frankz00

trade options successfully
The perfect speculative instrument 4 years ago

I started studying options about eight months ago and I have to say that options are the perfect speculative instrument. I’ve always had a hunch about which direction certain stocks are going to go but I’ve never really had enough money to place the big bets and profit largely off of them them.

Options magnify the effect of rises and falls in stock. So for a fraction of the share price, you can bet on the direction of a stock and be rewarded greatly for being correct or punished severely for being wrong. However, you’re only putting up a fraction of the money that you would if you were buying the stock. If you’re smart and you don’t put all your money into one option (which would be stupid), you can manage your risk.

I’ve come up with 5 rules for trading options. They are:

1) Buy your option at least 6 months into the future.

2) Buy your option when as close to the stock price as you can possibly afford.

3) Be aware that you run the risk of losing EVERYTHING that you put into an option and act accordingly.

4) Don’t put all of your money into a single option.

4a) Don’t pump as much money into an option as you would a stock. Stocks don’t expire, options do.

5) Be right (or lucky) at least ONCE between the time you buy the option and the time the option expires.

5a) Know when you’re right. If you hit a homerun on an option, sell it and move on. A missed opportunity to sell an option can prove deadly.

Nov 20, 2005, 09:05AM PST


Comments:

Got Papi? (Papacito) is headed back to Microsoft! :D

Straddles and spreads ...

Hey, for all of you that ARE trading options as a speculative tool (I am NOT) ... you would want to learn about straddle and spread positions.

Holding options naked (without some hedge) is an extremely dangerous/aggressive proposition.

Straddles, spreads are a means to mitigate some of that risk without needing the capital to write covered calls.

Good luck. And be careful. ;)

.DaveFer

Dec 06, 2005, 10:52AM PST | Thread | Respond to this

frankz00

While I understand the goal of hedging with the use of straddles and spreads, I think money management is a better way to mitigate risk. I use the fact that my positions are far out and I’m using limited funds as my hedge. My approach is high risk/high return oriented.

There is something that I did leave out in my original comment and that is I would NOT recommend options for a beginning investor. I would only feel comfortable recommending them to some that has had a couple of years investing experience.

Also, it’s important to have lost your ass investing. I’m being a bit facetious but the point is you have to accept the fact that not all of your trades are going to be winners. The key is to make your trading profitable as a whole. But once you’ve had your big loss, you’re either ready to get out or be serious about managing risk.

Dec 09, 2005, 01:27PM PST | Respond to this

rodo

Managing your risk by managing your money? How general can you get man. You’re going to mislead a crap load of people that may want to learn options.

Money management is a NEED. You NEED to do it whether or not you are investing. You manage risk by knowing about the trade you’re getting into.

If you get into an option 6 months ahead, you area paying way too much for time value vs intrinsic value.

Papacito is correct in assuming 1.5 months is a good time to get into an option. He is also correct in using spreads as a speculative tool that limits upside and downside potential.

But hey, with a spread, you can still regularly get 20-150% returns and way more if you leg into the trade 1 position at a time.

Also, you do not need to already have experience in stocks to start options. Options are great for the beginning trader because they are cheap and they entail that you learn how to analyze stocks in a way you will never do by investing in stocks alone.

All it boils down to is knowing your strategy, having an entrance and exit plan and being consistent with those things all the way through.

Before that, you need some education. This education is by far the most important factor.

It will take time, but any snot nosed kid, low income demographic or high school teenager can learn the material easily and relatively well in about 6 months to a year if they were diligent or at least had a good instructor.

So friends, start your education now. you won’t regret it. There are many sites out there than you can get informed on.

I would recomment Investools as your first step.

Nov 28, 2006, 09:08AM PST | Thread | Respond to this

frankz00

I’ll just say I don’t agree that you can jump right into it. I’ve seen people lose their a$$es by seeing the dollar signs of options investing. One should have a firm foundation in at least watching how stocks move before investing a penny into options.

Nov 28, 2006, 09:29AM PST | Respond to this

rodo

i didnt say they should jump into it. i said, “start their education now”.

if they do it properly, they will know not to just jump into it.

a ”...firm foundation in at least watching how stocks move…”

is what an education gets you. its not rocket science and its not about luck.

its about consistency and discipline. luck is involved, but consistency wins you the game. just like with most things in life.

stop misleading people with your general comments on options. its true they can lose a lot of money in it. that is why you cant be so general. you cant also say “ooooh you need to be experienced.” because again, you don’t need to be.

if the video game addict generation playing all those mmorpgs right now suddenly got into options, i kid you not, in a year’s time, a good majority of those kids and young adults will be making very good money—assuming they apply the same obsessive behavior in learning the options game as World of Warcraft.

and honestly people, if you read any of frankz’s tips, do not and i repeat DO NOT buy an option 6 months ahead unless you’re doing a LEAPS.

you will all know what a LEAPS is after you educate yourselves.

all of you can do it. just dont do it the way frankz is doing.

and yes i sound mean, why? because i want people to do options. its not a zero sum game. everyone can make money. at the same time, i dont want ppl mislead and end up losing their money.

Nov 28, 2006, 09:46AM PST | Thread | Respond to this

frankz00

Hey, I’m not the reason your boss or wife chewed you out this morning so you need to get off of my ass. I posted what works for ME. If you have a different method that works, fine, share it. But don’t jump on my back (anonymously) because it doesn’t agree with your godly view that you must buy options a week before they expire.

I buy them further out because they are generally safer. If you don’t like that, DON’T DO IT. I’m sorry I’m not an adrenaline junkie.

And to say everyone wins in options is just ridiculous. Someone writes the call or put. It’s not magic!

Nov 28, 2006, 10:13AM PST | Respond to this


 

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