Market Wizards - Trader Interviews

Every once in a great while, a great book comes along which changes your perspective on your career. It's been said many times that if there were to be a  trading "bible", Jack Schwager's Market Wizards would be it.

If you've never heard of the book, then you are doing yourself a disservice. If I were to put a label on the book, it would have to be "a guide to take your trading to the next level".

Why is it so important, does it have a "system" to trade inside? Well, not really. It's all about the mental game of trading and seeing for yourself how the pros handle losses, disappointment and gives you insight into their mindset each and everyday they trade the market.

Here are some of my favorite quotes from the book:

“If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.”
Paul Tudor Jones

“Don’t focus on making money; focus on protecting what you have.”
Paul Tudor Jones

“The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”
Victor Sperandeo

“I think investment psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell.”
Tom Basso

Do you see a pattern here? Risk control, cutting losses, letting winners ride, etc. Yes, we've all heard these mantras many times - but how many times have you heard it directly from traders who manage millions and sometimes billions of dollars?

I'm including a link to the pdf download, only because one could easily find it on Google anyway (I see there are about 200 available downloads of it) so here it is:

http://optionboost.com/Market_Wizards.pdf

Please visit Amazon and get your hard-copy. It's an absolute must-have on your trader's bookshelf.

Hope this helps.

 

Market Wizards - Trader Interviews

Trading Scared and How To Avoid It

So what exactly does it mean to be "trading scared"? Well, allow me to begin with an example:

This morning I was looking at buying a washout on a stock ($ANGI, to be exact). I've had some good success with buying morning washouts on volatile stocks lately and decided that this was a good candidate. I entered a decent size shares, had my mental "stop" in place and let the trade work out. As my eyes shifted around to other things, I noticed out of the corner of my eye that a massive print lower in the stock happened.

Staying calm, I wanted to size out on the uptick and re-assess the situation to hopefully wait for another setup in order to size back in. Well, needless to say this never happened and there was another massive downtick in the stock - when I sent the order to fill at the offer, it didn't fill and had to cancel and resend to finally get a fill.

It happens sometimes I guess - you plan, plan, plan and things just happen that are out of your control. As a trader, I have learned over the years to move on and make back the losses slowly throughout the day......but for some reason, this rattled me.

I made a few more trades later in the day, but I noticed that I was cutting my profits too soon and not letting them work out the way they should. This is a rookie mistake; after having a big loser, trading differently that you normally would.

So what is the point of all this? Well, the first point is to REALIZE what you did wrong and fix it. Some of the ways I could have coped better with this is trading smaller size and ADDING to my winners. This would have given me more confidence to let the rest of the day work itself out and perhaps even finished in profit.

Another thing I should have done was to detach a little bit from the computer - take a walk and come back with a fresh set of eyes on the market.  Around my desk, I have several notes that remind me what I am supposed to be doing and to keep my psychology in-check. One of those notes reads as follows:

Remember that this is a mathematical process, of which you are not respecting by skewing the numbers with cutting profits too soon. You WILL have red days. This is a fact and they should be welcomed, because they need to happen in order realize profits in the future.

Good advice! I'll be sure to remember it next time and learn from today to become even better.

Good Luck Everyone.

Trading Scared and How To Avoid It

My Trading Toolbox

I am an option trader - through and through. My bread-and-butter has always been trading options throughout my professional trading career. Within the last few years or so, I feel like my mind has started to open up to other strategies and thoughts about how and what to trade in the markets.

Having spent almost 3 years at a hedge fund, I had the privilege to see inside the minds of other traders who often had very different styles compared to mine. None of us were every "right" or "wrong", we just understood that there will always be different styles and strategies between us which will work or not work depending on the situation in the markets at hand.

Experience sometimes makes you humble and appreciate the process of stepping outside of your comfort zone and trying new things. For me, I am fortunate to be able to expand my trading strategies at my own pace. I guess it's one of the perks of working for yourself - YOU decide when you want to learn something new during working hours.

The new tool I've been perfecting in my trading toolbox has been day trading equities. Often times, certain stocks will make an exaggerated (some would say irrational) move in a certain direction which is a great opportunity to take the other side of the trade - however, not ALL stocks have options on them (in case you haven't noticed) so these have been my candidates for short-selling.

I've been working with the traders in Nate's chat room at Investor's Live for about 2 years now and have to say that everyone there has been extremely gracious and helpful. While I'm still primarily 90% an option trader, I still have a few screens dedicated to this new day-trading venture. So far, it's been going well and I've been lucky enough to notice that there is some "crossover" between what I've been doing for years and the day trading strategy.

As a professional trader, don't ever be afraid to step out of your comfort zone and try something new. It goes without saying that you should ALWAYS trade smaller size when trying out a new strategy until feel confident and see real results.

Nate's Chat on my screens:

 

My Trading Toolbox

Stock Lockup Expirations

As traders, we're always looking for that edge - that one thing that we can exploit that will hopefully pay our bills until it stops working.

This morning, I read a lot of chatter on Twitter about the expiration of the lockup on $GPRO.  For those of you who are unclear about what a lockup expiration is, here is a great explanation from investopedia.

In the above article, it mentions a certain statistic which says, "There is also empirical evidence suggesting that after the end of the lock-up period, stock prices experience a permanent drop of about 1-3%".

The trick is, "when do I know how to pinpoint the turn in the stock so I can capture this 1-3% drop?".

I like to handle lockup expiration a little differently and take advantage of the flurry of volatility in the options market shortly after the stock opens on lockup expiration day. I'll look to sell volatility on a few out-of-the-money options and take quick profits on the fade. If this trade works out, then I'll use the profit to purchase some bear put spreads farther out in time to capture some more longer-term fade on the stock.

If you are new to selling volatility on out-of-the-money options, this trade is NOT for you. However, you can practice the strategy by reading my three-part series:

Part One

Part Two

Part Three

 

Good luck everyone.

Stock Lockup Expirations

5 Steps to Surviving a Trading Slump

We've all been there as traders; you lost your mojo, your groove, your zen-like state and can't seem to get it back. In my humble opinion, psychology is the most important aspect of trading and when your emotional state changes because you are watching every day go by with loss after loss, it creates a kind of negative spiral that extends the slump even longer.

I've attempted to outline some of the important steps which help me from time to time. As traders, an important skill to have is self-examination in any scenario - so hopefully these steps will help get your profitability back on track.

1. Get Back to Basics

I can't really remember which of the Rocky movies deals with this - I believe it's Rocky 5 - In any case, he tackles the challenge of his new opponent, as well as problems in his personal life, by going back to basics. I believe firmly that going back to what has worked in the past will help you conquer your trading slump.

I always try to revisit my old trades to see what worked and what didn't work. It's helpful to follow people that can help you get back to basics and start hitting singles again. Once you start hitting smaller profits on your trades, your confidence gets stronger and you see the trading day more positively - which turns a negative spiral into a positive one.

Those of you who think that keeping a journal of all your trades is boring and not worth the time - then enjoy staying in your rut.

2. Trade Smaller Size

Along the lines of building confidence, it helps to reduce your normal trading size during slumps. Just for the simple fact that your emotions and fear of losses become more manageable, so you are able to have a bit wider of a stop to help you analyze the intra-day price action within the space of your stop without feeling a sense of panic.

It's all about gaining the confidence you've lost - so having smaller size allows you reduce your risk and take smaller wins, both of which helps get that confidence back.

3. Examine Personal Life

See those pretty charts you look at during market hours on your large computer monitors? Well, they're not really monitors; they're more like mirrors which reflect your current emotional state right back at you. Did you just get into an argument with someone? Guess what, you're probably trading angry. Have you recently experienced a loss in your family? You are probably not 100% focused on your entries/exits. Do you have some money problems? Then you are most likely trading aggressively in order to make some quick cash to alleviate those negative feelings.

I've personally witnessed traders/investors go into deep depression, break furniture and fly into a rage. If we are all supposed to be trading a system, with strict rules, then what does that tell you about someone's inner personality? There is more going on inside you than you realize - so take a step back and delve in a little deeper - your trading account will thank you later.

4. Thin Out Your Watchlist

As traders and even as humans we often think that since we are losing we need to work harder and look for more opportunities, even when they don't exist. If you diligently go back to your older trades and see what was working, hopefully you'll notice that you had a few big winners which really padded your account. Ask yourself, "how many stocks were I watching that day"? Your answer will help you thin out your watchlist if needed and help get your Back To Basics again.

5. Examine Each Loss and Learn From It

Write your journal! Everyday, every trade, every feeling and emotion and review it. There is a reason why all the great traders recommend this - because it works.

Brett Steenbarger has a great article on the qualities of great traders and their disciplin on keeping good records. Check out his article here.

 

Good luck everyone and don't give up!!!

 

 

5 Steps to Surviving a Trading Slump

Top 10 Option Trading Websites

I'm often asked about what sites I consider valuable to my trading, or who has the best scanner, free option statistic data, etc. I've compiled this list on my favorites. I hope you find it helpful.

1. Barchart Options Center - I've always like this site for overall market data; it's well laid-out and easy to read. Recently, they've added a section dedicated to options data. I really like the sections on Highest Implied Volatility, Top Percentage Increase/Decrease in Volatility and the Volume Leaders. A great site to browse option data as well as news.

2. The Options Guide - I refer students here all the time as it's a fantastic site for finding definitions on unfamiliar option-related terms. Both experts and beginners will find good information on this site. I would say this is pretty close to having an options reference book on your desk, without having to give up your precious desk space.

3. Chicago Board Option Exchange - Of course! The CBOE has really expanded their site in recent years to offer tons of articles as well as practical tools for searching and scanning. I really like the "Tools and Resources" tab - it's something you can get lost inside.

4. IVolatility - Before the days of using software to scan for option trading opportunities, this site was amazing. It still is one of the best, free sites around for searching volatility across different option strikes, stocks, etc. and finding good trades where there are imbalances in the option market. Although it looks like now they are charging to do scans, I still like the historical data tabs and articles as well as the IV index.

5. TD Ameritrade - Why am I listing a broker on this list?! Well, some would argue that their software platform ThinkOrSwim is hands-down the best retail platform for trading, researching, scanning and paper trading options. Last I knew, you don't need to fund an account to use it. I still use it to this day for charting and viewing the option chain and risk graphs - though I don't use them as my broker. I highly recommend them for paper-trading your strategies, as I haven't found another platform which compares in this regard.

6. SeekingAlpha - Although this is just a news site, I like the news ticker for finding plays. Now please keep in mind, I don't necessarily use it the way most people use it - and that can be explained in this post. In any case, it's nice to see news on tickers at a glance as well as market updates.

7. Finviz - One of, if not the best free scanner out there. I love the fact that you can chose if you want to view optionable (has options on them) stocks - what a great time saver. The strength with this scanner isn't the scanning per se, but it's how many different ways you can view the scans once they are completed. I really love the "snapshot" tab which allows you to see all the results as a small chart on the left with the stocks fundamental data on the right.

8. StockCharts ChartSchool - Ever wonder what the exact calculation is on a Volume-weighted Average Price indicator? What the hell is a McClellan Summation Index anyway? If you've ever wondered about these type of things, this site is for you! Not only is it a great reference point for indicators and  technical chart patterns, but they have great looking charts too! (my favorite is "gallery view" from the drop-down menu on the big charts)

9. Investopedia - Another desk-reference type of site for option terms and strategies. My favorite thing about this one though is the "related terms" box at the bottom of the page which allows you to really get lost in finding knowledge about anything related to options, investing, trading, etc. Great site.

10. LiveVol - Although this isn't a free resource, the scanner is the best I've found. If you don't want to pay for the software, they still have great articles on their site and on their blog. If you run into any terms you don't fully understand, just use the sites I've listed above to expand your knowledge!

 

I hope this helps.

-Derek

http://optionboost.com

 

Top 10 Option Trading Websites

Constraining Chaos - Part Three

In this article, we will be building off the information presented in my last two posts: Constraining Chaos - Part One and Constraining Chaos - Part Two.

The main strategy for selling out-of-the-money options will be using strangles, straddles and naked options. I must warn you that these strategies are NOT for the beginner. The information I am providing here is for educational purposes only and should ONLY be used with trading a paper account until familiar.

Here are the strategies I mentioned in Part Two:

1. The Split

If you have a contract which you've sold and it is going against you to the point of causing some discomfort, the Split is the most common way to move an option that is too close in-the-money by splitting it up into two contracts which are further out-of-the-money. The idea here - as with all these strategies listed - is that we want all of our short options to live out in the 70-90% percentile of expiring worthless.

Example: Say I sold an out-of-the-money option in $GPRO - the Jan4 Weekly 47.50 strike Put for around $1.00. As you can see, the $47.50 strike put is now close to the money, so I want to close it out for approximately $2.00, then sell the $50 strike Call for approximately $1.00 and the $45.50 strike put for approximately $1.00. Now, I've "split" my position to move out to wider strikes and I've sold the exact amount of premium I lost on the original 47.50 put.

For your contract size, it will be the exactly the same for both options. So, if you have 10 contracts on the 47.50 put, after you close it out, you will then sell 10 of the $50 strike calls and 10 of the 45.50 strike puts.

 

 

 

2. The Swap

Sometimes price will move against you rapidly and unexpectedly. When you are short options, this is your worst enemy. In this situation, you'll want to keep a level-head and work off of your support and resistance lines carefully. If price rips through support or resistance and rips through your strike price, you'll want to do a "swap" - that is, if sold a put and it is against you, you will swap it out for a call of equal price, or vice-verse.

Example: If you are holding the short $47.50 call that you sold for $1.00, and price is moving through that level and it looks like it will hold $47.50 and move higher, you can close out the call for approximately $2.00 and sell the same number of 47.50 puts for $2.00 - making an even exchange of premium.

 

 

 

3. The Double Down

Just as you can move options to different strike prices for the same amount of money, there is another variable that you can use in your favor: Contract sizing.

Not all trades are the same, so sometimes a trader's confidence level is a bit lower on a less-than-optimal setup. In this case, you would want to go in a HALF your normal contract size, so as to give yourself room if price goes against you.

When you place a trade at half your normal contract size, you are anticipating the trade going against you and you've plan a step ahead of price action. This is one of my favorite strategies because it gives me room to be wrong, but if I'm immediately right, then I take quick profits on half my normal contract size and move on to the next trade idea.

Example: If you sold half your normal size of the $47.50 calls for $1.00 and they are now $2.00 - and you sold only 10 contracts. You could close these out and sell 20 of the $50 strike calls for $1.00, this would equal the same premium you were trying to collect.

 

 

 

4. The Roll Out

This is the commonly used of all the strategies. It simply means rolling one option which might be close to the money for another one of equal price further out in time. Since you are selling something further out in time, the strike price will be further away, thus completing your objective of getting your position out to the 70-90% percentile of success.

 

 

 

The goal with each of these strategies is to practice them until they become a reflex. The ultimate goal is to use your knowledge of price action to plan two or three moves ahead of where price is currently so you always have a plan of action when things go against you.

Again, I need to stress that these are high-margin, advanced techniques that should be practiced thoroughly with a demo account because they are very risky. Please be careful out there.

I hope this series was helpful. Please check out my video course on options, where we go into detail regarding these strategies and many more. http://optionboost.com

Happy Trading.

Constraining Chaos - Part Three