Archive for the 'paper trading' Category
Well .. I am delighted to say that last months trading produced a 24.4% return on margin .. not an outstanding outcome by some standards, but a healthy yield on investment for that one month, just the same. But do remember .. I am still paper trading.
As I have previously mentioned, knowing how to trade options with confidence involves a number of factors.
I thought to share with you today some of my own perceptions when I came to close off trading for the month of April. I stress .. these are just a few things which got me to thinking, as a newcomer to the world of online options trading.
It is recommended that one does not try to extract maximum profit by holding on right through to expiry. It is not uncommon to see quite a lot of price volatility in the last week of trading and so it is strongly recommended that for most situations you close off no later than a week or so before expiry date. So effectively that is around 7-10 days before.
With April trading I decided to close off on the Thursday before Easter figuring that by holding off to when trading re-opened on the Tuesday I might strike problems with price movements. In retrospect a good move, but I had also placed some opening positions on for May a couple of days earlier.
I won’t pretend that I have mastered the Think Or Swim trading platform fully but I’m getting there by degrees. One of the first things I observed was that trading results for the two months were scrambled together in the listing of positions on and I was left to guess which keystrokes to use to highlight the spreads I wished to close out (my fault solely, as I should have familiarized myself with that first) . That was after I had to put on my thinking cap to establish just which of the trades showing up, I wanted to close out.
On the day before (The Wednesday) I’d seen quite a profit hike but the trend was to be reversed on the Thursday as prices moved against me. No great drama because I was well ahead for the month as I said .. but hassles I’d have preferred not to encounter when things started to heat up.
It is recommended that when trading options for any given month you set up your spreads between 30 to 40 days before expiry. I had put the May spreads on nearer the 40 days and this gave rise to the overlap. Next month, I will place my opening positions on, nearer the 30 days and after I have closed out May. This is something I would be recommending to newbie traders, at least until they feel they have completely mastered the TOS platform. This will overcome any prospect of confusion when it comes to closing out and putting on the new trades. Another reason for doing this is because shortly after placing the positions I had price move quite quickly up on me and I was forced to adjust. Then followed a few days of sideways movement so I made the decision to add a few more positions across all of the indexes. And now again I see price creeping up a bit .. so the next few days may prove interesting.
My journey through the world of online options trading I find increasingly fascinating, with each day bringing just a little more newfound knowledge and a ton of excitement as I master the art and science of how to trade options profitably and with confidence.
Well I guess I could have opted for a couple more add-ons to the title, but then it would have ended up extra long and looking rather silly. I am holding off with the post continuing on with my discussion of the Greeks just for a day or two. Fact is I’ve broken some more rules .. and ignored some I’d covered earlier. Result .. not a good month! But .. fortunately still .. I am only paper trading. And .. I have learned once again .. how not to trade options.
Mistake No 1: I abandoned a multi-directional approach, preferring to just stick with the one type of spread .. the Iron Condor. The reason was because I was coming up with good starting positions, and having trouble getting the nice two peaks I wanted with Double Calendar spreads. Nothing wrong with Iron Condors but they are just a little less forgiving than Double Calendars. Rather than spread over 5 indexes I would have been better to have put my Iron Condors on just a couple until I’d got my head around the Double Calendars.
Mistake No 2: Greed!!! Rather than opt for a single position on each index, in some instances I opened with two or three. You know how it is. Just so any profit would be half way decent. Ha! Ha! Definitely not recommended when you start out. The problem is when you have to adjust (and in this market you do), that may mean you need to put another 3+ positions on each index in order to correct. And then later .. maybe a few more. Suddenly, you have exceeded your budget ending up with a higher margin than you intended. Ok .. so what .. if you are paper trading? It makes sense does it not to simulate the real world scenario? Why would you have a margin of $10,000, when trading for real you would limit yourself to $6,000. And .. then nearing expiry date you encounter something like the massive upswing we have seen in the market, which has seen me backed up against a fence, ill prepared to counter the late movement.
Mistake No 3: More greed!!! Hanging on in for that little bit more, when if I had exited a wee bit earlier things would have been quite different.
Mistake No 4: Settling for second best spread positions. By this I mean ‘so so’ spreads where the break even points were too close together, thus leaving little room to move. I made this mistake with two of the spreads I put on. The others were fine.
Mistake No 5: Still not getting up to speed with ALL possible corrective measures. That has meant I’ve been left in a bit of a spot this last 3 days. And .. there are still a few more days to expiry.
So .. it is back to the drawing board and time to fire up those videos again. On the positive side I know just where my failings lie. The next step though is to not keep on repeating the same old practices, but to stick with the tried, true and tested formula for ensuring that one can learn how to trade options with confidence.
When learning how to trade options, it is vital we understand that in order to trade profitably we must “manage by the numbers”; just as we would in any bricks and mortar business. You may have got the impression that trading options is just about placing spreads as opposed to individual trades; partly right, but there has to be a bit more to trading than that. And .. that does not mean that we have to go big on technical analysis using our charts and graphs.
Enter The Greeks! In a nutshell the Greeks are the numbers that you need to know in order to manage your portfolio of trades profitably. So let’s delve a little deeper. The Greeks which concern us are Delta, Vega, Theta and Gamma . In explaining these I will use as examples one of the paper trades which I have on for the month of March.
Fortunately, on the Think or Swim platform, I am able to set up The Greeks so that I have them showing in my Monitor Screen layout and at a glimpse I can see how things are shaping up.
Delta .. is the measurement of change which occurs in an option’s value. With regards the positions I have on in the EEM index, Delta reads at -23.32. In other words I am ‘short’ approximately 23 Delta. Now think of these 23 Delta as being 23 shares of stock which are short. In other words, 23 shares of stock which I have sold but don’t actually own, but which I have ‘borrowed’. In order to make a profit I want my shares to go down. If the price of the shares should go up, then for every $1 rise in the share price , I would lose approximately $23. If the shares should go down by a dollar, then conversely I stand to profit by approximately $23. Think of Delta in this light. Given the other Greeks which I will now turn to .. this is a relatively neutral Delta and is in fact not such a bad position to be in.
Gamma .. is the measurement of change of an option’s Delta, resulting from a 1 point move in the underlying stock. It is not a variable directly of the price of the option; it is a measurement of the change of the Delta. On the EEM, Gamma is -29.37. In other words I am short Gamma. The particular spread I have on is the Sale of an Iron Condor – involving the sale of a 24 call protected by a 26 call and the sale of an 18 put protected by a 16 put. So I’m short both calls and puts and therefore the last thing I want is for the market to move too much on me. We shall see.
In my next post I shall continue on examining both Theta and Vega which you will need to understand if you are to know how to trade options with confidence and I will also provide you with a brief explanation of another one of the Greeks .. Ro. You will also be given a look-in on my present trading activity, which has had its ups and downs this last few days. Fortunately, right now .. things are not looking too bad.
I just thought to quickly give you folks an update on my paper trading activity. It is important when learning how to trade options that one learns by one’s mistakes.
The month of February has seen share prices dancing around all over the place. So what are some of the things I have learned from my paper trading activity?
1. If you live outside of the USA (we are here trading options based on underlying American indices and stocks) think out your time zones. Don’t go in to check your positions and make adjustments in the last half hour or so of trading. Better to know if a position you have put on has been accepted before days end.
2. If starting out it may be best to focus just on indices because they are inclined to less volatility than any one stock. Although there may be benefits in hedging with a stock which may run against the general tide with price, I feel it best to test the waters with just three or four of the indices to start. IBM has been tracking upwards this last couple of months or more but the release of the earnings report on Jan 20th saw prices move from around 81 to a high of 97, with me going into negative territory. I have however profited by the downwards move in the last day or so, pulling a profit of $110 just in this last day .. but the overall position for this stock is still a loss of $95, as at today.
Fortunately, I had wide breakeven points on both the SPY and the IWM. Although suffering a combined loss of around $46 on both these positions today, they are still looking pretty healthy, with an open profit of around $200. I will probably close out the SPY tomorrow because the rate of Theta decay is only around $2 a day .. and we are getting very close to expiry anyway. So better to get out now while I am ahead. The EEM posted a $65 profit yesterday bringing me out of a small loss situation into positive territory.
Theta decay? Volatility? More to come on these later.
3. I am not likely to see much of a profit arising in IBM before expiry date (indeed there may well be a small loss). But given my bumbling with adjustments (remember I am still learning and getting my head around these), and the fact that because of this I did at one point allow myself to get outside one of my breakeven points, I feel the lesson has not been too painful. Will I take IBM right through to expiry? I don’t know .. but will certainly be watching it closely over this next day or two.
4. Have a solid plan in place. Watch your margins carefully. I have thrown a bit more “cash” into the pot .. with margin now being around the $3,000 and profit to date of around $900. Not a bad return I am sure you would agree, but in a real life situation I would probably not have started out with quite so much – so try and stick with what you would do when you come to trading for real.
5. If prices are moving around a bit and your profit position looks good, don’t be afraid to close down your position and take your profit. I should have probably done that with the SPY today.
6. Put the time in to studying your charts. Although I have done this, placing in my channel lines and support and resistance points (yep .. I will cover this soon), positions may have been improved upon, with a little more time taken for analysis.
Tomorrow I will be looking at the March options. But this time round I will be documenting everything I do, setting a margin limit, focusing solely on indices, and analysing carefully the effect of each and every adjustment made. Then, I know I will be well on the right way to learning how to trade options as a business.