with fundamental questions about options. One goal, then, needs to be launching investors into trying their first option play. A second, associated goal needs to be providing guidance for how to manage an option when it is in play.
Maybe for one or two weeks, the skilled could focus mostly on teaching us, and doing so without moving beyond a truly basic level. Frank – If you reflect on this, I’d appreciate learning your thoughts.
In your opening post No 6, you don’t want to forget the “option’ dummies. Thank you. Plain language is what I need. Looking forward eating your lectures. Eddy
Meg; I make no promises but I will at times chime in if I think it helpful & in my depth. For now on the stop loss mentioned I think that tight stop loss is just noting a small movement in the stock as an indication of how you treat the option,,,,,whether to get out,,,add to,,, or otherwise modify. I seldom sleep more than 3 or 4 hours at a time so all depends on my degree of fogginess as I read the thread,,,,@ 3am or 3pm .
Shall we ding you one, Frank, if you’re foggy? So far, I’ve never noticed the least dimming.
If it is your preference to sleep longer, let me know if you are open to trying several supplements that I find helpful. But here I am, having intended to go to bed in the early AM…still chugging along at 4 PM my time. Unless I exert a big effort to be disciplined, I then have no schedule at all.
And do, please, chime in to help us with options. Interesting about the tight stop-loss on the underlying stock. I have 4 or 5 options running just now. So tomorrow, I’ll begin tracking them differently, maybe selling out when I have less loss. I don’t know how this change is going to translate.
Margeret — post 13
When one publishes their email address on the web, one opens oneself to several types of different nefarious deeds. It is not a good idea.
One safe way to do it is to substitute something for the “@” symbol – something like “HippyPockets= = gmail.com [ replace the “= =” sign with @ ]”. Be sure to add the part in brackets.
I apologize if there is a HippyPockets uslng gmail. :>)
I agree wholeheartedly with your statement, ” . . . a mix of skill-levels is needed.”
Thank-you for the note of caution, Hi Pockets! And I did it twice on this thread.
So where the @ would be, type the bracket symbols enclosing something other than @? Example : myname[&]yahoo.com
Or myname%yahoo.com
Or myname@Jyahoo.com
Hey! What sort of nefarious deeds might I be alert to now?
Margaret — post 13
In your example “myname%yahoo.com”, replace “%” with “@” to arrive at “myname@yahoo.com”
There are ‘bots that cruise the web looking for email addresses — The most obvious damage is someone harvesting your email address and spamming you unremittingly A more serious result could be that the email address, combined with other tidbits of information [ phone number and address from phone books ( you did mention Minneapolis, I think ), the mention of other personal things on websites, etc., hackers] about you will lead to the possibility of financial harm **. Unlikely, but there are a lot of conniving, educated people on the web.
If I remember correctly, Minneapolis is not far from Lake Woebegone, home of Powdermilk Biscuits and the Association of English Majors. It’s out there somewhere on the prairie.
** To paraphrase Winston Churchill, please forgive the complicated sentence. I did not have the time to write a simpler one.
Hi Pockets…Yes, you do remember correctly that I live I not so far from a place where all the children are above average, so I’ve often heard. But at my grocery store, I can’t find those Powdermilk Biscuits that they eat all the time out there on the prairie where the wind blows and they got ten inches of snow last week. Right after Easter it was, ten inches of snow. And I can tell you, people had had enough, and they know how to turn their heads away and pretend they don’t see. They practice at church every Sunday morning when they see Mr. Neilson, turning their heads that little bit ever since Mr. Neilson talked about things not fit to print. I heard that they never saw that snow, ten inches it was, a lot of snow, hard to ignore that much snow in someone’s hometown. Yes, that one out there on the prairie.
Edouard – I need plain language, too. So here is repetition of #6, adding your clever revision:
We who are option-dummies depend on those with knowledge and experience to give us explanations that are clear enough [dummied down enough] for us to understand.
Here is try #3 with the assignment.
________________________________________________________________________________
CBST 1/6-$63.61……………………ARNA 1/17-$7.26………………..DRTX 3/25-$5.54
l Cubist………………………………..l Arena Pharm …………………l Durata Therapeutics
l antibiotics……………………l safe weight loss l super-antibiotic
l……………………………………………..l l
l______________________………L_____________________………l_______________________
1.2M % YTD……………8.2M………………% YTD…………..468K………………..% YTD
_________________________________________________________________________________
Margaret – Re post 15 –
Assuming the website’s font size in your post is 12 points and the spacing is proportional, there are 80 characters per line in post 15.
You could try holding your line to 65 characters to see if that helps.
This line is 65 characters.
123456789012345678901234567890123456789012345678901234567890123456789012345
But it shows up in the compose window as 61. Let’s see what it is when I post this comment.
Just realized that the number of replies to the original comment affects the available characters per inch. Oh, well!
Margaret et al: why not dummy run an option deal (phantom portfolio so no real dosh.) All settle on MSFT say. See how that pans out. Various people can suggest various ways to play it….lets see who’s the guru.
Alan – Great idea.
Right now, I don’t know what The Blind DayTrader plans to do with MSFT. And I want to begin with a focus on how to analyze a stock, then how to identify a stock that might be a good underlying stock of an option play. We’re starting with the assignment of analyzing 4 stocks. Maybe you could add some more for us to consider (and include some that would be lousy choices).
I can so easily identify lousy choices. Good ones…I do not so easily find those for myself.
I certainly like your idea of everyone creating a phantom portfolio, with no money on the line. So as you conceive it, would all of us have the same underlying stocks, that we play with different strikes and expirations dates?
Id suggest that we settle on one stock and get those in the know to come at it from different directions. Winner takes all the applause….but all take the lesson) Im gonna suggest APPL as of tomorrow. Your call (‘scuse the pun 🙂
So many years ago, I held APPL. And across all the years of enjoying investments, I’ve only held stock with a price less than $50.00, preferring less than $15.00. APPL was a small-fry back then.
I do hold high-cost stocks as option plays, though. So for that reason, too, I think that APPL is a good choice. Alan, I am going to assume (unless I hear otherwise…mkittels@msn.com) that you would introduce APPL, who I no longer know, then guide discussion toward things appropriate to this stock as an option play.
We might not get to it tomorrow, depends on how things go, huh?
3 strikes, and I’m out. I’m sensing that there is a profound lesson to be conveyed, as it applies to options. Something about compulsions, such as the compulsion to pick some stock right now for an option play. Or the compulsion to hang on when an option is moving against you. Both sorts of compulsions often enough have the consequence of loss of investment capital.
Instead of being propelled by compulsions, we will improve our skills through perseverance that will not allow us to stop at roadblocks of discouragement.
No no no no!! Theres as much to be learned (if not more) from a failure as a success. Lessons learned and all that. Take one deal……see where it leads and learn the lessons.
As someone who has no holding in Beni. I have not commented til now but it seems to me you are in a “look before you leap” “He who hesitates is lost” situation. Getting a product to market is seldom linear,,,,if likened to a race it is more like a relay where the starters are ill equipped for the next leg,,,etc etc. Timing is often of greater importance than the product itself as to success. Politics is nothing more than public policy & any enterprise publicly traded becomes political. Please note I am not talking D’s & R’s here but policy as it tries to balance shareholder interest with founders interests. There once was a famous ad that said “No wine before it’s time” ?? perhaps it might be helpful to again gain more info on what is going on . As one who intends to sometime invest in Beni I think Dr. KSS is best suited as representative.
Wups wrong thread. Sorry,,must be senior moment again.
Yes, of course you are right, Alan.
But I wasn’t referring to anything other than the mess I made trying to post charts for an assignment. 3 tries. See #9, #10, and #15. I can’t identify what I did wrong on #15. That’s why I can’t try it again. So that is the reason I said 3 strikes, and I’m out.
I need to identify what I did wrong in order to correct my course. That is the case with putting investment money into options, too.
With options, we have a vehicle to use for making spectacular gains on occasion. And a string of options, each gaining 20%, also adds up to spectacular gains. But it can be difficult to analyze our own tactics on our own. Therefore, we band together here to benefit one another. Right?
Right! well ish. Youre taking the lazy way (as I would) by cut and pasting info. Better to take the time to describe it. We are dimbo’s so the c&P means nuffin.
Meg; I agree,,,also as well as making gains , options may be used to limit losses or to ‘lock in’ a gain.
Frank – I think that the concept of using options to limit losses can be introduced to a person who is relatively inexperienced. I don’t know about “locking in” a gain. How does one do that?
How about you introduce both tactics at a point when you think that they can be grasped?!
Frank – Your thinking pattern intrigues me here, as it swirls, circling around while going deep. Yes…Look before you leap. But…He who hesitates is lost. Conundrum.
You pose, on one side, that it might be helpful to gain more information to find out what’s going on. Yet, as one who intends one day to invest in Beni, you [encourage?] Dr. KSS to act as our representative. Is that roughly capturing the tensions in things that you said?
You got it.
Meg; I tend to make snap decisions & have painfully learned that at times it is best to
“don’t just do something ,,,stand there”… I always,if possible, like to have more than one path to a destination.
Frank – I have in my head all sorts of contradictory phrases about how to conduct a good life. He who hesitates is lost… Think before you act. Then, with a bit more eloquence: There is a tide that, taken at the flood, leads to fortune. Omitted, all is lost in misery and shallows.
For the investor, the tide that can lead to fortune might be an agreement with self to stop unnecessarily losing investment capital. Once that agreement is reached, it may appear to be a snap decision when the investor quickly sells out of holdings (whether stocks or options) that have fallen 8% or so from the high point since purchasing them .
This investor decided, sometime in the past, to always be willing to lose a bit whenever stocks or options start dancing dip-dip. Better just a bit, than a bite.
Can Frank’s comment be carved into the top of this thread? “don’t just do something ,,,stand there”
That is a stupidly difficult lesson to learn, and often a rather costly one. Not acting is often the best action! Learning that has certainly been both difficult and costly for me, and took years.
The best thing about options may be that they can profit for you in markets that are going up, and markets that are going down. So as long as we still have optionable markets, THERE WILL ALWAYS BE ANOTHER OPPORTUNITY! If the opportunity that makes you want to jump on it now, is not well founded, in the words of a song that I will hate myself for quoting: let it go.
I have saved more money with this strategy, than I ever made, using any other.
Fellow” Blind” investor, re “Don’t just do something .. stand there!” I am 100% in that camp of thought. During my career as a Financial Advisor to retail accounts, I would sometimes tell the clients that understood what I meant “There are days when the best thing I do for you is not show up.” A little tongue-in-cheek, yes. But true nevertheless.
I never was much involved in option trading. A few covered calls now and then but that’s it. The reason was two fold. First, after several ears I the business, I came to understand that at times the one and only friend you have in the market is TIME. If you are long a position and tings go south, you can just stand pat and wait for a turnaround (don’t just do something .. stand there!). But when you engage in an option position time now becomes your enemy – or at least not a friend. It works against you when things aren’t going according to plan. And that aspect of the whole option process bothered me. So I did little to encourage clients to get involved.
Second, seeing as how I was surrounded by 40 to 50 other FA’s in the office, some of which worked neck deep in options of all stripes, I had plenty of real-world opportunity to see first hand the results of the trades they put on. And far more often than not the end result wasn’t good. Sure, some were – incredibly so. The leverage that options provide can work wonders when things go well. It’s just that it seemed to me that the number of times things went “well” were far outnumbered by the ones that didn’t. That’s just my observations. Maybe I was surrounded by a bunch of FA’s that only thought they had a knack for option trading but lacked any real skill. I dunno.
I once overheard a fellow FA make a comment that was paraphrased from its original intent and applied to option training. He said “At the start of an option trading account the FA has all the experience and the client has all the money. At the end of the program, the FA has all the money ad the client has all the experience.” Cavet emptor.
I’ll conclude with a true story:
October, 1987. My best friend and fellow broker always had a fascination with options. He actually did pretty well for a few clients but kept most of the trading in his own account. The first week of October he had gotten bit antsy about the market overall, so he bought 20 put contracts on the S&P 500 index that were silly far out of the money and had an expiration date in late November. Paid about $1.50 – $150.00 per contract – for each, so had some $1500 at risk. Just a joy ride, really. I thought he was nuts to go so far OTM and have such little time.
Then the Crash of ’87 came calling. First Friday, the Black Monday, and everything went to hell in a hand basket. I was so crazed trying to make sense of it all for clients and do the best I could to keep the ship of my business upright in the sea of carnage I totally forgot about my friends puts.
He stopped in to see how I was doing on the Tuesday following Black Monday and dropped a little bomb. Seems he had second thought about those puts just three days before the sell off began and closed them out with a loss of some $200 or so. He had finally gotten what he thought was a reliable quote on the options a few minutes before coming o see me ( solid and reliable quotes on anything were hard to come by at that moment in time). He found out that, if he still had those puts in his account, they would be worth some $245,000! He wasn’t feeling too well. So close, so close .. but not to be. That would have been a life-changer. All it was now was a sleep-depriver. I still to this day get a little upset for him when I think on it. I can’t imagine what he thinks in the dead of a cold night.
So here I have posted a few random thoughts of my own that lend little to this new thread re option trading. I think the concept of this thing – education and training – area wonderful idea and a nice addition to the Gumshoe site. Kudos to Margaret K. for the idea and leading the charge. I’ll be following but not have any real contributions to make. Best of luck to al who use tis to increase knowledge and gain understanding. May the money roll in your door!
Jim Skelton
The Blind Squirrel
But since you intended to post on the other thread, we’ll just let it sit here…just so long as you know that I enjoy thinking patterns such as yours. It is a pattern associated with scientists, creative writers and orators, and philosophers.