New Option TraderLearning how to be a successful option trader and blogging about it

Here’s another video for you guys, hope it lightens your mood on the market we’re having these days…

If you missed the Options University webinar the other night, they’ve just made the recording available.  Over 1000 people showed up so the audio quality in the first half hour sucked but halfway through it got better. The audio should not be an issue in the recording though.

View the recording here

The purpose of this webinar was to introduce a 12-week series of classes that is starting this Sunday night, 3 times a week and 2-3 hrs each.  So, it does have excellent info but keep in mind they are promoting a class.  Nevertheless, LOTS of good information and I highly recommend watching the replay.  I also HIGHLY recommend taking the class.  It goes through everything and the teaching is superb.  Really, Ron and his team really work hard to make sure the students get the concepts down and will stay online until every last question in answered.  I signed up so if you do get into the class, let me know.  Will be nice to have someone on the chat line…

I get the Shadow Trader video every week.  Given what’s now become a global bear market, we got an extra report written report which I want to share with you guys.

Shadow Trader Bonus Report

What I know right now is that futures lead the Dow and Futures are trading down — way down.  Tomorrow will likely be a huge sell off driven by panic and mayhem.  Scary stuff.

Options University is getting ready to begin a new “semester” for their Live Mastery classes and to give us a preview of what’s included and what the classes will be like, they’re holding a free webinar tomorrow night.

I’ve been to several of their classes and strongly recommend that you attend whether or not you plan on signing up for the Live Classes because even this free webinar will give out a lot of great free information.  I will definitely be there, so say hi in the chat area if you decide to attend.

Details for the Live Mastery Series Free Webinar:

Date:  Jan 22, 2008
Signup here for the Live Mastery Classes free webinar

I’m really excited about this class.  I’ve been waiting for it ever since I met a bunch of people at the workshop in October who raved about it. This is a 12-week series of classes held twice a week and 2-3 hours each time!  It’s completely comprehensive and goes through all the basics and then goes on to option greeks, implied/historical volatility, all the option strategies, and just about anything else you can think of.   So, if you still have gaps in your understanding of options, this class will probably clear the cobwebs.

My company has an ESPP plan which (in case you’re not familiar with this term) is a way for employees to buy company stock at a discount — it stands for Employee Stock Purchase Plan.  It’s a great thing because they purchase it at a 15% discount to it’s average price over the time the money has been collected for this purpose.  They purchase the stock twice a year, so in a way it’s also a forced savings account — also a good thing.  So even if all you do is flip the stock, you’re likely to make at least the 15%.  If the stock has risen significantly, then you make more. If it’s dropped significantly then better to hold it for a while.

Fidelity manages this program for my company.  And, being an educated option trader I thought I would sell covered calls or buy protective puts on this stock for a while. You have to apply for option trading at Fidelity but that’s not the problem since I think that’s pretty standard.  They want to make sure you understand the risks and give you the appropriate trading level — I get that.  Selling covered calls is at the lowest level because the calls are covered by the stock you own, hence the term, “covered”  meaning if the stock does hit that price and you ARE forced to sell, you already own the stock so no real risk.

So anyway, I “applied” for option trading using a form which asked about my experience with and understanding of options — which, let’s be honest — even at a beginner level is way beyond what the average person trading options knows.  Most people just wing it by buying calls and puts and don’t ever bother learning about implied volatility, option greeks, or option strategies such as butterflies and iron condors.   Today, I got a letter from Fidelity telling me that I’ve been denied for option trading privileges.  No explanation or details on why or what I need to do to get approved. Seriously?

If I really cared, I’d call them up and try and get it worked out. But, the truth is I only wanted it to sell covered calls on my ESPP stock. I do all my real option trading at Think or Swim.

I’m filing this under “Lessons Learned” because it’s proof that the bigger brokers are completely inept when it comes to options trading and should not be used.  For options trading you need a broker that understands options and has policies and staff in place as well as a superior platform and execution time. Any broker who matches this description would never pull crap like this.  Think or Swim is my first choice but if for whatever reason you’re looking for alternatives, there’s also Tradeking and  OptionsXpress

I’m stepping off my soapbox now…

Just found this and want to pass it along to you guys. Its a free chapter from Bill Johnson’s new book, “Options Trading 101″

Bill has a knack for zeroing in on the stuff that’s hard to understand when you’re first learning about options and explains things in a way that so very crystal clear.  If you like this chapter, then definitely get the whole book. It covers mostly the basics but puts those basics in a way that you may not have understood until now.  I know I’ve learned alot from this book and that’s after taking several classes.

Right click this link and choose “Save As”
to download the free chapter –>  Free Chapter

Just found out that Options University is holding a free webinar on Technical Analysis tomorrow night.  Options University is the best place I’ve found to learn about options trading and technical analysis is key for trading options.  These webinars fill up pretty fast so not sure if there’s still room but definitely worth a shot.

Sign up for the Technical Analysis webinar here.  Again, it’s this Wed and starts at 6 pm PST

Anyone who trades actively had to learn at some point that losing is just part of the game.  It doesn’t mean you’re a bad trader, it’s just the way probability works.  You can’t control the market but you can control how much you lose on any single trade.  There’s absolutely no reason anyone should ever lose their entire account just because of a “bad month” if they’re sticking to their money management rules.

Now, as we get more experienced we’re able to spot the higher probability trades and (ideally) go with those.  But, there is no sure thing in trading and a bad week or two that comes out of nowhere will turn any trade no matter how good the setup into a losing trade.   That’s why money management is so important  — it stops losing trades from going too far in the losing direction and lets the good trades run.  You really only need to be right about 35% of the time to be a successful option trader with sound money management rules in place.  That may not sound like a lot but remember — options are leveraged instruments.  A little goes a long way…

Think about money management as risk management because that’s what that it really is — managing your risk with every trade by limiting how much you put into each trade. Most people dive right into learning option strategies right away and only come back to money management after a few bad trades This really should be the other way around.  Good money management habits should be at the beginning of the learning process and every single trade so you don’t get wiped out with one bad trade which can happen no matter how good you think it will be — otherwise you’re just gambling.  Smart traders trade with a plan and that plan includes rules about money management.

So, what are some good money management rules?

1. Don’t lose more than 2% of your total account capital on any single trade.  2% is the generally recommended percentage. Think about it.  If you never lose more that 2% on a trade, that’s pretty safe, right?  Let’s put this into perspective.  Say, you have $25,000 in a trading account.  This means you will not lose more than $500 on any single trade.
2. Now that you know the most you want to lose on this trade, figure out where to put your stop loss so that you’re out the minute you’re at a $500 loss.  There are various formulas for figuring this out.  Below are two other sites that do a spectacular job of describe positioning sizing formulas, so I won’t go repeat them here.

Money Management and Position Sizing

• Position Size
• Money Management 101

Money Management Key Points

• Comes down to planning your trade and having the discipline to follow that plan
• Determine amount you are prepared to lose before placing the trade — that is the amount you will risk
• Figure out your position size based on the amount you’re prepared to risk
• Stick to the plan no matter what