February 10, 2009

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.

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