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

Dynamic Hedging

Hedge entire portfolio with one or two trades.

What is hedging?  A process that protects position from adverse movements.  Making a trade that counters the direction of the primary trade.  Many positions are naturally hedged (spreads, married put, most synthetics).  Doesn’t mean position can’t lose money but limits amount that can be lost and thus the risk.

Key Points

• Hedging is not eliminating risk — but limiting it to a comfortable point.
• The hedge side of a trade is a losing but important aspect because for a small extra cost you’re protected It’s like ife insurance, car insurance, and other money you spend just in case…
• Since there’s always a chance of being wrong, better to make a little less and be protected
• Long positions are automatically hedged because your loss is limited to what you paid for the position
• Short positions are unhedged because if you are assigned you have to purchase the stock at whatever price is currently trading at.

Hedging Examples

• Stock direction can be hedged by delta
• Volatility can be hedged by vega
• Time decay can be hedged by theta

What to Scan For.. Or, How to Find Good Trading Opportunities

The other night I saw a presentation for what looked like a truly amazing scanning program called Best Choice Software.  I didn’t get it because even though if it’s as good as they say (and I’d make my money back with the first trade)  I realized for where I am now my time and money is better spent on education.  Plus, Think or Swim has a scanner feature that set up right should produce very good opportunities.  So, with that in mind, here are criteria for setting up scans.

Basic Scan for Stocks That Moved at Least 10% in the Day:

1. Volume:  minimum 1,000,000
2. Net Change %:  minimum 10%
3. Last:  minimum 10

Rolling Up

If an option is close to expiration but the stock is in the middle of a strong uptrend, rolling up is a good way to lock in profits but stay in the trade until the trend runs it’s course.

Selling your long call with a lower strike while simultaneously buying a new call (in the next month) with a higher strike.  Produces a credit that locks in profits while keeping the same trade going.  Less money will be at risk because it’s been rolled out along the way.

Volatility

“Lottery tickets are a tax for people who are bad at math…”

Just saw a probability analysis on lottery tickets and will probably never buy another lottery ticket again.  Basically, it was a reminder of what the odds are.  Yes, trading is a much better way to go once you know what you’re doing that is.  For instance, this presentation was actually about volatility and why it’s important to known when it’s unusually high and thus options are expensive — both of which affect the probability of a trade being profitable.  Depends of course on whether your buying or selling but still important to know what the volatility is nevertheless.

A few more key points:

• To see if an option is expensive or a good value, check Black-Scholes model to find true value of option and compare to what’s it’s selling at
• The VIX may spike but over time mostly moves sideways
• Bullish direction and high volatility –> be the seller  –>  sell puts and buy back at lower price later

Assumes I have a stock in mind and am thinking of placing a trade…

1. Determine the overall trend of the market
2. Is the trend of the stock the same as the overall market?
3. Check the VIX
4. Check greeks
5. Technical signals:
   - Candle signal
   - Slow stochastic
   - Moving averages
6. Determine support and resistance
7. Determine best strategy for the trade
8. Determine entry point
9. Determine exit conditions
10. Calculate risk/reward, max risk, and max profit
11. Take half of position profits at 100% or more.  Ride other half position until it gives back half its gains, or if it doubles again

• Fundamentals do not move stocks – perception of fundamentals moves stocks
• Dojis are powerful reversal signals.  Dojis at the top – take profits.  Dojis at the bottom – wait for bullish confirmation
• Bullish/Bearish engulfing signals. The bigger the candle the more compelling the signal
• A signal isn’t a signal if it’s not occurring in a trend

They have wifi at the Options Intensive Workshop, so I’m blogging a quick update during the break.  I’m going to try blogging throughout the workshop with little thoughts and notes that I find interesting..

Today is the bonus day and the workshop goes through Sunday.  So far it’s really great. First presentation was Ron Ianieri speaking about greeks.  Next up is Stephen Bigalow and Candlesticks.

Thurs through Sunday is the Options University conference. They’ve got a great line-up of speakers and topics.  I’m hoping to blog from there, we’ll see… Depends on the wifi situation at the Hyatt..