Archive for Options Trading
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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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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Options’ Time Decay Factor: How it works on value of Options
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Although there are many ways to trade, almost every trader at least THINKS about the possibility of trading options.Recall the old adage, “Trading is not risky, only untrained traders are risky!”
This is no more true anywhere than in the area of options. The reason: they are a bit tricky!
Having already enumerated the various main components of options, I’ll now start a SERIES of detailing these so called ‘derivatives.’
Option feature: time decay – three statements
They called derivatives because they’re not stock, but DERIVE their value, at least partially, from the movement of stock.
Statement #1 – The main difference between stock and options is that the value of options can decay over time.
Example: If you bought 100 shares of a stock valued at $30, you would have ownership of an asset worth $3000. If the price of the stock went up, you would make money;if it went down, you’d lose value in your asset. But, for the sake of the example, let’s say that it did go up for a while, and then go back down and one year later, the price was back to its original $30. You would STILL have $3,000 in assets in it.
On the other hand, suppose you spent $500 for a certain number of contracts (called lots) with an expiration date of 30 days later and attached to the price of the underlying, which is at $30. (As we’ll see, they ALL have expiration dates.) At the end of that time, regardless of the price of the underlying — it might be higher, lower or the same – your options contract could be ZERO! Gone! Totally evaporated! This is because it ‘decayed’ to nothing during that time.
In other words, although the option’s value was ‘derived’ from the value of the stock, there were other factors and other dynamics that came into play and these overrode the straight one-on-one value that a new trader might expect.
When a stock offers options, those contracts or offered in various lengths of time and at various possible prices of the stock, then referred to as the ‘underlying.’ The prices are display on a table known as the ‘options chain.’
The options chain shows the decay rates of the various options in a structured, month-by-month format. Also, even though it’s not specifically stated on the chain itself, it’s implied that if one BUYS the option, he is PAYING for the time decay and if one SELLS the options, he is MAKING money on the time decay. Much more on this later…..
Statement #2 – To further complicate matters with reference to this first characteristic of options – time decay – the RATE of decay in the value of the option varies depending on how far away the expiration date is and other factors, e.g., the movement of implied volatility which will be discussed in future issues.
Statement #3 – Finally, remember that the value of any option, just like the value of the underlying, is constantly changing. There are many factors involved, but just know that the value and the amount of time decay and the rate that it’s changing is different right now then it was 5 minutes ago!
It, like everything else in the market, is NOT a structured movement, with straight lines and 90 degree angles. It’s a very fluid sponge that moves and transforms with the emotions of the trading herd (all the people in the market).
So much for time decay for the moment…. Next we’ll take a wider look at how the options value is calculated.
