options

xi Coulda Woulda Shoulda
The approach of this text will be to stretch the reader’s mind in
order to allow him or her to handle any situation that can confront the
investor while trading options. At the end of the day, perhaps 99% of all
customers will find one or two spread strategies, to put on or leg into,
that will be their bread and butter positions.
I would venture to guess that not many speculators have ridden a
call or the shares of Yahoo (NASDAQ:YHOO) from almost nothing to
$250 a share. Perhaps there are some lucky souls that have ridden Yahoo
from $250 back down to $11 and change with naked puts or a short stock
position. There is really no way of telling how many day traders /
speculators there are that can ride a play for that kind of a move. Most of
the players would have been ecstatic to take 50 points out of one of those
moves in the shares. Still others would have been jumping up and down
to take even $10. Still, a lot of traders would have taken their profits
with less than 5 points.
Given the mentality of quick profit in the world of volatile hightech
stocks, the feature of ‘unlimited profit potential’ long naked calls or
puts is only worth employing when the options are cheap to buy and
even then it is a long shot to win. Without getting too technical, at the
moment, when markets are volatile, demand for options keeps options’
premiums (implied volatility) high. In many cases, the prices are really
on the moon, making them too expensive to buy. On the other hand,
margin requirements make shorting naked options quite a challenge to
many. What can one then do? In a word: Spread. Spreads make it
simple to take advantage of almost any type of market action.
In order to be profitable using options it is vital to conserve capital
long enough for the market to start contributing funds to one’s account in
the way of profits. Good luck is a nice thing to have but a sound
approach begins by identifying the factors that cause losses. Once
learned, options become easy to deploy without any mysteries of where
the money goes to and comes from. Everything is quantifiable as long as
one understands how to measure it.
I do hope you learn a lot from this Excerpt as I am sure it pill paint a
realistic picture of what options are all about.
All the Best,
The best way for options knowledge to be absorbed is through
experience, which can be costly in the options business. Learn from the
triumphs and the mishaps that are passed on throughout this book and the
live interactive forums hosted at www.RiskIllustrated.com. These
experiences are supported by graphic illustrations and commentary. This
is what the book is about and that is what my work as the Ri$k Doctor is
about.
©2001 Charles M. Cottle RiskDoctor@RiskDoctor.com