Friday, December 08, 2006

Sharing My Thoughts on Options Trading

 
It's been almost 2 years since I started trading options - mainly share options. I have to admit 2 years is not long compared to many successful, professional traders who have been trading in no less than 10 years. It's just that I wanted to share some of my personal experiences in this journey so far.

I remembered after graduating from Dr Clemen Chiang's Live Freely Options Trading Seminar back in Nov 2004, I started traded options based on the gapping analysis technique taught in the seminar. My initial trades were good, mostly attributed to the so-called "beginners' luck". Then the trades started turning "bad". I lost money and I began to doubt the technique. The truth is, I haven't master the technique with enough trading experiences. To make matters worst, I "got creative" and developed my own trading techniques and didn't test them first with paper trading and subsequently got punished by the market. No offence to my options trading buddies but I also traded haphazardly based on what were discussed in our online trading forum and they turned out to be losing trades as well.

Watching my capital drained so quickly made me lost quite a bit of confidence thus I shut myself off the market for a few months. In these few months I read some books related to stock & options trading by authors like Lawrence G. McMillan, William J. O'Neil, Nicolas Darvas, Gary Smith etc. I find them useful and gained some knowledge especially on the psychological aspect of trading.

I re-learned what was taught in the Live Freely Options Seminar and reminded myself to follow the steps strictly and only entered an option trade when the conditions were met. I also started a options trading journal - which is actually a MS Word document - where I recorded information like the stock options I chose to trade & had traded, the reasons to enter a trade based on fundamentals research/technical analysis, the outcome of the trade - whether good or bad, the mistakes that I've made and how to avoid them in the future etc. This options trading journal has since become a very important reference tool even till today to guide my options trades.

Once again, the first few trades were good. I've even earned more than 1000% profit from 2 of the trades as recorded here. Then I started growing bored again as a few weeks have passed and I didn't encounter any good options trades based on my gapping analysis conditions. So, I became impatient and went into my "destructive cycle" again trading options based on my "creative techniques" - without testing them with paper trades. This time - I lost money even faster than my 1st round.

So, I became inactive in the options market for a while again and during this time I brushed up my fundamentals analysis research by subscribing to Investors Business Daily SmartSelect Corporate Ratings which provide very thorough analysis of every companies' fundamentals. I learned some more technical analysis stuff like the candlestick chart patterns. At the same time, I also wrote some options trading articles in my web-site which I hope would guide beginner options traders to pick up some basic skills.

I started trading options a few months ago and this time I've been disciplined and trade options based strictly on the conditions which met my gapping analysis research criteria. If no trades satisfy my criteria, I just walk away. I'm glad to inform that so far I've some profitable trades and although I did encounter some losing trades along the way my trading capital is still healthy. I really hope that I will maintain my trading discipline this time round.

Although being disabled, I'm still persevering in this options trading journey even after taking a few hard knocks. I hope this would encourage you not to give up quickly too soon, whether you are now trading options, shares, forex, futures etc.

Here wishing everyone a Merry Christmas and a Healthy & Prosperous 2007.

Yours Truly

Tony Chai

P.S. Are there any options trading secrets? You might ask. From my experiences, winning in the options trading profession comes from the refinement of your trading techniques as you apply and learn from them during your options trading. If a particular options trading technique yields you profits consistently, jot down the circumstances which lead to such winning trades in your trading journal so that when such circumstances occur next time, you would know that entering such trades would yield a higher probability of success. It pays to be patient to stick to a winning formula although the particular technique may not produce that much trading opportunities. Remember that I lost money when I felt bored and experimented with new, untested techniques. So when you feel bored, simply stay away from the options market. Meanwhile, upgrade your trading knowledge by reading books, attending seminars or surfing the internet for relevant information.

13 comments:

Anonymous said...

Hi Tony, good staffs you wrote here. Mind to share how successful have you been growing your capital so far? In my opinion, that is the key thing in investing. Thanks.

Tony Chai said...

Hi :

Thanks for your question.

Frankly speaking, I've only grown a bit of my 2nd capital. My 1st capital was lost generally due to my inexperience in trading. But I still consider myself a learner in this options trading journey after trading slightly more than 2 years.

Options is a derivative trading tool and its basic function is to protect an underlying asset (eg. stocks) something like an insurance. I've made a lot of mistakes initially trading options like a stock and I realized I couldn't trade profitably that way. I have seen people who day-traded options successfully but may be I just don't have the flair for it. Thus I focused my trading technique solely on price gapping based on earnings announcement, using options as a leverage trading tool (the skill was taught at Live Freely Workshop). I applied the skills, sometimes met with good profits, at times met with certain market situations that I didn't expect and lost money. I took note of such occurrences in my trading journal for future reference. I kept applying the skills as I kept my focus on earning gapping analysis. This eventually led to my very stringent selection of options to trade based on this technique. If there's no trades with higher probability of success, I walked away. Sometimes, I don't even have a single trade for weeks especially when earnings season simmer down with less and less companies reporting earnings.

For me I felt that options is a decaying asset, the purpose is not to trade frequently but to seek out a high probability situation where a stock would gap up or gap down in the anticipated direction and use options as a leverage trading tool to take advantage of the situation. I'm still learning in this journey.

Regards,

Tony Chai

Anonymous said...

Hi,
Good to hear that you can make you way. Can you share with us your trading plan in details in terms of setup/trigger/entry/exit/adjustment ?
Regards,

Steven said...

Hi Tony,

I took Clemen Chiang's course in Sept 2005 and since reading up more about options and attending the Optionetics course, I have found the freely gapping strategies based on earnings announcements to be very risky.

To me, trying to predict whether a stock price will gap up or down after earnings announcement is as good as tossing a coin. What appears to be good news may be followed by a gap-down in the stock price. In which case, buying a straight call instead of a straddle leaves your down-side totally unprotected.

Furthermore, the freely strategies, as taught in the course I attended, did not provide clear exit strategies and did not consider implied volatility and the greeks, which are important factors to consider in options trading strategies.

What I found terribly lacking was the post-course support, which is essential for newbies in options trading. Chiang's answers to email questions posted at my course group's email discussion site were woefully inadequate and some questions were not answered at all. There weren't any experienced traders to provide mentoring advice.

Chiang also mentioned that his students have achieved returns of 1000%, 2000%, 4000% and so on, on single trades. I don't doubt that this has happened but it is terribly unrealistic for traders to aim for such returns on each trade. What's more important is to achieve consistent and realistic profit targets.

In my journey towards being a successful trader, I've found it important to attend different courses to broaden my perspective on trading. There are other financial instruments that you may find less complex than options.

Regards,

Steven

Anonymous said...

May I know what is the meaning of a "straight call" and what is a "straddle?


Kingsley
kenviro@yahoo.com

Tony Chai said...

Hi :

Buying a straight call means buying only a call option contract.

Buying a straddle means buying a call & put option of the same strike at the same strike.

Regards,

Tony Chai

Anonymous said...

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