Forum Archive Index - September 2002

["Williamson, Mark" <m.williamson@auckland.ac.nz>]

<delurk>

 

Great stuff on options - thanks Morgy

 

Speaking of Dr Elder, I was reading is most recent book ("Come into my trading room") this morning and I thought I would throw into the mix an excerpt about what he has to say on options - he's not exactly positive.

 

Before I go back to lurking I want to say thanks to all of you who contribute to this list - its always interesting and informative.

 

Mark

 

</delurk>

 

Excerpt from Come Into My Trading Room:

 

OPTIONS

An option is a bet that a specific stock, index, or future will reach or exceed a specific price within a specific time. Please stop and reread that sentence. Notice that the word spec occurs in it three times. You must choose the right stock, predict the extent of its move, and fore cast how fast it'll get there. You must make three choices-if you're wrong on just one, you'll lose money.

When you buy an option, you have to jump through three hoops in a single leap. You have to be right on the stock or the future, right on its move, and right on its timing. Ever tried tossing a ball through three rings at an amusement park? This triple complexity makes buying options a deadly game.

Options offer leverage-an ability to control large positions with a small outlay of cash. The entire risk of an option is limited to the price you pay for it. Options allow traders to make money fast when they're right, but if the market reverses, you can walk away and owe nothing! This is the standard flow of brokerage house propaganda. It attracts hordes of small traders who cannot afford to buy stocks but want a bigger bang for their buck. What usually gets banged is the option buyer's head.

 

...<snip>...

 

In options the majority buys calls and, to a lesser degree, puts. The insiders almost exclusively write options. Professionals use their heads, while amateurs are driven by greed and fear. Options take full advantage of those feelings.

Greed is the engine of option-selling propaganda. You must have heard the slogan: "Control a large block of stock with just a few dollars!" An amateur may be bullish on a $60 stock, but doesn't have $6,000 to buy 100 shares. He buys some $70 calls with two months of life left in them for $500 each. If that stock rises to 75, those options will acquire $500 of intrinsic value, while maintaining some time value, and a speculator can double his stake in a month! The amateur buys calls and sits back to watch his money double.

Strange things begin to happen. Whenever the stock rises two points, his calls go up only one, but when the stock falls or even pauses, his calls fall briskly. Instead of seeing his money double in a hurry, the amateur is soon staring at a 50% paper loss, while the clock starts ticking louder and louder. The expiration date is nearing, and even though the stock is higher than it was when he bought his calls, they are now cheaper, showing a paper loss. Should he sell and salvage some money or hold and wait for a rally? Even if he knows the right thing to do, he's not going to do it. His greed does him in. He hangs on until his options expire worthless.

Another great motivator for buying options is fear, especially in options on futures. A loser takes a few painful hits-his analysis was wet and money management nonexistent. He sees an attractive trade but fears losing. He hears the siren song-"unlimited gains with limited risk"-and buys options on futures. Speculators buy options like poor people buy lottery tickets. A person who buys a lottery ticket risks 100% of what he paid. Any situation where you risk 100% looks like an odd case of limited risk. Limited to 100%!?! Most speculators ignore this ominous figure.

Option buyers have a dismal track record. They may make a few dollars on a few trades, but I've never seen anyone build equity buy ing options. The odds in this game are so bad that after a few trades they are sure to kick in and destroy a buyer. At the same time, options have a high entertainment value. They provide a cheap ticket to the game, an inexpensive dream, just like a lottery ticket.

You need a minimum of one year of successful trading experience in stocks or futures before touching options. If you are new to the markets, do not even dream of using options in lieu of stocks. No matter how small your account, find some stocks and learn to trade them.

WHERE DO I GO FROM HERE? The all-time bestseller on options, and deservedly so, is Lawrence MacMillan's Options as a Strategic Investment. It is a veritable mini-encyclopaedia that covers all aspects of Options trading, better than his other book.

 

 

-----Original Message-----
From: Morgy [mailto:morgy40@xtra.co.nz]
Sent: Friday, 6 September 2002 2:17 p.m.
To: sharechat@sharechat.co.nz
Subject: [sharechat] Options, Dr Elder, Futures

 

 

For any one wishing to learn options trading, there are 2 good sites on learning, one for Australian options is through the ASX web site www.asx.com.au , look under options, it is a fairly good introduction to options trading.

Secondly, through the CBS marketwatch site at www.cbs.marketwatch.com there is a new free service from the US Options council for tutorial lessons on Options trading. You need to become a site member which is free.

The CBS site is a very good site in my opinion as it provides comprehensive Fundamental & Technical search & analysis as well as portfolio facilites (free) & also accepts ASX & NZ stocks, so if you want to get everyting for free under the same roof this is the site, as I say it is extensive.

 

Last Sunday I attended a seminar hosted by Phyllis for Dr Alexander Elder. two key points were hammered home about TA trading, firstly the KISS  Rule (keep it simple stupid, a key point Phaedrus has constantly reiterated to me) & he graphically showed how he would interpret charts using simple MA crossover techniques coupled with MACD & his own Force Index indicator for entry timing & Price envelopes for developing price targets. Secondly,money management techniques to keep you in the game long term & how to develop a trading journal to measure your progress. All this is covered in his 2 books. He also mentioned that he would not be trading much in the US share market next year, he sees "futures" as the money game.

Lastly, not a fundamentals Investor in sight  :-) . A good day, thanks Phyllis.

 

Regards

 

Morgy