Option trading with DanPickUp

[DanPickUp]

Hi

Let me start a thread about directional and strategically option trading. AW10 thread is about low risk option trading. This one not will be only about that subject and I do not want to cross my friends thread with those subjects. As far as I have recognized: Here in Traderji are people who really like to know more about option trading and this thread should serve them to a certain point.

Options are some times quit tricky and confusing, as there are so many ways to trade them. Even the option greeks make many . This thread should bring you to a point, where you hopefully will lose some of your confusion or for more advanced option traders, it may will expand your knowledge about the derivative. By the way: I do not mind if I also can learn from you .

I will go here through different subjects post by post. You maybe will see sometimes copy past posts from me from old posts from the past. I only will do that, when I think it makes sense to complete a subject or to expand a subject. I like to have them once organized in one thread.

You will need to do a lot of work and testing by your self, as I not will lead any body. The first few post will be about the subjects shown below** and I would please you not to interrupt the flow of posts with to many questions until the first bulk is done. If there are points you think or see which are not makable with option trading in India, please post it, so I can adjust my writing to that.

After having all the ingredients, you then can add more of it or reduce it. Target should be a useful trading plan for option traders after all the subjects are lighted out. I will try to avoid complicated option greek explanations. Further I will not be able to watch and post all the time. So please, visit when ever you want but do not expect spoon feeding from my side.

**Subjects which will be spotted on

- What kind of option trader do I want to be?
- Direction of the market.
- Volatility in the market.
- Time frame of our option trade.
- Choosing the strategy.
- Margins for the strategy.
- Choosing the strike level/s.
- How to implement a strategy.
- Entering the market.
- Adjustment of our option trade.
- Stop loss of our option trade.
- Exit strategies for our option trade.
- Money management and risk reward ratio of our trade.
- What to do after the trade.
- Summary

DanPickUp

 

[RAAMAKANT]

Thanks for starting The whole new Thread on The Most Awaited Subject on TJ for the Newbies like me.

 

[timepass]

Let me start a thread about directional and strategically option trading.................

Phew.. about the time too. Small morsels please.

 

[jain.er]

I vote to make this thread Sticky .....

 

[DanPickUp]

Hi

First subject: What kind of option trader do I want to be or to become?

This question may is much to early to ask for some of you and others have done that step and know already what kind of option traders they are. How long did it take for them to know it?

As earlier as you begin to define your self what kind of option trader do you want to be or become, as earlier you may will feel comfortable with what you do. Very psychological aspect and as many thing in trading is based on psychology, it is quit an important point. ( Imagine the child who wants to become a pilot )

Ok, let me try to make two simple definitions as we will try to keep every thing as simple as possible. That was also the wish of timepass and I guess it is the wish of many of you.

Definition of a pure directional option trader:

If you think a security (Future, Stock or ETF) is going up, you buy a call or sell a put and if you think the security is going down, you buy a put or sell a call. Thats it.

Definition of a pure strategically option trader:

A strategically option trader will implement whole strategies in the market. He combines put and calls in any given variations. Direction is not as important as it is to the pure directional option trader as he also can trade sideway markets.

The next level would be the traders which internalize both option trading styles. We will talk about that later.

I am clear that some of you already come up with the question: How do you define the traders which combine different derivatives with options? That level is quit high and I also will later comment on that.

First subject closed.

DanPickUp

 

[NTrader42]

Thanks Dan for this thread

As i am into it for learning, i would choose to be of the 'strategically option trader' variety

If there are any exercises to be done or any trades to be followed / plotted etc, do let me know

Thanks
NT

 

[DanPickUp]

Hi

Some of you may ask: Why does he comment on all that subjects? What does it helping for? Why does he not just say to buy here and to sell there and I can follow this trades.

No.

The main purpose of each post on any subject is to give some easy to understand information about the specific subject, as we will make at the end some kind of simple check list, which you quickly can go through by your self before entering any option trade. By your self is the point! for newbies and the oldies know any way what to do.

Second subject: Direction of the market.

Simple spoken: Market can be in an uptrend or downtrend or sideway move. Now I just heard that laugh in the background: I know that, so common show me some thing I do not know.

May I ask: How many of you really trade options with a clear idea of market direction? Some of the more experienced traders do, but what about the rest? How do they try to spot the direction of the market?

Most simple answer: Use your eyes to spot the direction. As option trader you do not need to be able to make decisions on market directions on a three, five or 15 minute time frame. We trade options and not futures and as far as I recognized, here is an other important point which many miss interpret. They see all that post on future day trading and automatically start to think that options are traded the same way.

No.

May I ask you: Have you met any successful option trader which trades this short time frames successfully in the long run? If so, he is welcome to make the next post.

Spot the direction of the market for your option trades on time frames like one hour, three hours, daily and even bigger time frames. If you feel or think or have some other experience and like to say: This is wrong, then please post your thoughts with precisely comments why.

If some body has any problem to spot any direction of the market, use simple TA . Now the confusion starts again like the confusion with the option Greeks. What is TA and what kind of TA should I use?

That will be the follow up post on this subject.

DanPickUp

 

[DanPickUp]

Hi

A simple definition of Technical Analysis:

"Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.". In its purest form, technical analysis considers only the actual price behavior of the market or instrument, based on the premise that price reflects all relevant factors before an investor becomes aware of them through other channels.(*)

Many start to struggle when it comes to the use of TA indicators. There are many systems presented here in this forum and all over the net from many TA experts. To say this is best and that is worst would be wrong. Only thing you should ask your self each time you try to learn such a new presented technique: Does it really help me in what I do? And I do option trading.

It is finally YOU, which decides with what you want to work and in what you believe. If you are at the begin of your trading experience, you will test many things in the coming future and many times you will come back to the most simple systems you ever have seen. As we for the moment only want to spot the direction of the market and want to add some TA to our chart, we use for the begin only one indicator to keep it simple .

I will show you one of the simplest ways to use an indicator most of you already know or have heard about: Moving Average.

Short definition of MA: Moving average data is used to create charts that show whether a stock's, futures or ETF’s price is trending up or down. They can be used to track daily, weekly, or monthly patterns. Each new day's (or week's or month's) numbers are added to the average and the oldest numbers are dropped; thus, the average "moves" over time. In general, the shorter the time frame used, the more volatile the prices will appear.(**)

I made you five screen shots, starting with a pure bar price chart from Crude Oil. I am clear, that you not can trade options on commodities in India. Even than, a chart is a chart and we are still on the subject: Spotting a market direction.

First chart with the pure price bars and nothing else. Define the different direction of the market by your self.

http://i41.tinypic.com/2ldcas2.png

Second chart with what I see. That can be different compare to what you see. Never mind, as we all have different brains with different views:

http://i43.tinypic.com/imi0i9.png

Now we add the moving averages in a way, most of you never did. I not have seen any oldie/senior trader here which ever showed this way of using MA’s.
(Edit: In what ever software you use, you can set the time frame to one day for the high / low simple MAs and for the simple median MA you can set it to three days. That then would reflect what you see on my screen shots )

http://i44.tinypic.com/vdzllg.png

Now we zoom in this daily chart to see in dept, what we want to see very clearly: The direction of the markets moves. Spot the blue line: If it is near the red line, we are in an uptrend. If it is near the green line, we are in a downtrend and if the blue line is some where between the red and green lines, we recognize a sideway moving market. This is, at least for me, one of the best and simplest ways to visualize market direction.

http://i39.tinypic.com/287n040.png

If you feel, that any picture you analyze is too volatile for your understanding, just expand the time frame. In this picture I expanded the time frame to five days and you see the chart becomes less volatile.

http://i44.tinypic.com/14wajhk.png

During the time you will see more screen shots. But for now: Second subject closed .

DanPickUp

*(Source: Hedge Funds Index)
**(Source: Investor Words)

 

[Dev Mookerji]

Dear Dan,

Buddy I am a great fan of you, though my schedule is very hectic I used to read your post meticulously . Thanks for this wonderful thread.

regards
dev

 

[jain.er]

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