Saturday, January 05, 2008

 

Happy New Year...

Nice way for the market to wish us a Happy New Year huh? Not sure if a lot of people saw this coming (maybe this guy with this time machine did). We'll have to wait and see what happens next.

So it's that time of the year, when people make resolutions, look back at how the last year went. Just wanted to post a few thoughts myself.

2007 was a flat year for me. I think I finished nearly at the same point as I started. Not good... It was a good learning experience though, and hopefully the lessons learnt will enable me to make some money in the future.

I started this blog, posted my trades, posted some lessons learnt in the hope that I won't repeat my mistakes again. I have tried hard to stick to them, but sometimes the gambler in me prevents me from doing so. Going forward I'll try to do a better job of this.

A few things I plan to practice/pay attention to this year-

1. Respect Stop Loss
How many times have we taken profits quickly, but let our losers bleed us dry? I'm sure many many times. When a trade goes against us, we try to wait it out, thinking it will go our way again. Most of the time it just keeps on going the other way. That's when a small loss starts becoming bigger and if you're holding options you tend to say, 'Well since the position is already down so much, I'll wait it out some more.'. That's when your option will expire worthless.
This year I've let way fewer options expire worthless than the previous years. I'll try to bring that number down to 0.

2. Be Patient
Sometimes, when traders look at charts and spot a pattern, they'll get
into the trade before the pattern has a chance to finish itself. This could be disastrous. Wait for the pattern to finish, then decide which side of the trade to take. BIDU for example, a few months ago, it looked like it was forming somewhat of a head and shoulders pattern, and on a break of around the 300 area, it would fall straight through. I'm sure many people shorted the stock in anticipation. But it bounced right off of that level and went back over 400.
One should identify a good support and resistance area, and wait for the stock to
reach that before making a decision. These areas are like magnets, stocks will generally test them before making their moves.
It is very possible that inspite of waiting for the stock to do it's things around
these areas, you would still take the wrong side of the trade. In that case, follow point number 1 that I made above.

3. Learn what make options tick
Although I've been trading options for some time now, I don't think I've ever sat back and thought what makes them tick, what are the undercurrents that people usually don't see from the top.
A few days ago when I bought a put on GS when it was trading at 215, it went down to 210 and after about 4 days it came back up to 215. In the meantime, my option lost about 80 dollars, even though it was at the same spot as when I bought i. Although I knew options will lose money as time passes, I didn't look to see how much it would be losing. I then looked at theta, which tells you how much value the option loses with the passage of time. It was over 20 dollars. So I was losing 20 dollars each day just by holding on to it. So after that day, I'm taking a look at the theta as well before making my decision (I've always looked at the IV and delta before).
This year, I'll also try to look at trading spreads etc to possibly lower my risk. Also, I'll be looking into being an options seller more than a buyer. If 70% of the options expire worthless, it's better being on the side of the trade that has a higher probability of success. As an options seller, time is your friend.

I guess that's it for now, I'm sure there are many more things that I would like to do which I haven't mentioned, but these are the more important ones.

I would like to thank all those who visit my blog and those who post comments. That's what keeps me going. Going forward, I would really appreciate it if more of you could post your comments. I might not know the answers to your questions, but by doing so all of us could learn together.

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