The Final (Sixth) Characteristic of the Winning Trader
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The sixth personal, mental characteristic of the winning trader is his ability to objectively evaluate and judge his own progress. Here are seven points to consider:
1. The winning trader avoids one of the most common thought processes among trading students as they attempt to survive their learning curve: comparing their perceived progress of other students or of professional traders against their own perceived progress and beating themselves up about it.
2. He knows that in any field of endeavor, they’ll ALWAYS be those that are ahead of and behind you, not matter what level you see yourself. Therefore, where someone else is in their trading has NO BEARING WHATSOEVER on where you are at.
3. He drops his expectations of himself and of others. This is simply a different version of this same mental illness described above, wherein we compare our perceived progress with where we EXPECTED us to be by this time. Here again, beating ourselves up is a futile process that only harms us. It does NOT encourage or motivate anyone!
4. The winning trader realizes that all of these placings of where a person is on the road to success ARE perceptions and all perceptions are subjective. He realizes that it’s not likely that either what he ‘sees’ in himself or what he ‘sees’ in others is truly correct and in touch with reality. Those perceptions can easily be a reflection of his jaundiced fears and, therefore, should NOT be taken seriously or as FACT.
5. The winning trade thus realizes that only SELF-TO-SELF comparisons, WITHOUT ATTACHED time frames, are what count. He only sees how far he’s come and he takes pride in that and uses it to further up-build his self-confidence. As to the time element, his motto is: “Time of no consequence to those of us in search for excellence!”
6. Finally, the winning trader, looking upon the obvious success of many professional traders, finds, not depression, but admiration and inspiration by that. He is encouraged when he perceives others succeeding because it reinforces his belief that ‘he can do it, too!’ He is truly happy for them.
7. Finally, the winning trader has an extremely clear method of performance evaluation wherein he can develop ‘the numbers’ to show his progress.
Thus the winning trader’s six personal characteristic: personal confidence in what’s he done, where he’s at and where he knows he’s going.
We have been discussing the universal mental profile of the winning trader, reducing the general characteristics to just six components.
Characteristic #5: Total involvement
Make no mistake. Becoming a successful trader is an immense project, requiring innumerable hours of hard work as the months and years roll by.
While many students of trading seek shortcuts, called, in the industry, the ‘holy grails,’ their existence is but an illusion. There ARE no shortcuts.
It has been said that there are many ways to failure, but only one way to success. Part of that ‘one way’ is not unlike getting any business off the ground: a total commitment, a total involvement, a total immersion of one’s self into the project. Trading success cannot come in the form of a hobby. It takes one’s ALL.
Here are 6 every day activities of this seriously dedicated trading student:
1. He stops wasting time and energy seeking for shortcuts and accepts the fact that it’ll require his complete dedication.
2. He quits relying on the work and research of others and does his own ‘homework’ to find out, for himself, how trading dynamics operates. He asks for answers from others as little as possible and only after having done his own search and study.
3. He is able to do #2 because he has mentally elevated his OWN opinion above all others.
4. He reads his own intuition, watches himself trading, so as to observe areas that are in need of improvement and he follows his gut. He trusts himself.
5. When an opinion turns out wrong or a trade does not work out, he shrugs it off as part of the learning process, as something to be accepted just like a restaurateur knows that he’ll have to pay his vendors. It’s a cost of doing business, but, more importantly, is the cost of his education.
6. The more deeply immersed he his in his trading, the more of a ‘feel’ he gets of the market and the more confident he his because he begins to feel that he is truly the captain of his ship.
All in all, he is totally immersed in his work, disallowing distractions that sap his energy. As one person said, “He’s into it up to his eyeballs. It’s in his skin, in his eyebrows and in his breathing.”
Please note that each one of these traits can be LEARNED and can be made into HABITS by anyone with enough dedication and determination.
More to come…….
The 2nd Characteristic of the Winning Trader
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This is the second in a series entitled, ‘Six Characteristics of Winning Traders.’The second psychological characteristic common to all winning traders is an ABSOLUTE DEDICATION to their success.
The key is the word ‘absolute.’ This word is usually attributed to a power higher than that of humans because it means, ‘no exception – ever!’
It’s almost part of the definition of being human to make mistakes, to go back on our word and, for we traders, to make exceptions to our trading or portfolio rules whenever we’re under pressure.
Thus the word infers that we need some outside help, some intervention.
Could this be the reason that so few traders make it REALLY BIG?
Recall the Laws of Probability, slightly re-worded to read:
a. Each trade must be done in ABSOLUTE consistency
b. We must do an ABSOLUTELY huge number of trades
c. We must ABSOLUTELY keep our hands off a trade and allow it TIME for the laws to take effect
We traders have a big enemy when it comes to DEDICATING ourselves to our work: Distraction.
Distractions are of two types: Inner and outer. Outer are those that come from other people, from events and from things pulling at our time and energy. The inner ones are much more insidious because they come from within our own minds and emotions.
Another way of looking at distractions is that they come in the form of GOOD ideas and BAD ideas. The challenge is not to cut out the bad ideas. What distinguishes the winner trader from the crowd is the cutting out of GOOD ideas and placing them in the ‘delayed gratification’ bin.
That’s right. Ideas and thoughts that are GOOD must also be set aside because they’re not connected to trading! That’s the tough part as we truly give our work an ‘absolute dedication.’
Speaking of dedication, that’s another word for ‘commitment.’ I have mentioned before that to commit means to ‘lay down in front of.’ What it refers to is that we must lay down or give up any and all CONTROL over a person, thing or outcome of events (like a trade).
This trader, then, turns his back on many, many distractions, whether from within or without, even if they are, in themselves, good things, so as to FOCUS his complete time, talents and treasures toward mastering only ONE THING — BECOMING A SUCCESSFUL TRADER.
This is the characteristic we dedicated students of trading must choose.
Next, we’ll look at the next characteristic of the winning trader….
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The SIX Characteristics of the Winning Trader!
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This begins a series of posts that will describe the psychological profile of a winning trader.
Just what IS this beast that can trade so well that he makes it to the level of professional trading and makes a good living out of it?
How does he think? How does he look at the world? What are his attitudes about life and about trading?
These questions and more will be answered in this first in a series that will give the SIX PSYCHOLOGICAL CHARACTERISTICS of the mental attitude that it takes to make it as a trader.
Here we go……………!
Characteristic #1 of the student of trading that WILL achieve his goals is that he is highly motivated, deeply EMOTIONAL, clear about what he wants and has a goal that hits upon one of the core values of his life. He feels VERY STRONGLY about what he WILL achieve and grits his teeth when he states it.
This drive is actually in two parts: Going TO something and going AWAY from something.
He is motivated TO something when he sees himself moving toward a situation that is directly connected to his deservedness. It’s something very good and he KNOWS he deserves it. Additionally, it’s something that is part of what he holds as a core value in life. It’s not only important to him, but he feels that it should be important to every living soul. He is so deeply connected with this drive that it literally defines who he is, what he’s about and what his reason for living might be.
He’s also driven by the idea of moving AWAY from something. Most people arrive that THIS type of motive before the ‘TO’ drive, but, in fact, this one alone is rarely enough on its own. The reason is that it’s based on FEAR or anger or disgust or some other negative.
Yes, fear is stronger than greed and it can be more emotional, but, in my opinion, the going AWAY from something should not be our primary motive.
The reason is that, in generally, it’s better to be strongly motivated into action by a positive than a negative.
Therefore, what I suggest is a BALANCE between the two – going TO something and going AWAY from something – as a picture of mental health as we approach our trading.
Be motivated in BOTH directions, KNOW, clearly and specifically what is driving you and you alone and read about the other five characteristics of the winning trader in the continuing series……………
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The Option GREEKS- Option price power factors
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Recall the OPM – options pricing model – explained a few days ago. It describes the mathematical process of how an options value is calculated and includes the following variables:
1. Price of the underlying stock
2. The strike price selected for the option
3. The number of days left until expiration day
4. The current interest rate
5. The current dividend rate
6. The current implied volatility, as determined by the market maker, based on momentary supply and demand for that option
Recall, also, that these variable are inserted into the OPM to result in the momentary value of a specific option.
Furthermore, recall that there are five market variables that the option trade must be monitoring to see what affect they’ll have on the value of his option:
1. The price of the underlying rising
2. The price of the underlying dropping
3. The passage of time
4. The implied volatility rising
5. The implied volatility dropping
Now, as if that wasn’t enough complexity in learning how to trade options, we turn to how MUCH affect each of the variable have on the option’s premium.
This is done through the enumeration of what are called the OPTION GREEKS specifically the delta, gamma, theta and vega. (There’s a fifth one, rho, but it’s not as significant.)
The DELTA measures the amount of change in the option premium for every $1.00 of change in the price of the underlying stock.
The GAMMA measures the rate of change of the delta.
The THETA measures the amount of decay in the option premium for every day of passage of time that this contract exists.
The VEGA measures the amount of change in the option premium for every $1.00 change in the volatility of the underling stock.
So, here’s the REAL picture:
A. As the price of the underlying rises or falls, the effect is seen in the option premium by the amount of delta and, as it moves, the amount of gamma that affects the delta
B. As time passes, the rate of time decay on the option is seen by the amount of theta it has
C. As the implied volatility of the underlying rises or falls, the effect is seen in the premium by the amount of vega
So, here again, you can see the need for PROPER TRAINING before one attempts to trade profitably!
But, wait! There’s more.
The delta, gamma, theta and vega vary greatly from option to option AND are constantly CHANGING during any trade!
More on that, next time………..
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Let’s take a look at the structure of the options chain. Recall that the options chain is the complete listing of all the options that are available on an underlying or stock.
Each of the months that is currently available for the choosing of an option has its own options chain for that month.
At the top it will show the number of days left until expiration of the options listed, normally the 3rd Friday each of month that has options available. (Except for cash settled options; their expiration is the day before that one, on that Thursday.)
The options chain has the calls on the left and the puts on the right. It is important to note that the option prices, called premiums, are listed with the LOWEST on top and the HIGHEST on the bottom. While I use the thinkorswim trading platform, most options chains will have a variety of other parameters, aside from the price, to be read from the column settings for both calls and puts. Typical readings in these columns are open interest, the greeks, implied volatility for each option, etc. But the basic information is the theoretical price, the actual price of each option and the bid/ask prices.
Of crucial importance is that the current, momentary at-the-money (ATM) price is marked by the shading on the chain. ATM refers to where the current price is of the underlying. Options that are ITM (in-the-money) have both intrinsic value and a certain amount of time value remaining, while options that are OTM (out-of-the-money) consist only of time value.
As you gaze on the options chain, the ITM calls are on the upper left, while the OTM calls are on the lower left, with the calls, at the edge of the shaded area, are ATM. The ITM puts are on the lower right, while the OTM puts are on the upper right, with the puts, at the edge of the shaded area, are ATM.
A crucial component of all options trading is the implied volatility of each month of the underlying and of each individual option. As will be shown later, the implied volatility will play a major role in the future of the option’s value.
The only way that you can really grasp this is to view the options chain on your platform and study many of them, using the many different settings that are available.
Also, note the months in the future that have currently available options, often extending into the January’s of 2 or 3 years out. The January’s options are shown for a specific type of option known as LEAPS. Long Term Equity Anticipation Securities or L.E.A.P.S. are simply long term options that are useful for specific types of strategies. Like all options, they have advantages and disadvantages.
More next time………
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All options are priced through a complex calculation called the options pricing model. I call it a ‘machine’ because it’s so exact and so dependable! (The markets are so efficient.) The OPM works like this:
It takes the six market variables — the current price of the underlying stock, the strike price of your option, the number of days to expiration day, the current interest rate, the current dividend rate and the current implied volatility and runs them through the very complex, highly mathematical, Nobel prize-winning formula to come up with the current value of an option.
Of special note to options traders is that while the price, the interest rate and the dividend rate are what they are. Furthermore, the strike price and days until expiration are of your picking. But the IMPLIED VOLATILITY is a made into a crucial ‘wild card’ of which ALL OPTIONS TRADERS MUST BE AWARE.
The reason is that this variable to the OPM is ‘manipulated’ or, perhaps I should say, ‘calculated’ by the market makers depending upon the current supply and demand on that particular option.
For example, if a certain option, for what ever reasons seen from the perspective of traders, is highly desired and begins to have lots of people buying it, the market maker will increase its implied volatility and, EVEN THOUGH HE CAN’T TOUCH THE OTHER FIVE FACTORS, CAN,IN EFFECT, CAUSE THE VALUE (price) OF THE OPTION TO INCREASE.
Likewise, if the market’s desire for a certain option decreases, he will decrease the IV (implied volatility) and cause the price to respond, along with its responses to the other five factors, to decrease in value.
The bottom line, for options traders, is that the implied volatility variable is a significant consideration when searching for an option and in determining whether to buy or sell it.
The following scenario, as a matter of fact, is common:
A trader performs his market analysis on a stock and chooses to have a bullish bias, meaning that he thinks that it is going to go up in price (value). It’s at $30 and he buys the option at the $30 strike price for, say, $2.00.
[Note: Each option represents 100 shares of stock. The prices shown on the options chain, which we'll discuss soon, are of individual shares. Thus the option described above represents 100 shares @ $30 or $3,000 in stock value. Since its price is listed as $2.00, he actually places 2.00 x 100 or $200 at risk in this trade.]
Then the price of the stock DOES slowly increase in value and a week later, the new price is now $31.50. He thus proceeds to sell the $30 strike price option that he owned and finds, to his chagrin that, even though he predicted the stock increase correctly, he actually LOST money on the trade!
Incredulously, our hero calls the trade desk of his broker to complain and to find out what happened. That’s when he learns, the hard way, that while the PRICE of the underlying did go up, as he had predicted, two of the other factors – passage of time and implied volatility drop – overrode the increases in his option value that arose from the stock price increase to the point of taking a loss.
In other words, he failed to realize that in ANY MARKET MOVEMENT some of the five variables of the OPM will work FOR you, to make your trade profitable and some will work AGAINST you, to make you suffer a loss. Whichever side achieves the most will decide the overall outcome of your trade.
More next time………..
The Calls and Puts of Options
By · CommentsRecall that options are of two types, calls and puts. We’ve already covered their definitions, so we’ll proceed to the next step.(All of options learning is sequential! That means that it’s best to learn ONE section at a time and know it well before proceeding to the next step.)
Every option has an ‘open’ order which must be followed by a ‘close’ order.
When you SELL an option, you want its value to decrease so that you can buy it back cheaper and put the difference in your pocket. When you BUY an option you want its value to increase so that you can sell it back for more money than you paid for it, which represents your profit.
So the process is STO (sell to open)/BTC (buy to close) or BTO (buy to open)/STC (sell to close).
However you approach an option, you do so based on how you believe the market is going to move.
Summary of these two points:
If you think the stock you’re looking at is going to go up, you might BUY a call option that will increase in value when the underlying stock does so. Or you could SELL a put that will decrease in value when the stock goes up.
If you think the stock is going down, you could BUY a put that will increase in value when the stock does so. Or you could SELL a call that will decrease in value when the stock goes down.
Confusing? Of course it is! This is only ONE example of why NO ONE SHOULD TRADE OPTIONS WITHOUT GETTING THE PROPER TRAINING and have plenty of experience in PRACTICING the trading of options before putting real money into them!
But, back to the point…….
The point is that whether we make money or lose depends on how the VALUE of the options changes once we made placed our trade.
But how are those VALUES calculated (thus how is it determined that you make a PROFIT or suffer a LOSS on a trade)?
Here are the six factors that determine, through a fancy and complex calculation, what the new value of the option is:
(the original calculation won a Nobel prize!)
1. The current price of the underlying stock
2. The strike price of your option (recall that all options are contracts that have, as one of their stipulations, the price at which the transaction will take place; that’s the ‘strike price’ of the option)
3. The number of days to expiration day (again, recall that all options’ contracts have a time limit, i.e., a date at which time, if the transaction has not occurred, the options expires worthless)
4. The current interest rate
5. The current dividend rate
6. The current implied volatility (here I’m introducing a new term – volatility. There are volumes written on this subject, but at this point, just know that it is basically a measurement of the amount of fear and uncertainty that exists in the market at this point. The more fear there is, the more erratic and unpredictable price movements tend to be.
In the next section, I’ll cover how all of these comes together to form the new option value.
