Sunday, August 21, 2005

My Recent Successful Trades

These were 2 of the trades that I've closed recently, with Deere and Co (DE) earning me a profit of 1,100% ($330)and Abercrombie & Fitch Co. (ANF) earning me an incredible 2,033% profit of $305. This is the leveraging power of options which could let you earn a decent profit for a small outlay of investing capital. By the way of the total costs of the above put contracts were $45.

You might ask why I bought puts for the above stocks which have performed well in their previous earnings quarters. First of all, I want to reiterate that you should try to buy an option, whether its a call or put option, in anticipation of an event, in this instance, earnings announcement. Try not to buy an option after the event has happened, with the exemption of stock splits that I've mentioned earlier.

Now, why did I buy puts. First of all, I felt the general market was bearish. A few days earlier before DE and ANF announced their earnings, the oil price hit $65 a barrel. A few counters were hammered indirectly by this news, for example Red Robin Gourmet Burgers Inc (RRGB) plunged over $12 on 12 Aug 2005 though it beat Q2 EPS but lowered its earnings guidance for Q3 and Y05. That made me a bit cautious about buying call options.

Although I've decided to buy puts for the above mentioned stocks ie. DE & ANF, I wanted to keep my risks minimal so I bought Aug just OTM put option for both counters which would expire in a few days time. The time value wasn't substantial thus I was able to fetch the put options cheaply at $30.00 and $15.00 per contract respectively. But I would advise against buying options with less than 2 months of expiration date because if you have anticipated the direction of the stock wrongly after earnings announcement, you would most probably be left with insufficient time for the stock price to turn around. Thus, do trade cautiously and don't bet the whole farm buying loads of cheap options hoping to reap giant profits in anticipation that the stocks would gap in the correct direction after earnings every time. Try investing only 5% of your capital on any option positions so that if you were wrong, your account would not suffered a big blow with one bad trade. I have ever encountered a series of bad trades in a row and luckily because I kept every position at 5% of my capital, I was able to retain some capital to open new positions after a few drawdowns.

Yours Truly,

Tony Chai
Options Trading Resources

Saturday, August 20, 2005

Profit from Stock Splits

One technique that I've been able to obtain some success trading options is to buy a 2-months out call option when a stock just announced stock splits.

Generally, stock splits occur when shares have risen to a price where the management felt that it's advisable to split them so that they would be more affordable to investors. For example in a 2-1 stock splits, a share selling at $100 would become 2 shares of $50 after the stock splits execution date.

There are various kinds of stock splits, the common being 2-1 & 3-2. The stock would gap up in most instances when the stock splits is announced. If the trend is generally bullish, the stock will rise gradually from the time the announcement were made till the stock split execution date, which is usually about 1 month away. Sometimes at the execution day of the stock splits, the stock may even gap up further if the stock is a sector or industry leader.

I have found more successes buying call options using the stock splits technique for shares which are industry/sector leaders having a daily trading volume of at least 1 million shares. Moreover, I only stick to shares announcing 2-1 splits and of course the shares have to be optionable.

I don't necessarily hold the call option till the stock splits execution date hoping it will gap up on that day. If I've found that the stock has risen to a profitable position after holding the call option for a while but has started showing signs of trend reversal, I would not hesitate to sell the option for a nice profit.

To check whether a particular share is an industrial/sector leader, you can go to, key in the ticker symbol and click on the "Industry" link on the left. Then scroll down to see the "Market Capitalization" information and check whether it is ranked at least position 1 or 2. You can also check the trading volume in the same web-site.

To get email alerts of stock splits the moment that they are announced, I would recommend that you subscribed to It's free.

I hope you would have profitable options trades using this method. I do want to advise you to paper trade and see whether it's effective before you trade with real money.

Get Cheaper Books on Trading Here

Stock options trading is a life-long learning journey where you've just have to keep on upgrading your knowledge on the stock market, be it the fundamental or technical aspects of it.

I've found the following web-site to be extremey useful whenever I wanted to stock up any books about trading. Currently, they are running a special offer where DVDs and video tapes on various trading techniques are selling at an incredible price of $9.99!! But this offer will lapse soon, so do grab this opportunity fast. If you miss this offer, do check back the website now and then for other sweet bargain on trading books. Any money saved buying cheaper trading boks could be plough back to your trading account. I hope you find this web-site useful.

Friday, August 12, 2005

Don't be Greedy

Mistake #2 - Buying back the option when you just profited from selling it.

You know, there are 2 emotions which you would need to control in trading - fear and greed. This mistake is about greed. Have you ever bought a option contract and it gapped (up or down) on certain news alert or from an anticipated event. You were elated when your option gained some profit from this sudden movement and you promptly sold the option.

After selling your option, you thought there's no harm looking at development of the stock which you've just sold your option. But your smile turned to frustration as the stock you just sold off your option keeps going up steeply and you saw the option keeps gaining money which you could have potentially gained if you didn't sell off too soon.

So, you know what, greed stepped in and twisted your thinking. Thinking that you are a moron for selling too fast, you impulsively buy back the option (which could be quite expensive after gaining much value in such a short time) and felt so proud thinking you could reap further gains from this re-buying. But sometimes life just luvs to play tricks on us. The moment you buy the option, the stock starts to drop, and fast too. UUUHHHH !! Oh No !! Your earlier profits were erased from this stupid dip. NOW you STUBBORNLY refused to sell your option because you just couldn't take the reality that your nice little gain is wiped off. "I HAVE TO WIN IT BACK!!!". You keep telling yourself that. But alas the stock keeps dropping and you finally woke up and sell the option at a loss.

The solution is : Once you sold an option for whatever profit, be contended with it. To rid yourself of the emotional ups & downs of selling too early if it keeps going according to your trend, set a trailing stop so that you could keep riding on the profit if it trends favourably. If there is a reversal of trend and your trailing stop loss is triggered, at least you would still exit with a nice profit. As long as the market is alive, you have tonnes of opportunities to gain more profits from other counters in another day; as long as you applied the technique consistently which would help you pick winning options trades.

Costly Mistakes

I've learnt my options trading mistakes through the hard way by losing money with them, I hope you could avoid them by learning from mine.

Mistake #1 - Trading options like a stock

Yes, the underlying asset of the options I trade are stocks, but that doesn't mean I should trade options like I would trade stocks. As I've earlier mentioned, options are depreciating assets. This means that if an event which you anticipate did not happen within the contract period of your stock option, you would have to sell your option quickly hopefully at a small loss (since the time value portion would have depreciated substantially) or you would stand to loss the entire money paid for the option premium if you simply let the option expire worthless.

I've read books written by stock market "gurus" which advocate buying a stock after it has broken its resistance line and sell a stock when it has broken its support line. The mistake I made was that I've bought the stock option & thought that the stock would move quickly in my anticipated direction. Sometimes when a stock breaks out from its resistance or support line, it might consolidate for a while before it moves further in the trend it established. So, if you hang on to the option hoping it will move up (if resistance line is broken) or move down (if support line is broken) but it didn't happen before the expiration month of your option, you are going to see your option contract lose money quickly because of the effect of decaying time value.

The way to make money from this solution is : If you see volume building up (from the stock chart) and the stock is about to break out from its resistance or support line, buy at least a 2-months out option before the resistance or support line is broken and IMMEDIATELY sell the option the moment the breakout occur. One thing about option is that once an anticipated event has occurred (in the case breaking out from its resistance or support line), the option would still lose value because its implied volatility has also erode. So, sell the option quickly, hopefully for a profit, when the breakout occurs.

Tony Chai

Wednesday, August 10, 2005

Why Options?

So why trade options?

Well, one good advanatge of options is its high leverage power. For example you think IBM shares would go up. As of 9 Aug, 2005, it costs $83.50 per share. If you want to buy 100 shares, that would cost you $8,350. If in a week's time, IBM rise to $90, you would gain $650 for a nice 7.8% profit. You would need to pay out-right $8,350 to earn $650, unless your brokerage account has margin facility where you foot only a certain % of $8,350 to buy 100 IBM shares.

When you buy options, similarly if you think IBM shares would rise, you would buy a call option (you buy a put when you anticipate the share to drop - think of 911 when airline stocks plunge). Let's say you buy a IBM Sep 85 Call contract when the share price is at $83.50, you would pay only about $116 ($1.16 x 100) per contract. Options are sold at 100 shares per contract. In the same scenario, if IBM rise to $90, your call option would now inherit a intrinsic value of at least $5 (ie. $90 - $85 Strike Price). Since it's a September call option contract and it won't expire til the 3rd Friday in September 2005 (I assume I bought the call contract on 9 Aug, 2005), the call would now worth about $650 ($6.50 x 100) !!! when IBM rise to $90. So, let's see, you sold your call at $650 and yield a profit of $534 (ie. $650 - $116). Wow !! that's a whopping 400% profit !!! And that's what I meant by the high leverage power of options.

The other advantage when buying options is if let's say you bought the same IBM shares and due to unforseen circumstances, the share plunge to $75. If you're holding the shares, you would lose $850 straight away. But if you have bought call option contracts instead, the very most you would lose is the value of the call option ie. $116.

But options do have their downside. They are depreciating assets, meaning if you expect the shares to move in a certain direction and bought a call or put option in the hope the incident would trigger the stock price in your pre-determined direction in a pre-determined period but the event did not happen, your call or put option would lose value as the expiration period of the contract draws near and you would lose money either selling the depreciating option contract at a loss or if you let the option contract expire worthless you would loss the entire value you pay for the options.To have a better understanding of how options work and the terms associated with options trading, you can go to this web-site to get a free CD-ROM which will give you an idea how options work.

I would next share some of the mistakes I made while trading options so as to let you avoid these same costly mistakes.

Tuesday, August 09, 2005

First Mistake

Over-confidence can be dangerous.

So after almost 90% of my option trades in the Nov & Dec 2004 were profitable because of the "Santa Claus Rally", I said to myself "Hey, this was easy money !!".I chose my option trades in the start of the year 2005 sloppishly. I bought calls in Yahoo (YHOO) and IBM, thinking these were respectable, high-volume traded counters which were about to report earnings announcement. I was punished. Though these counters beat earnings, the shares fell, and my call options lose money. I was dumb-founded. Why? Aren't shares which beat earnings supposed to rise? Well, that wasn't the end of my nightmare. I bought EBAY calls a few days later. The counter dropped $25 (!!!) after the company reported missing its EPS earnings for the 4th qtr by 1 cent and what worst was that the co. issued downward guidance for the coming quarters. I lose my hard earned money on the EBAY calls too.

So what happened to the above trades. One thing I realised was that the market was bearish at the start of January 2005. So I should have been more cautious buying calls when the market is bearish. The stock market is dynamic, whatever works in the "Santa Claus Rally" is not going to happen indefinitely. I was punished for not studying the market and my counters thoroughly before I trade them. You've seen in most trading book advocating that "The Trend is Your Friend". Well, I didn't monitor the trend at that time and was trading against the trend. I learnt it through the hard way.

Monday, August 08, 2005

My First Step

Like the wise old saying, "Every Journey Starts with the First Step .."

Well, this is my first step - my foray into the options trading world, accumulating my trading experiences, learning from my money-losing mistakes and refining my skills as I ploughed this journey.

US equity options trading only become popular a few years ago in Singapore. Now you can see a no. of options trading seminars advertisement sprouting in the Straits Times frequently.

So, is options trading really profitable? From my own opinion - the answer is YES, BUT only if you treat options trading professionally and put in lots of hard work in it. First of all, it is not to be mistaken as a get-rich-quick scheme. It IS related very closely to shares trading and you know any form of trading carry some form of risks, just think of dot-com crashes, currency crises etc.

I started trading options only seriously after I attended a 2 1/2 day seminar in Nov 2004. It was eye opening and I graduated with good skills that I apply immediately (with real money) in Nov 2004. Well, you ever heard of the "Santa Claus Rally"? I was lucky as my options trades in Nov and Dec 2004 were 90% profitable. But that was the start of bad news for me - I hope to share with you soon.