Option trading with DanPickUp
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Hi
If you are interested: I did a little thread about more or less naked directional option trading, purely done on TA. The thread was meant to give an idea about how difficult and dangerous it can be to trade options just on that tool or even only on news. Most positions never have been hedged and some have been hedged only on a very large scale.
Some trades have been incredible profitable, specially the very, very short time frame directional option trades. Doubling the money in minutes no problem. But that was pure gambling and is not to recommend for long term option traders. In those trades I some times not even had the time to set a stop loss on the option, as the market moved so fast. (Calls: Euro up 200 pips and the put trade: Euro down 200 pips just like that)
Beside that gambling I showed a play with some long and short otm and deep itm options. The small portfolio was a high risky one, very directional in his idea. The final outcome is zero as first all the profits I made with the very short time frame trades have been calculated or used for the stop loss levels from the longer time frame options. As the market finally reached the last bastion on the way down where the last SL was placed, the whole portfolio was executed.
http://www.traderji.com/forex/70864-euro-trading-danpickup.html#post697820
Good trading
DanPickUp
If you are interested: I did a little thread about more or less naked directional option trading, purely done on TA. The thread was meant to give an idea about how difficult and dangerous it can be to trade options just on that tool or even only on news. Most positions never have been hedged and some have been hedged only on a very large scale.
Some trades have been incredible profitable, specially the very, very short time frame directional option trades. Doubling the money in minutes no problem. But that was pure gambling and is not to recommend for long term option traders. In those trades I some times not even had the time to set a stop loss on the option, as the market moved so fast. (Calls: Euro up 200 pips and the put trade: Euro down 200 pips just like that)
Beside that gambling I showed a play with some long and short otm and deep itm options. The small portfolio was a high risky one, very directional in his idea. The final outcome is zero as first all the profits I made with the very short time frame trades have been calculated or used for the stop loss levels from the longer time frame options. As the market finally reached the last bastion on the way down where the last SL was placed, the whole portfolio was executed.
http://www.traderji.com/forex/70864-euro-trading-danpickup.html#post697820
Good trading
DanPickUp
@bpr
An other prove to never put all your money with one broker. MFGlobal used customer money to protect the bets from there CEO Jon Corzine and PFGBest CEO Russell Wasendorf Sr misstated financial statements.
PFGbest signed chapter 7 and not chapter 10. That means that customers will get there money quicker back (What is left !) as the whole company will be liquidated as soon as possible.
MFGlobal on the other hand, which signed for chapter 10, still exists and is rebuilding them self. They even do trades with the companies money and that is what many makes incredible angry as 28% of customer money is still not on the table.
PFGBest had high quality platforms for option trading but was quit expensive with there commissions. After dealing with them with out success about the commissions, money was token away and this time we had more luck compare to the situation with MFGlobal. Still, the feeling comes up: Who can we trust and where is the next bad boy.
Again a sad story for many and even a worst case story for the others. Imagine those traders which after the MFGlobal debacle changed to PFGBest and stayed with them; and here we talk probably about a few hounderts. They again lost money and this in a period of a few months. Money which was stolen out from there accounts the second time. Those people must have lost there believes in the trading industry in the states. Nobody tell me any more how safe and how great this country is. It is really a shame for the trading industry. CME knows which broker company still trades with customers money, even after the MFGlobal case. They were asked to give or to publish the names from these broker houses which still do so and CME chair man regrets to tell the names!
http://www.forbes.com/sites/walterp...ested-the-audit-confirmation-that-caught-him/
An other prove to never put all your money with one broker. MFGlobal used customer money to protect the bets from there CEO Jon Corzine and PFGBest CEO Russell Wasendorf Sr misstated financial statements.
PFGbest signed chapter 7 and not chapter 10. That means that customers will get there money quicker back (What is left !) as the whole company will be liquidated as soon as possible.
MFGlobal on the other hand, which signed for chapter 10, still exists and is rebuilding them self. They even do trades with the companies money and that is what many makes incredible angry as 28% of customer money is still not on the table.
PFGBest had high quality platforms for option trading but was quit expensive with there commissions. After dealing with them with out success about the commissions, money was token away and this time we had more luck compare to the situation with MFGlobal. Still, the feeling comes up: Who can we trust and where is the next bad boy.
Again a sad story for many and even a worst case story for the others. Imagine those traders which after the MFGlobal debacle changed to PFGBest and stayed with them; and here we talk probably about a few hounderts. They again lost money and this in a period of a few months. Money which was stolen out from there accounts the second time. Those people must have lost there believes in the trading industry in the states. Nobody tell me any more how safe and how great this country is. It is really a shame for the trading industry. CME knows which broker company still trades with customers money, even after the MFGlobal case. They were asked to give or to publish the names from these broker houses which still do so and CME chair man regrets to tell the names!
http://www.forbes.com/sites/walterp...ested-the-audit-confirmation-that-caught-him/
Last edited:
Hi
Here a little help (Framework) to get some clarity for your trading plan in option trading. I guess some of you really can use it, as not all readers here are experienced in option trading. Even then; Some little experience is needed to do it. Home work has never done any bad to me and it is little home work you may have to do. Keep in mind that some trading plans in option can be done with less market direction knowledge. So do not bring in a whole future trading plan to do option trading. Ok!
The plan shown here is not a plan in which each point is defined and packed with rules and ideas from me. You can choose what you need and you then can write in what you think is important for you. The plan just gives the framework and what you paint in it is your idea. If you want to post it here, you are welcome to do so.
Keep each point very simple. Use screenshots for your chart definitions instead writing down a houndert rules. If you want to write down some thing, write on the chart. Use simple and only a few words how and why you want to do this trade. This some times is much more effective and more easy to understand compare to reading a trading plan word by word but not seeing the chart. I am more a picture guy, means I learn better by seeing some thing on a pictures, but that is me.
Trading plan with the most essential cornerstones for successful option trading:
Every trading plan setup will be defined in a starting trade which is plan A. Plan A is as a general starting plan to enter what ever market. The general entry plan should serve the idea and necessity to stay flexible in what ever the markets followup action is. Plan A can either be a non directional entry set up or a directional entry set up. This plan A is always used as our starting point. This helps to keep option trading a bit more simple as there are so many different ways to start an option trade and most get completely confused about all that possibilities.
So plan A is a simple help and plan A has to be kept very simple. It defines more or less only in general with what kind of option strategy we want to enter the market. That can be as simple as: Long call or long strangle or what ever you prefer. If you do it in that way, you will get the experience with that special strategy and you not will make the mistake to try each time some other kind of option strategy. Entering option trades most of the time with other legs and strategies: You know what?: That needs a hell of experience to trade in such a free way. I do not know about you, but I can count the once I know on one hand.
Plan A: A general trading plan for the entry. More or less only the definition of the name of the entry strategy
After we entered the market, our follow up plans have to come in to play. Those follow up plans are as following and those follow up plans are the bone or bones of our whole option trading plan. Here you have free hand to put in what ever you like or think is needed.
Plan A1: For range bound markets
Plan A2: For trendy markets
Plan A3: For strategies which are more complex
All plans (A1, A2, A3)) have to give a clear idea with screen shots or any description needed about the following points:
- Chart picture rules and what ever is needed in dept for the entry levels. Keep that simple !! as hounderts of TA indicator rules are a waste of time and do more damage then any other way. Use either a mechanical system or if you know how to do, use your skills in tape reading or any special knowledge you have. Other wise: Simple,simple, simple.
- Strategy: Name and traded as a whole entry unit or/and what ever follow up is planed.
- Special tools needed for the strategy like confirmation of high OI or what so ever is needed. Also here: Keep it simple.
- Clarity about the order possibility given in your trading platform. By the way: This point is a must. Hope you get the point!
- Your money management plan which includes the amount of position you want to trade. Again: Simple. Fix the amount of money and fix the amount of positions and do not write down a whole book you saw some where. If you have some Rp, calculate the % of that amount and that is your risk and if you can take some more positions which not expand that risk, then that's it. Works as long as you are not a fund manger or have big money to invest in different assets classes.
- Your stop loss in what ever way you want to set that.
- Entry plan with clear defined orders for the entry, the stop loss and the follow up plans (if needed).
- Outworked adjustment plan in what ever way.
- Exit plan which completes the trade or the strategy or follow up plan for trend trading markets.
- And here one of the most forgotten and not done points because of laziness: Profit/loss sheet and trading journal have to be completed after every trading day or after each trade. Here you analyze why you have been successful or why you failed. Got it?
Now as told: That is a framework and each one is free to use what ever she/he thinks is useful or manageable for her/him. If you are more a picture person, work with pictures and if you are more used to work on plain reading, then write down what ever you need. If you are a more experienced option trader, you will have the ability to do a more complex trading plan if you are less experienced, you do it on the level you are. Simplicity is the basic for every level.
Good trading
DanPickUp
Here a little help (Framework) to get some clarity for your trading plan in option trading. I guess some of you really can use it, as not all readers here are experienced in option trading. Even then; Some little experience is needed to do it. Home work has never done any bad to me and it is little home work you may have to do. Keep in mind that some trading plans in option can be done with less market direction knowledge. So do not bring in a whole future trading plan to do option trading. Ok!
The plan shown here is not a plan in which each point is defined and packed with rules and ideas from me. You can choose what you need and you then can write in what you think is important for you. The plan just gives the framework and what you paint in it is your idea. If you want to post it here, you are welcome to do so.
Keep each point very simple. Use screenshots for your chart definitions instead writing down a houndert rules. If you want to write down some thing, write on the chart. Use simple and only a few words how and why you want to do this trade. This some times is much more effective and more easy to understand compare to reading a trading plan word by word but not seeing the chart. I am more a picture guy, means I learn better by seeing some thing on a pictures, but that is me.
Trading plan with the most essential cornerstones for successful option trading:
Every trading plan setup will be defined in a starting trade which is plan A. Plan A is as a general starting plan to enter what ever market. The general entry plan should serve the idea and necessity to stay flexible in what ever the markets followup action is. Plan A can either be a non directional entry set up or a directional entry set up. This plan A is always used as our starting point. This helps to keep option trading a bit more simple as there are so many different ways to start an option trade and most get completely confused about all that possibilities.
So plan A is a simple help and plan A has to be kept very simple. It defines more or less only in general with what kind of option strategy we want to enter the market. That can be as simple as: Long call or long strangle or what ever you prefer. If you do it in that way, you will get the experience with that special strategy and you not will make the mistake to try each time some other kind of option strategy. Entering option trades most of the time with other legs and strategies: You know what?: That needs a hell of experience to trade in such a free way. I do not know about you, but I can count the once I know on one hand.
Plan A: A general trading plan for the entry. More or less only the definition of the name of the entry strategy
After we entered the market, our follow up plans have to come in to play. Those follow up plans are as following and those follow up plans are the bone or bones of our whole option trading plan. Here you have free hand to put in what ever you like or think is needed.
Plan A1: For range bound markets
Plan A2: For trendy markets
Plan A3: For strategies which are more complex
All plans (A1, A2, A3)) have to give a clear idea with screen shots or any description needed about the following points:
- Chart picture rules and what ever is needed in dept for the entry levels. Keep that simple !! as hounderts of TA indicator rules are a waste of time and do more damage then any other way. Use either a mechanical system or if you know how to do, use your skills in tape reading or any special knowledge you have. Other wise: Simple,simple, simple.
- Strategy: Name and traded as a whole entry unit or/and what ever follow up is planed.
- Special tools needed for the strategy like confirmation of high OI or what so ever is needed. Also here: Keep it simple.
- Clarity about the order possibility given in your trading platform. By the way: This point is a must. Hope you get the point!
- Your money management plan which includes the amount of position you want to trade. Again: Simple. Fix the amount of money and fix the amount of positions and do not write down a whole book you saw some where. If you have some Rp, calculate the % of that amount and that is your risk and if you can take some more positions which not expand that risk, then that's it. Works as long as you are not a fund manger or have big money to invest in different assets classes.
- Your stop loss in what ever way you want to set that.
- Entry plan with clear defined orders for the entry, the stop loss and the follow up plans (if needed).
- Outworked adjustment plan in what ever way.
- Exit plan which completes the trade or the strategy or follow up plan for trend trading markets.
- And here one of the most forgotten and not done points because of laziness: Profit/loss sheet and trading journal have to be completed after every trading day or after each trade. Here you analyze why you have been successful or why you failed. Got it?
Now as told: That is a framework and each one is free to use what ever she/he thinks is useful or manageable for her/him. If you are more a picture person, work with pictures and if you are more used to work on plain reading, then write down what ever you need. If you are a more experienced option trader, you will have the ability to do a more complex trading plan if you are less experienced, you do it on the level you are. Simplicity is the basic for every level.
Good trading
DanPickUp
Hi
If you have in plan A, which names the basic strategy you start with, a whole long Iron Condor with all four legs, then you would surely already here in plan A mention that the statistical volatility in the market should be low. Other wise you do not even start the trade as the odds would be against you.
If you have on the other hand in plan A a credit spread, you would not need to mention any thing else. In that case you then could define all other parameters in the follow up plans.
A1 would explain how you trade this credit spread in a range bound market.
A2 would explain how you trade this credit spread in a trendy market.
A3 would explain how you would convert this credit spread in an iron condor by legging in with a put credit spread.
All the mentioned points/cornerstones can be looked at and if needed, you define them new in each follow up plan. If you enter just a simple credit spread and do not plan to convert it later in to an iron condor, you would only in A2 the MM define. If you plan to convert, you also have to mention the MM in A3 as you here define your rules for the leg in from the second credit spread.
Following an example with just a simple credit spread:
Plan A: Credit Spread.
Next step now is to work through all mentioned points/cornerstones. You go through them each time you complete one of the follow up plans A1, A2, A3. In some cases you not have to define anything. Reason to do it the way I show is to be prepared when it happens in the market and not to panic in such situations or not knowing what to do. If done in that way you are really prepared for the market as you have worked out in advance your personal cornerstones.
Plan A1: This plan comes in to play in range bound markets. But simple credit spreads should not be traded in range bound markets. So this follow up plan would not be needed in this case.
Plan A2: As this follow up plan is for trendy markets and simple credit spreads are best traded in such markets, we work through all the mentioned points.
Plan A3: This follow up plan is only used in case I want to convert my credit spread in to a more advanced strategy. As long as this is not in our mind, we not have to do any thing here.
Hope it is clear now.
Good trading
DanPickUp
If you have in plan A, which names the basic strategy you start with, a whole long Iron Condor with all four legs, then you would surely already here in plan A mention that the statistical volatility in the market should be low. Other wise you do not even start the trade as the odds would be against you.
If you have on the other hand in plan A a credit spread, you would not need to mention any thing else. In that case you then could define all other parameters in the follow up plans.
A1 would explain how you trade this credit spread in a range bound market.
A2 would explain how you trade this credit spread in a trendy market.
A3 would explain how you would convert this credit spread in an iron condor by legging in with a put credit spread.
All the mentioned points/cornerstones can be looked at and if needed, you define them new in each follow up plan. If you enter just a simple credit spread and do not plan to convert it later in to an iron condor, you would only in A2 the MM define. If you plan to convert, you also have to mention the MM in A3 as you here define your rules for the leg in from the second credit spread.
Following an example with just a simple credit spread:
Plan A: Credit Spread.
Next step now is to work through all mentioned points/cornerstones. You go through them each time you complete one of the follow up plans A1, A2, A3. In some cases you not have to define anything. Reason to do it the way I show is to be prepared when it happens in the market and not to panic in such situations or not knowing what to do. If done in that way you are really prepared for the market as you have worked out in advance your personal cornerstones.
Plan A1: This plan comes in to play in range bound markets. But simple credit spreads should not be traded in range bound markets. So this follow up plan would not be needed in this case.
Plan A2: As this follow up plan is for trendy markets and simple credit spreads are best traded in such markets, we work through all the mentioned points.
Plan A3: This follow up plan is only used in case I want to convert my credit spread in to a more advanced strategy. As long as this is not in our mind, we not have to do any thing here.
Hope it is clear now.
Good trading
DanPickUp
Dan Passarelli: Options Trading Strategies Interview
Tim Bourquin: Hello everybody and welcome back to TraderInterviews.com. Thanks for joining me for another show this week. We're going to be speaking with Dan Passarelli and Dan is a trader and he's got a website we're going to talk about as well. But we're going to find out about how Dan approaches the markets and finds good trading opportunities as well. So Dan thanks very much for joining me on the phone today.
Dan Passarelli: Thanks Tim. Thanks for having me.
Tim Bourquin: Well, let's talk about your overall philosophy and approach to the markets. What kind of trader do you kind of classify yourself as?
Dan Passarelli: Well when I started out, I started as a market maker and I traded for a number of years down on the floor of the Chicago Board Options Exchange and basically, any trading that I do now, I take from that experience. And without getting too far ahead of ourselves, having learned options there gave me a deep profound understanding of options, which makes me a better trader really in whatever style I execute now.
Tim Bourquin: And there are a lot of former market makers now trading their own accounts, some with varying degrees of success. What is it about being the floor trader that would help you trade now on your own?
Dan Passarelli: Well, you know it's funny as a market maker, a lot of people don't really think about market makers in this regard. But as a market maker, I was always kind of forced to take the wrong side of every single trade. Because I'm there making the market, providing liquidity, buying bids and selling offers when the rest of the world is buying calls in a particular stock, I'm the guy who has to sell them. And so because of that, I got really, really, really good at managing positions. And I also necessarily had to get really good at the really fine nuances of options because I would take really big positions and try and make very small profits. So I had to really get to know the inner workings really, really well.
Tim Bourquin: Well since 90% of traders lose out there, does that necessarily mean that market makers win 90% of the time?
Dan Passarelli: Well, maybe the good ones do. But no, I think that that's kind of a common misnomer about the retail market taker/market maker relationship. Really, it's a symbiotic relationship. Really, they're not in competition against each other at all. In fact, they can both thrive together. Just because a market maker makes money on a trade that he took the other side of it doesn't necessarily that the trader who traded "against the market maker" is going to lose money. They can both make money and that's the beauty of options. It's not a zero sum game.
Tim Bourquin: A lot of people have heard of course the fact that the only option traders who make money are the ones who are selling options, not buying options. What are your thoughts there?
Dan Passarelli: Oh, man I love to talk about this too Tim. That is another one of the biggest misnomers too. Anybody who believes that surely was not trading a year and a half ago when the market fell out of bed. The people who are the income generating traders or the options sellers, most of them got creamed and a lot of them are no longer in business. In order to have longevity in this game, you need to know how to both be an option seller and also be an option buyer. You need to be nimble and you need to be hedged.
Tim Bourquin: So what does it mean then when somebody - I guess the question I should ask then is let's get into how you know when to buy or sell options. I know that's a very general question, but maybe you can just give us some basic information starting out there.
Dan Passarelli: Sure. Well there's a lot to it and I talk about that in my webinar series extensively. That's really a major focus of Market Taker Mentoring and really a niche that I teach my students. And although it requires a really long drawn out conversation, let me kind of give you a little bit of an overview. Whenever you buy options, you're buying volatility. Both in terms of the volatility of the underlying and also in terms of implied volatility, which is the volatility component of options. And likewise when you sell options, you're selling volatility. So therefore if you want to get an edge on any option trade that you make, you need to take a look at that volatility that you're buying or selling and see what its relative expense is. If you're doing things like buying straddles or back spreads or even any trade as simple as buying calls or puts, you need to make sure that the volatility you're buying is cheap. And when you're doing volatility selling strategies, like credit spreads, Iron Condors, Butterflies, even covered calls, you need to make sure that you're selling a high level of volatility.
Tim Bourquin: What do you mean? Let's start by saying, when you say buying and selling volatility, what do you mean by that?
Dan Passarelli: Sure. Sure. Okay. So, you kind of look at it two ways. Let's take a straddle, that's a very classic volatility trade. A straddle is when you buy a call and a put. Now granted if you just buy a call or just buy a put, the concept is the same but you have a directional bias. But if I buy a straddle, every single day that I hold that straddle, I lose money. I lose money on time decay because those options get worthless a little every day. Now when people say that the only way to make money is by selling them, that's what they're looking at and it's an oversimplification. What they're ignoring is the idea that you also have this thing called positive gamma. And what positive gamma allows for is that it allows for when the market goes higher and you're making money, you make money at an increasing rate. And with a straddle, you also make money when the market goes lower and you make money at an increasing rate. Now again, I said, the same holds true even if you just say buy a call. If you buy a call because of positive gamma, when the market goes higher and you're making money, again you make it at that increasing rate. It's an exponential return you're getting. When the market goes lower, granted you lose money, but you lose money at a slower and slower rate the further the market goes down. And that's beneficial too and that's basically the benefit that you get for the detriment of accepting time decay. Now, there's another way we can look at it as well and that's in terms of implied volatility. Implied volatility is this volatility component that's in the pricing of every option and it fluctuates. So if you buy when the implied volatility level is high, it can decline and you can lose money even if the market goes your way.
Tim Bourquin: So the idea then is to constantly monitor these and make adjustments. I mean that's another one of the things that I've heard that traders don't do enough of. It's that they put on a position then just leave it there until it's done. And I guess the more professional option traders are constantly adjusting that position; selling half of it, buying different strike prices, different months out, that sort of thing. Is that correct?
Dan Passarelli: Oh, man absolutely. You know options require traders to be a little bit more active. They're not the kind of investment where you buy a call one day and then three years later you say, "Martha whatever happened to those calls we bought back in 2010?" You know it doesn't work that way. They have an expiration date first of all and second of all there's a lot of moving parts. And time is an important factor that can help you or hurt you and so you've got to be monitoring it all the time to see what the changes that affect the value of that option are doing to it.
Tim Bourquin: What do you recommend to people in terms of what options market they should be in? Should they be trading currency options or index options, what do you recommend?
Dan Passarelli: Well, I've been around the block. I mean I've traded equity options on the floor. I've even traded grain options on the floor and index options and I've traded a lot of stuff. And the reason why I've made a couple of moves here and there going into different markets is because sometimes some markets are better than others and sometimes it kind of flip flops a little bit back and forth. So here's what you want. You want to look for options that have high liquidity. A robust market means that the bid and the ask spread are tighter. That is an important cost in doing business. People spend so much time worrying about trying to save 35 cents in commissions, but they're willing to lose $100 on the bid-ask spread because they're trading something that's too wide. And that's really the primary thing that people have to focus on. It's trading something that's liquid, that's a robust contract where they're not giving too much up to the market. And as far as whether it's volatile or if it's not volatile or if it's an uptrend or a downtrend, that doesn't matter because options are versatile. Whatever the stock is doing or the commodity or whatever it is, is doing, you can find an option strategy to capitalize on that as long as you're not giving up too much to the bid-ask.
Tim Bourquin: So it sounds like you've got to be willing to go to whatever market is the hot market right then and trading well and it has that narrow spread?
Dan Passarelli: Yeah. Yeah. Liquidity is king. That's what makes the difference. If you're a smart option trader, even if the stock is not moving at all, it's the most boring stock in the world. You can find a strategy to make money on it.
Tim Bourquin: One of the things I've heard traders say is they get into it because they see options as an inexpensive way to trade because maybe they see something that's $1, $1.30 a contract or even those lower ones. You'd find those ones that are way out of the money, 30 cents or something along those lines. But then they also read these books like the Black Scholes' method or what not and it seems pretty complicated once they get in there and try all these different strategies. How should somebody start in terms of what to do? Is it as simple as covered calls or what should they be doing?
Dan Passarelli: Well the first step is to get some education, okay? And I realize that that sounds like a little bit of a copout answer at first but here's the thing. You need to be very, very prepared to trade options. The people who are making money are the people who understand the product. And even when you start out, you'll probably start out with some fairly basic trades, like maybe going out and simply buying a call or it may be a covered call like you mentioned. But because like you said traders need to know how to adjust and that's what the good successful traders do is they know how to make those adjustments. You've got to understand options more than just a simple strategy you're putting on now because you might adjust it and make it a little bit more complex.
Tim Bourquin: So is every trader's edge different or is there one edge that you need to find in option trading?
Dan Passarelli: Well, there's one methodology that I teach all my traders. Now I teach them slightly different given their personality and given their background and what they already know and what they need to know. But I'll give you a little bit of an insight into my trading path that I lead all my traders down. I teach them how to analyze the technicals to get edge. I teach them how to analyze fundamentals in order to get edge and I have a very straightforward approach at that. And then most importantly, I teach them how to analyze volatility and get a volatility edge.
Tim Bourquin: Explain what you mean when you say, get a volatility edge.
Dan Passarelli: Sure. Well, this goes back a little bit to what we were talking about before, about buying low volatility and selling high volatility. A lot of traders out there, you know they kind of know that volatility has something to do with options. But in general I found that most of the people who come to me looking for education really don't understand volatility. And they don't really understand all the power that it has in order to help you get edge and in order to help you buy cheaper options and sell more expensive options. Now let's look at just simply buying a call again. Let's back up for one second. If I buy a call at two bucks, maybe my goal is to sell it at $2.50 because the market - you know I'm bullish. Maybe I want to make 25% or maybe even 50%. Now what if I told you that you could make an extra, oh I don't know let's just be conservative and say 2% on every single trade you make. And let's say on your losers, you'd lose 2% less on every single trade you make. Now there's a lot of people out there who are pretty happy to beat the market, and there are some people who are a little bit more aggressive who want to maybe double what the market's doing, you know the S&P 500. I'm being very, very conservative by saying if you use volatility to gain edge on every trader, your winners will be bigger and your losers with be smaller on every trade. Now you're going to have winners and you're going to have losers but that edge adds up over time. It's much the same way that a casino thinks. I'm teaching you to stop being a gambler and to start being basically like a casino. I want you to be in the business of statistics, not just in the business of trying to take a chance and get lucky.
Tim Bourquin: All right. Well, we've obviously just barely scratched the surface here. So, what you can do is scroll down just a little bit on this page here and you'll see a link to Dan's site and we'll send you over there and you can check out all that he has to offer. Dan thanks very much for spending some time on the phone with me and talking about options. I know it's a big interesting subject for a lot of people, there's a lot to learn. So, thanks for your time.
Dan Passarelli: Thank you Tim. I love doing interviews like these and talking to people.
Source: (http://www.traderinterviews.com/free/Dan-Passarelli-Option-Trading-Strategies.php)
Tim Bourquin: Hello everybody and welcome back to TraderInterviews.com. Thanks for joining me for another show this week. We're going to be speaking with Dan Passarelli and Dan is a trader and he's got a website we're going to talk about as well. But we're going to find out about how Dan approaches the markets and finds good trading opportunities as well. So Dan thanks very much for joining me on the phone today.
Dan Passarelli: Thanks Tim. Thanks for having me.
Tim Bourquin: Well, let's talk about your overall philosophy and approach to the markets. What kind of trader do you kind of classify yourself as?
Dan Passarelli: Well when I started out, I started as a market maker and I traded for a number of years down on the floor of the Chicago Board Options Exchange and basically, any trading that I do now, I take from that experience. And without getting too far ahead of ourselves, having learned options there gave me a deep profound understanding of options, which makes me a better trader really in whatever style I execute now.
Tim Bourquin: And there are a lot of former market makers now trading their own accounts, some with varying degrees of success. What is it about being the floor trader that would help you trade now on your own?
Dan Passarelli: Well, you know it's funny as a market maker, a lot of people don't really think about market makers in this regard. But as a market maker, I was always kind of forced to take the wrong side of every single trade. Because I'm there making the market, providing liquidity, buying bids and selling offers when the rest of the world is buying calls in a particular stock, I'm the guy who has to sell them. And so because of that, I got really, really, really good at managing positions. And I also necessarily had to get really good at the really fine nuances of options because I would take really big positions and try and make very small profits. So I had to really get to know the inner workings really, really well.
Tim Bourquin: Well since 90% of traders lose out there, does that necessarily mean that market makers win 90% of the time?
Dan Passarelli: Well, maybe the good ones do. But no, I think that that's kind of a common misnomer about the retail market taker/market maker relationship. Really, it's a symbiotic relationship. Really, they're not in competition against each other at all. In fact, they can both thrive together. Just because a market maker makes money on a trade that he took the other side of it doesn't necessarily that the trader who traded "against the market maker" is going to lose money. They can both make money and that's the beauty of options. It's not a zero sum game.
Tim Bourquin: A lot of people have heard of course the fact that the only option traders who make money are the ones who are selling options, not buying options. What are your thoughts there?
Dan Passarelli: Oh, man I love to talk about this too Tim. That is another one of the biggest misnomers too. Anybody who believes that surely was not trading a year and a half ago when the market fell out of bed. The people who are the income generating traders or the options sellers, most of them got creamed and a lot of them are no longer in business. In order to have longevity in this game, you need to know how to both be an option seller and also be an option buyer. You need to be nimble and you need to be hedged.
Tim Bourquin: So what does it mean then when somebody - I guess the question I should ask then is let's get into how you know when to buy or sell options. I know that's a very general question, but maybe you can just give us some basic information starting out there.
Dan Passarelli: Sure. Well there's a lot to it and I talk about that in my webinar series extensively. That's really a major focus of Market Taker Mentoring and really a niche that I teach my students. And although it requires a really long drawn out conversation, let me kind of give you a little bit of an overview. Whenever you buy options, you're buying volatility. Both in terms of the volatility of the underlying and also in terms of implied volatility, which is the volatility component of options. And likewise when you sell options, you're selling volatility. So therefore if you want to get an edge on any option trade that you make, you need to take a look at that volatility that you're buying or selling and see what its relative expense is. If you're doing things like buying straddles or back spreads or even any trade as simple as buying calls or puts, you need to make sure that the volatility you're buying is cheap. And when you're doing volatility selling strategies, like credit spreads, Iron Condors, Butterflies, even covered calls, you need to make sure that you're selling a high level of volatility.
Tim Bourquin: What do you mean? Let's start by saying, when you say buying and selling volatility, what do you mean by that?
Dan Passarelli: Sure. Sure. Okay. So, you kind of look at it two ways. Let's take a straddle, that's a very classic volatility trade. A straddle is when you buy a call and a put. Now granted if you just buy a call or just buy a put, the concept is the same but you have a directional bias. But if I buy a straddle, every single day that I hold that straddle, I lose money. I lose money on time decay because those options get worthless a little every day. Now when people say that the only way to make money is by selling them, that's what they're looking at and it's an oversimplification. What they're ignoring is the idea that you also have this thing called positive gamma. And what positive gamma allows for is that it allows for when the market goes higher and you're making money, you make money at an increasing rate. And with a straddle, you also make money when the market goes lower and you make money at an increasing rate. Now again, I said, the same holds true even if you just say buy a call. If you buy a call because of positive gamma, when the market goes higher and you're making money, again you make it at that increasing rate. It's an exponential return you're getting. When the market goes lower, granted you lose money, but you lose money at a slower and slower rate the further the market goes down. And that's beneficial too and that's basically the benefit that you get for the detriment of accepting time decay. Now, there's another way we can look at it as well and that's in terms of implied volatility. Implied volatility is this volatility component that's in the pricing of every option and it fluctuates. So if you buy when the implied volatility level is high, it can decline and you can lose money even if the market goes your way.
Tim Bourquin: So the idea then is to constantly monitor these and make adjustments. I mean that's another one of the things that I've heard that traders don't do enough of. It's that they put on a position then just leave it there until it's done. And I guess the more professional option traders are constantly adjusting that position; selling half of it, buying different strike prices, different months out, that sort of thing. Is that correct?
Dan Passarelli: Oh, man absolutely. You know options require traders to be a little bit more active. They're not the kind of investment where you buy a call one day and then three years later you say, "Martha whatever happened to those calls we bought back in 2010?" You know it doesn't work that way. They have an expiration date first of all and second of all there's a lot of moving parts. And time is an important factor that can help you or hurt you and so you've got to be monitoring it all the time to see what the changes that affect the value of that option are doing to it.
Tim Bourquin: What do you recommend to people in terms of what options market they should be in? Should they be trading currency options or index options, what do you recommend?
Dan Passarelli: Well, I've been around the block. I mean I've traded equity options on the floor. I've even traded grain options on the floor and index options and I've traded a lot of stuff. And the reason why I've made a couple of moves here and there going into different markets is because sometimes some markets are better than others and sometimes it kind of flip flops a little bit back and forth. So here's what you want. You want to look for options that have high liquidity. A robust market means that the bid and the ask spread are tighter. That is an important cost in doing business. People spend so much time worrying about trying to save 35 cents in commissions, but they're willing to lose $100 on the bid-ask spread because they're trading something that's too wide. And that's really the primary thing that people have to focus on. It's trading something that's liquid, that's a robust contract where they're not giving too much up to the market. And as far as whether it's volatile or if it's not volatile or if it's an uptrend or a downtrend, that doesn't matter because options are versatile. Whatever the stock is doing or the commodity or whatever it is, is doing, you can find an option strategy to capitalize on that as long as you're not giving up too much to the bid-ask.
Tim Bourquin: So it sounds like you've got to be willing to go to whatever market is the hot market right then and trading well and it has that narrow spread?
Dan Passarelli: Yeah. Yeah. Liquidity is king. That's what makes the difference. If you're a smart option trader, even if the stock is not moving at all, it's the most boring stock in the world. You can find a strategy to make money on it.
Tim Bourquin: One of the things I've heard traders say is they get into it because they see options as an inexpensive way to trade because maybe they see something that's $1, $1.30 a contract or even those lower ones. You'd find those ones that are way out of the money, 30 cents or something along those lines. But then they also read these books like the Black Scholes' method or what not and it seems pretty complicated once they get in there and try all these different strategies. How should somebody start in terms of what to do? Is it as simple as covered calls or what should they be doing?
Dan Passarelli: Well the first step is to get some education, okay? And I realize that that sounds like a little bit of a copout answer at first but here's the thing. You need to be very, very prepared to trade options. The people who are making money are the people who understand the product. And even when you start out, you'll probably start out with some fairly basic trades, like maybe going out and simply buying a call or it may be a covered call like you mentioned. But because like you said traders need to know how to adjust and that's what the good successful traders do is they know how to make those adjustments. You've got to understand options more than just a simple strategy you're putting on now because you might adjust it and make it a little bit more complex.
Tim Bourquin: So is every trader's edge different or is there one edge that you need to find in option trading?
Dan Passarelli: Well, there's one methodology that I teach all my traders. Now I teach them slightly different given their personality and given their background and what they already know and what they need to know. But I'll give you a little bit of an insight into my trading path that I lead all my traders down. I teach them how to analyze the technicals to get edge. I teach them how to analyze fundamentals in order to get edge and I have a very straightforward approach at that. And then most importantly, I teach them how to analyze volatility and get a volatility edge.
Tim Bourquin: Explain what you mean when you say, get a volatility edge.
Dan Passarelli: Sure. Well, this goes back a little bit to what we were talking about before, about buying low volatility and selling high volatility. A lot of traders out there, you know they kind of know that volatility has something to do with options. But in general I found that most of the people who come to me looking for education really don't understand volatility. And they don't really understand all the power that it has in order to help you get edge and in order to help you buy cheaper options and sell more expensive options. Now let's look at just simply buying a call again. Let's back up for one second. If I buy a call at two bucks, maybe my goal is to sell it at $2.50 because the market - you know I'm bullish. Maybe I want to make 25% or maybe even 50%. Now what if I told you that you could make an extra, oh I don't know let's just be conservative and say 2% on every single trade you make. And let's say on your losers, you'd lose 2% less on every single trade you make. Now there's a lot of people out there who are pretty happy to beat the market, and there are some people who are a little bit more aggressive who want to maybe double what the market's doing, you know the S&P 500. I'm being very, very conservative by saying if you use volatility to gain edge on every trader, your winners will be bigger and your losers with be smaller on every trade. Now you're going to have winners and you're going to have losers but that edge adds up over time. It's much the same way that a casino thinks. I'm teaching you to stop being a gambler and to start being basically like a casino. I want you to be in the business of statistics, not just in the business of trying to take a chance and get lucky.
Tim Bourquin: All right. Well, we've obviously just barely scratched the surface here. So, what you can do is scroll down just a little bit on this page here and you'll see a link to Dan's site and we'll send you over there and you can check out all that he has to offer. Dan thanks very much for spending some time on the phone with me and talking about options. I know it's a big interesting subject for a lot of people, there's a lot to learn. So, thanks for your time.
Dan Passarelli: Thank you Tim. I love doing interviews like these and talking to people.
Source: (http://www.traderinterviews.com/free/Dan-Passarelli-Option-Trading-Strategies.php)
Jon Najarian on Options and Risk Management
http://www.youtube.com/watch?feature=endscreen&NR=1&v=6VaI1zNRbao
http://www.youtube.com/watch?feature=endscreen&NR=1&v=6VaI1zNRbao
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