<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:
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.
See IRG research reports
